ON MONEY: Beware of life insurance scams | Features

When I was returning from a bridge tournament some time ago, I listened to an advertisement on an XM radio channel of an outfit called The Infinite Bank. The announcement stated that investments in this program would never decrease in value and would always increase tax-deferred: long-term values ​​would be generated that would outperform other investments, including his IRA. Such claims are, at a minimum, misleading and to a large extent do not produce the advertised results.

This approach touts the use of a participating whole life insurance contract (i.e. a contract issued by a mutual life insurance company) to create and subsequently build its “bank” – translating the contract’s cash values ​​- so that the contract holder can then access their own “money from the bank” by borrowing against those cash values ​​and repaying themselves afterwards, and not to a third party, such as a vendors of this private banking concept recommend that the contract holder actually pay back more than is required, and thus create additional value.A gentleman by the name of Russell Nash, a former agent of Equitable Life, produced this private banking idea, and he holds seminars across the country in which he touts the virtues of his concept. Other providers will charge agents for training. Interestingly, when I inquired, I didn’t was able to find out the names life insurance companies that would allow this concept of selling, and there were inaccuracies on this “bank on yourself” website.

Another scam using permanent life insurance is marketed as “Section 7702 Retirement Plan”. Simply put, forget it.

Notwithstanding this caveat, purchasing a salary-limited life insurance policy from a reputable company has considerable merit in some situations, but what these 7702 plan advocates are touting is just a glorified form theft, and the sole beneficiary is the commercial agent.

Mutual life insurance companies have no shareholders and these companies are owned by their policy owners. Therefore, when a person takes out a mutual insurance policy, that person becomes a co-owner of the issuing company and can participate in a share of the profits of the company. These profits shared by mutual companies are known as policy dividends, but they are not guaranteed. However, large mutual life insurers, such as MassMutual, Northwestern Mutual and The Guardian are three of the most financially secure institutions in the United States, and all three have returned dividends to their policyowners for more than 125 consecutive years. .

These dividends can be paid out in a variety of ways depending on the policy owner’s choice: in cash, accrued at interest, used to reduce the next year’s premium, or used to purchase additional elements of paid-up life insurance coverage, called additions to the policy. . If paid in cash or used to reduce future premiums, no income tax is levied, since life insurance dividends are treated as a refund of premium. If accrued with interest, however, actual interest income is taxable. Finally, if a policyholder chooses to purchase these paid-up additions, they also have a cash value and the cash value growth of these additions is tax-deferred, as is any cash value accumulation.

The key to this “banking” concept is the purchase of additional amounts of bonuses released when the policy was first issued in order to accumulate the cash values ​​of the policy more quickly. Unfortunately, the IRS limits the rate at which cash values ​​can accumulate in a policy, so no policy can be too cash-rich.

As with many scams, there are elements of truth to this concept of private banking: the accumulation of policy cash values ​​over time allows the policyholder to access funds through policy loans. The cash value that accumulates in a policy is tax-deferred, but the interest charged for a policy loan does not directly constitute the cash value. Additionally, additional paid-in top-ups are only available to individuals who meet the medical conditions and cannot be added at will, given that there are regulatory limits on overfunding permanent life insurance policies.

MassMutual, Northwestern, and New York Life do not authorize their agents and brokers to sell policies using this self-banking approach, and the companies that authorize such sales are not in the upper echelons of quality mutuals. If you need to raise capital by taking out a loan, I suggest borrowing from your home equity line of credit, and you don’t need to purchase a life insurance policy to create and build the assets of your “bank” – increasing your capital at home will be enough.