Infinite banking/ Be Your Own Bank

I'm terrible math, but I have a reasonable handle on human nature... banking on your self sounds great, until you look at the person responsible for making the business decisions at your bank... what's their track record to this point?

That's exactly why I talk about being an honest banker with yourself. You've got to be a quality borrower and lender since these loans are unstructured and can become a huge tax trap over time if not tended to.

Here's what I wrote:

A Word of Caution: Be an Honest Borrower

Borrowing against a life insurance policy has many advantages. However, due to the unstructured nature of life insurance loans, there is a tendency to not repay the loans and sometimes not even pay the annual interest due.

This can cause two major issues down the line:

1. Should your policy lapse with loans outstanding and if there is a gain in the policy (cash values greater than the amounts contributed), it can cause a "phantom income tax" situation. In short, the entire gain is taxable as ordinary income in the year the policy lapses. It's called 'phantom' because you don't have the money from the policy to pay the tax because of the existing loans being repaid from the policy.

2. I believe this is even more important: The larger the existing loans against a life insurance policy at retirement age, the smaller the retirement cash flow you can enjoy from your policy.

I believe it is critically important that you be an honest borrower with yourself and your policy. Repay your loans so you can borrow again in the future for emergency, opportunity, and retirement cash flow.
 
How is this better than a Roth IRA?
It's not.

But as @SF_Anon pointed out, there are no income limits so as long as you're cool with having a ROTH-like account getting bond returns, it's not terrible. You also have a permanent death benefit that will grow over time which is certainly meaningful.

But you could just back door a ROTH (assuming you don't have a lot of traditional IRA money) and then get your equity exposure. Having the safety of something like WL in terms of consistency and returns is a feature, not a bug.
 
It's not "roth-like." It's the ORIGINAL Roth as Senator Roth based his retirement account almost entirely on life insurance tax code.
  • When one accesses their Roth, it's done by withdrawal. This means that it will stop compounding on that amount that was withdrawn.

  • It is a taxable disclosed event with no current taxable consequences, but it is disclosed as a 1099 transaction.

  • It is a FIFO account (you get your contribution out first, then interest - which is subject to the 5-year rule). No such rule for life insurance.

  • If/when you access your cash values through a loan, it isn't income. It's not disclosed to the IRS in any way (unless the policy lapses, especially with a gain as discussed earlier). No 5-year rule, no federal taxes, no state taxes, no penalties for accessing prior to age 59.5.

  • Loans will not offset Social Security or cause IRMAA Medicare success penalties, because it's a loan, not income. Now, currently, Roth IRA withdrawals don't do this either... but I predict it will one day as a form of means-testing (unless Trump actually does what he says, but I think he grossly overpromised on abolishing the IRS, let alone ending the taxation of Social Security. Time will tell.).

  • With a disability waiver of premium, cash contributions can continue to be made to your policy. No such provision exists for Roth accounts.
Is Cash Value life insurance a "Roth IRA on steroids"? No.

I'll take the inverse approach to that statement.

"A Roth IRA is a stripped down, government regulated,
benefit-reduced imitation of cash value life insurance
to help banks and brokerages offer accounts
with somewhat similar tax benefits."

 
Depending on your tax bracket and your overall objective, it can certainly replace equities.

Here's the problem: You'll have less money in the insurance contract. However, based on how it spends in retirement, it can be a far more efficient way of spending one's assets because of the tax-exempt nature of loans vs withdrawals treated as income.

I've done the math where the life insurance spends as though you had earned over 27% per year for 10 years. Let me be clear: the policy did not EARN 27% for 10 years. It's the tax-efficient use of loans and collateral that allowed that cash flow to spend as though it did earn that amount.

If your goal is more money, life insurance won't perform as expected. If your goal is to spend a greater amount in retirement, life insurance may surprise you compared to traditional retirement planning methods.

 
Depending on your tax bracket and your overall objective, it can certainly replace equities.

Here's the problem: You'll have less money in the insurance contract. However, based on how it spends in retirement, it can be a far more efficient way of spending one's assets because of the tax-exempt nature of loans vs withdrawals treated as income.

I've done the math where the life insurance spends as though you had earned over 27% per year for 10 years. Let me be clear: the policy did not EARN 27% for 10 years. It's the tax-efficient use of loans and collateral that allowed that cash flow to spend as though it did earn that amount.

If your goal is more money, life insurance won't perform as expected. If your goal is to spend a greater amount in retirement, life insurance may surprise you compared to traditional retirement planning methods.

not sure if this is true on this thread talking more about Roth than if in Traditional Qualified Funds. Roth withdrawals of basis come out tax free & Roth withdrawals after age 59 1/2 come out tax free without having an outstanding loan balance on the ledger with ticking tax time bomb should the life policy lapse or inadvertently/ignorantly be surrendered or 1035'd out of ignorance.

Not saying Life insurance is bad as I own a lot, just saying Roth is not treated as taxable income. So, if life insurance loans spend as if making 27%, dont Roth distributions spend as if they are making 27%, plus Roth wont send you a bill for ongoing premiums due if the life contract isnt a short pay guaranteed contract.
 
So, if life insurance loans spend as if making 27%, dont Roth distributions spend as if they are making 27%, plus Roth wont send you a bill for ongoing premiums due if the life contract isnt a short pay guaranteed contract.

No. There are a number of factors that make life insurance better than Roth and one of them is the ability to borrow for one's cash flow needs rather than withdraw.

Withdrawals + volatility of the underlying asset = smaller safe withdrawal rate assumptions... which requires greater capital for that strategy. For the same premiums/contributions, it requires a higher return.

Compared to what?

Loans + no volatility = higher safe withdrawal rate assumption... which means less capital requirement for the same income. If it spends the same, it has the equivalent performance based on its outcome, but not the actual cash performance in the contract.

But yes... I am making the assumption of a limited pay contract - not a short-pay, but a limited pay. A 10-pay works great as then it's paid up by contract. A short-pay is usually an agent-led design - like a 5-pay and the growth assumptions keep it going.

Now admittedly, because Roth accounts do not pay any taxes, the capital equivalent is far lower than if there were taxes... so it wouldn't be a 27% equivalent. My reasonably educated guess would be about 1/2 of that? I haven't done that particular math, but that would make sense to me. So 13.5% each and every year for 10 years if the (assumed) math holds up?
 
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If I were in the Cash Value Life Insurance Selling Business - [which I am not] I would simply start off by saying that Life Insurance may be a solid place to put extra money to work AFTER all of your Retirement Accounts are fully funded AND all of your debts [except a mortgage] are paid off. But it is not for everyone.

Roth IRAs are a really solid place to put money to work in this country and are not that complicated to use and understand. Cash Value Life insurance is not nearly as simple.
 
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