There are some insurance agents who suggest that the return on an entire life insurance policy does not matter. This strange statement is widespread within the self-banks (eg Infinite Banking®, Bank on Yourself®, etc.). So with aroused interest, it seems appropriate to explore this concept.
Does the return not matter? Is it all a quarrel? If it does not matter … what does it mean?
"It" The rate of return does not matter
I'm going to tell you most of the battle line before the joke about this one (but don 't worry, there's plenty of reason to stay until the end … you learn something). The argument that returns do not matter falls into two potential camps. A camp thinks of it as a way to draw your attention to something you have probably overlooked. The second camp … yes, it's much more ominous. <! – ->
In a spirit of positivity, let's start with the much more virtuous reason why a life insurance agent may declare that returns do not matter.
In fact, the agent does not really mean that the return does not matter. He / she really believes that the specific return does not matter.
Let's use an example to put this in context. <! – ->
Suppose you sit down with the insurance agent Larry who shows you a proposal to buy full life insurance. You look at the many pages in this proposal and look through the numerical delimitation of future calculated values. At 40, you are particularly interested in the cash value of 25 years when you plan to retire.
When you look at the numerical distribution of the policy, you note that in year 25 the insurance will have a cash value so that it has achieved an internal return of 4.5%. You can imagine this as the annual interest rate that you would need to earn if you put the premium on this entire life policy elsewhere to achieve the same value as the policy's cash value.
"4.5%?" Your question with a bit of disappointment.
"I can do better than that anywhere else," you say Larry.
But Larry, who is not willing to give up so easily, quickly pushes back that the return on your policy does not matter. What he really means is that the return on your policy at this particular time is not that important.
You see, if you collect the same balance in a stock portfolio, real estate or anywhere you plan to save money is largely irrelevant without a specific plan on how to redo this pile of money for retirement income (or whatever the intended use of the money is).
Larry refers to the fact that just looking at the rate of return at this seemingly arbitrary point in your timeline can only overlook any very crucial planning you need to do for how you will actually get value from the assets you are trying to amass. Not all assets work the same way when it comes to converting them into purchasing power, and Larry wants you to understand this in a way that does not feel like Ben Stein just showed up in your dining room and started a presentation on the importance of the Mandelbrot Set.
So what Larry really means is that this specific return does not matter as much as you might think it does. There is a much larger set of data that you need to look at to reach the actual rate of return for this decision, versus an equally large set of data that you need to think about for what options you think you can strive for. <! – ->
As you work through this issue, you will probably find that your entire life insurance policy looks good compared to your other options. But when you look at year 25 and think that there are other alternatives that can achieve a larger account balance then, it can lead to you giving up a lot of future purchasing power.
Lifetime Return Magician
While I find it perfectly reasonable to make Larry's appeal, there is another taste of the "return does not matter" statement that is causing great concern. This proposal is not really a reference to a larger thinking. Unfortunately, it is more of a tool used to divert your attention from flattering facts in the hope that you will be encouraged by the idea so much that you move on with a purchase.
For example, suppose you sit down again with an insurance agent (this time Ned … Bing!). Ned presents a similar presentation with many pages and a numerical distribution of future calculated values. You look again at year 25 interested in the results at that time and note the internal return of 3.5%.
Not sure what to do with this, you ask Ned if this is the best return you can achieve on an entire life policy. . Ned talks and informs you with great enthusiasm that the return does not matter. <! – ->
Ned goes on to explain that because you buy full life insurance and whole life insurance is a special asset that provides "uninterrupted composition" and the ability to take your money out of the garage, drive around in the city and then putting them back when you are done with the returns is not important.
These references … if you are new to this … relate to the different plates used to sell the term self-bank. In fact, they are not hooey. But we encounter a problem when we are placed in a way that indicates that they are always superior to all other characteristics of any other asset and therefore make whole life insurance policies indisputable.
In this context, Ned either knows or has reason to believe that you can do better with another product for life. But Ned does not want to sell the whole life product to you because he does not have a contract with that company, will make less money in commissions or may miss a production bonus if he does not sell you this specific whole life product.  So he created a clever plan to redirect your attention from a truth he can not argue for. It is a nice palm that serves as a good reminder. When it looks like magic may be at stake … there is no real magic … but there are real wizards. <! – ->
Why the Return Return Matter Price
Whole life insurance can provide many benefits that can dramatically improve your financial planning. It can perform a myriad of tasks. When you design and execute properly, you can use whole life insurance to grow your wealth significantly.
Although I am not a compulsory self-employed person and have no direct relationship with any of the marketing companies created to promote the mainstream. The concept of self-banking, I am more than willing to agree that they all have some degree of truth behind their claim to use full life insurance to build wealth faster and more efficiently.
But if we believe in the goal of self-banking, we must also agree that as much as possible is ultimately the best course of action. This obviously suggests that it is perfect to eradicate the product that provides the best longevity for return on cash value. Otherwise, suggesting with some twisted suggestion that the return does not matter shows us that the agent is not really committed to helping people through the virtues of such a concept.
It's kind of like the Primerica buy-and-time-invest-difference debate. If we agree that such a strategy is the panacea, why do they not want to sell the cheapest lifelong insurance they can find? Maybe it's because the argument is more about how they disrupt someone's life to make a sale and not an absolute compliance with what they preach …
Think of these two examples of policy illustrations:
They are both the whole life policy. Both are mixed throughout life politics. They can both be used for self-banking. But you have $ 176,525 more cash in year 25. It makes a meaningful difference in wealth building and overall self-bank that anyone can do with the first policy versus the second policy. The rate of return really matters, so make sure you know your entire life choice.
So yes the return is important. But the rate of return is a complex discussion and more nuanced than many people realize. If you hear someone claim that it does not matter, be careful but do not immediately dismiss it. And think about the total value that some investment / savings plans can give you throughout your life.