Wednesday, August 8, 2012

The Elevation Group Has “Bank on You” Wrong: The Flaws of IULs

I admit I was pretty excited when as an Elevation Group (EVG) member I read Mike Dillard’s endorsement of the Infinite Banking Concept (IBC) cleverly re-named “Bank on You”.  It’s lesson #2 in Mike Dillard’s online diary to help educate people on ways to “take you inside the secret black-box investing strategies of the ultra-rich.”  

Most people who have been investing in mutual funds and 401(k)'s  have never heard about the Infinite Banking Concept, as first written about by author R. Nelson Nash, and so I first have to applaud Mike Dillard for helping raise awareness to an idea I believe in wholeheartedly.  My belief is so strong in this financial strategy I made teaching the Infinite Banking Concept my primary business focus to help more people learn about this "black box secret” that banks and Wall Street firms hope you never discover.

Unfortunately, my enthusiasm was short lived.  Instead of endorsing the concept as it should be taught, Mike Dillard and his advisor, Paul Haarman, have instead bastardized the entire concept by utilizing the wrong vehicle for the strategy.  Bastardized is a strong word to choose but I chose it with careful consideration because there are no shortcuts in life.  Any attempt to circumvent a proven and tested 150+ year old system (IBC utilizes dividend paying Whole Life contracts) with an experiment (Indexed Universal Life contracts were created in 1998) inherit with long-term contractual flaws is bound to have unintended consequences for the consumer.

The Infinite Banking Concept as written by R. Nelson Nash is entirely based on utilizing a participating Whole Life insurance policy as the vehicle to protect and grow cash.  (Participating means you partake in the profits of the life insurance company via a dividend.

My biggest beef In Lesson #2 of the Elevation Group diary is that Mike Dillard and Paul Haarman hype the ability to earn a positive arbitrage on your money without disclosing the fundamental flaws of the “chassis” they have chosen for their version of IBC called “Bank of You”.  If they talked about what could go wrong, it’s doubtful anyone would be excited to risk their hard earned money and assets in such a risky financial vehicle.  I say risky because ultimately the policy holder, not the life insurance company, bears responsibility for the performance of an Indexed Universal Life contract. (With a Whole Life contract, the life insurance company bears responsibility for the performance of the contract, not the policyholder.  Huge difference!)

While it is true that an individual with an Indexed Universal Life (IUL) contract can participate in the upside of a stock market index up to a cap of 15% per year (cap limits depend on the insurance carrier) while at the same time borrowing money from the policy, there is never any mention of its two greatest flaws.  

Let’s look under the hood to see what this IUL “chassis” looks like before you have buyer’s remorse.

First, an Indexed Universal Life insurance policy is built on a cost structure of annual renewable insurance costs.  This means your cost of insurance increases each year you own the policy.  And let me be clear, the annual cost to maintain the policy doesn’t just increase by an equal amount each year.  The cost of insurance grows by an increasingly larger amount each year starting  small when a policy owner is young, but by the time a policy owner is in their mid 60’s, the cost of insurance is increasing exponentially.  Of course, it is at this particular age range when most people will be retiring.  Can you spot the lion hiding in the grass waiting to feast on your cash values?   

At a time when policy owners are most likely to start taking policy loans to supplement their income, their costs of insurance is contractually guaranteed to keep rising and rising at accelerated rate each year until the policy crashes or the policy owner dies!  It’s like buying a mutual fund that gets more expensive each year you own it.  Who would knowingly buy that?

Now if you’ve been sold on rates of return between 0-15%, increasing annual costs may be okay… IF:

…you can get a rate of return greater than your borrowing costs (not to mention your increasing insurance costs).  That’s a pretty big IF and something completely outside your control if you choose the EVG “Bank on You” strategy.  How many of us would like a guarantee of positive arbitrage each year? (I’m raising my hand.  Hope you are, too.)  Guess what? If you can find guarantees in an IUL contract that will keep your contract in force for your entire life, you will be the first!  I have yet to see a contract that has lived up to its illustrated performance.  (If you have an IUL, you can request a free policy review here.)

News alert: Indexed Universal Life contracts WILL have negative arbitrage.  You can count on it because a return is not guaranteed but Mike Dillard and Paul Haarman don’t want to scare you off which is why I want you to know Negative Arbitrage is the second major flaw of Indexed Universal Life insurance policies.  Despite all the hype of positive arbitrage in the “Bank of You” lesson, there is no mention of the risk of negative arbitrage inherit in this type of life insurance contract.    

So here’s the worst possible scenario you need to avoid if you choose a “Bank on You” plan.  Take a moment and imagine having one of these Indexed Universal Life insurance policies when you are retired after years of paying premium.  As I’ve covered, you’ll have annually increasing costs of insurance and this will either be paid out of your pocket in the form of additional premium payments or from your existing cash values.  Now imagine you experience multiple years of negative arbitrage on top of the rising costs.  Poof, your policy is going backwards fast even though your advisor told you that your principal would always be protected.  Time to wake up!! Now if this dream becomes reality for you, I’m guessing you’re not going to feel so excited about “Bank of You” then, right?  My opinion is that these policies are lawsuits waiting to happen.

For the Kool Aid drinking IUL salesman masquerading as advisors, I will concede that yes, there will be some years where the contract will return better than the borrowing rate but if you are truly thinking long-term you have to consider the years when the returns will be lower than loan rate, not to mention years when you’ll have no return at all.  My question to you:  How do you think an IUL will recover from years with 0% returns while the insurance costs are increasing and your clients are also taking policy loans?  Remember this rule about money: it doesn’t grow based on averages.  If you are an advisor/agent selling Indexed Universal Life policies illustrating to show a fantasy world where magically your clients will have returns averaging 6-9% each year and have borrowing costs of less than 6% for the rest of their life, you will be exposed by me and the other practicing IBC advisors who remain true to the concept.
Let me throw in one other point here because I realize I’m starting to sound like every other advisor out there who focus on Rate of Return and by default completely miss the bigger picture.  The Infinite Banking Concept is not about chasing Rate of Return.  It’s about reversing the flow of your money from out to in so your money is working for you 24 hours a day for the rest of your life!

So why does Nelson Nash and Pamela Yellen recommend a dividend paying Whole Life contract?  It’s pretty simple.  When you have the right type of Whole Life insurance contract as your “chassis”, you are guaranteed two things that an Indexed Universal Life insurance contract can never offer.  A true Infinite Banking Concept plan has:
  1. Fixed Costs:  Your annual cost of insurance is guaranteed never to rise.
  2. Guaranteed growth: You are guaranteed to have an increase in your cash values every single year.
 When you eliminate uncertainties in a contract, you have the perfect “chassis” to implement your family banking system and remember this last point: Whole Life contracts have a proven track record of performance of over 150 years!  This is why Pamela Yellen writes in her New York Times best-selling book Bank on Yourself® that you can “have a rock-solid financial plan and a predictable retirement income that could last as long as you do – with NO luck, skill or guesswork required” when you choose a properly structured dividend paying Whole Life contract.

I hope you agree learning the pro’s and con’s is vital to making an informed decision.

To learn more, visit

John Montoya

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