Gary North Is Wrong About Whole Life Insurance and the Infinite Banking Concept

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by Ryan Griggs
Gary North, Ph.D. (History, University of California — Riverside) is an economist, social commentator, and author. His reputation is controversial — some love him, some hate him. Some both love and hate him, depending on the subject of a given North article. In this post, I’ll attempt to set love and hate aside and focus on the validity of North’s analysis in his 2009 article on whole life insurance and the Infinite Banking Concept.
Throughout, Dr. North is plainly, painfully, loudly wrong. Jolting as the frequency and magnitude of the errors are, a line-by-line approach is necessary to deconstruct North’s polemic against sound finance.

From the top:

All life insurance is built on deliberate deception. The industry sells death insurance. It changed the name to life insurance because “death” doesn’t sell.

Insurance is a promise to pay in the event of loss. You insure assets. If the asset is lost, insurance financially compensates you. Because the risk of loss is relatively small for many assets while the cost of the loss (the sum of the future stream of income from the asset, discounted to the present) is relatively high, asset owners pool their financial resources in a concentrated entity so that if misfortune were to strike one asset owner out of the group, he or she could receive a relatively large payout. Your life is your greatest asset — financially speaking — because you will generate more income for yourself than any other asset will. This must be the case, because other assets are useless to you without your ownership of and involvement with them.

Life insurance is not death insurance, because death is not an asset.

Fire insurance insures against losses from fire. It is called fire insurance. The same is true of flood insurance, collision insurance, burglary insurance. But not life insurance. Also, not health insurance. It is sickness insurance.

Marketing considerations govern the sale of death insurance. Never forget this.

Fire, flood, collision, and burglary insurance are colloquial terms for property insurance. The risk of loss for some forms of property are greatest under specific circumstances, for example, when it’s on fire. So to refer to the particular subset of property insurance that compensates the property owner in the event of loss of property due to fire, one might call such a policy “fire insurance.” If such a term is a product of “marketing considerations,” then it is because such terminology efficiently communicates the nature of the coverage of a specific type of property (remember: assets) insurance. What would North have us say instead? “Property insurance that pays out in the event of fire?”

Second, the worst form of death insurance for buyers is whole life — the lowest payment to survivors per premium dollar. Term insurance is by far the best. But it provides the least income to death insurance companies.

Compared to term insurance, whole life does not pay out the lowest payment to survivors per premium dollar if the payout occurs one minute after the given term. In fact, supposing an individual passes away closer to natural mortality (the statistically more likely outcome) and after the term, the whole life payout is literally infinitely greater than the term payout ($0 term payout / >$0 whole life payout = infinity).

The idea that term policies necessarily provide the least income to life insurance companies is just wrong. More than 98% of term life policies lapse. This means that only 1–2% of term policies will actually pay a death benefit. In the other 98% of cases, the policy owner will outlive the term. This means that for those 98% of term policies, the company collected premium and paid out nothing. In contrast, a (legitimate) whole life policy (I’ll elaborate below), will definitely pay out. Now, whether whole life benefits the company more than term depends on other factors (like pricing), but the claim that term pays less to the company than whole life is not supported by the (erroneous) claim that whole life pays out relatively less to the client. Nor is it obvious which policy type would pay the company better when we compare the two on an (honest) apples-to-apples basis.

Also, some life insurance companies are mutual companies. This means that the companies are owned by the policy owners, like in a co-op. This also means that policy-owners receive dividends, which you can think of as participation in the profit of the company. You might ask yourself, “would I prefer to own a profitable company, or an unprofitable company?” If you follow North’s anti-profit animus, you might choose the latter. But if you’re like the rest of us, you might dismiss this lazy lapse into the anti-capitalist mindset and prefer the former.

They label whole life as “permanent insurance.” An annual renewable term policy is renewable by law. It is permanent if you pay your premiums. The companies use deception to sell a much poorer product from the buyer’s point of view.

North is technically correct that term insurance will renew year-to-year. Conveniently, he leaves out the fact that while the policy itself will remain in-force (renewed), the premiums will rise. Those higher premiums do not purchase additional death benefit. Put differently: sure, you can treat term life insurance as “permanent” if you’re willing and able to pay premiums that rise by double-digit percentages every year, particularly in your middle ages and beyond.

In contrast, whole life insurance premiums are level. This means they are contractually guaranteed to not increase, even as you approach the time of payout, even if you get sick, and even if you become disabled. You might say North is using “deception” when he illegitimately compares annually renewable term with its high-rising premiums post-term to level-premium whole life.

Third, the whole life policy’s insurance coverage shrinks over time. As you grow older, the company agrees to pay less to you above your own money in the policy. At age 65, your widow gets paid if you die. Not a dime of this is insurance. It’s all your own money. She gets her own money if you die. Some deal!

One wonders what sort of “whole life” policies North encountered in his considerable experience. No whole life policy I’m aware of has a death benefit equal to the individual’s cumulative premiums at age 65 — or any year for that matter. Maybe North has confused whole life with another type of “permanent” insurance called universal life (UL), an unfortunate, relatively newer product (created in the 1980s; whole life was created in the mid-1600s) that can “implode” on the owner in one’s middle age. That’s too bad if he is. Imagine a technology writer who confuses a PC with a Mac and you have a good idea of an “economist” who confuses universal life with whole life. It’s a basic, categorical difference. Put differently: all whole life insurance is permanent insurance, but not all permanent insurance is whole life insurance. Best not to throw the whole life baby out with the permanent insurance bathwater just for the sake of a lack of critical thinking.

The salesmen do not show the buyer a chart of how the insurance coverage declines to zero at age 65. The buyer might figure out what is really going on.

Again, this is a product of North’s regrettable refusal to distinguish between types of permanent insurance.

Whole life insurance is bought by economically ignorant people. The industry profits from buyers’ ignorance. It charges huge commissions, which are paid to salesmen. This is why corrupt salesmen over time cease to listen to their consciences about deceiving the ignorant. Whole life policies offer low coverage for young wives who need at least $250,000 of coverage. Few young families can afford to buy whole life policies this large.

Whole life insurance (by the way — have you noticed that North has resumed calling this particular type of asset insurance by it’s correct name, i.e. life insurance?) is purchased by economically savvy people who understand the power of tax-favored, compounding, guaranteed growth in a piece of private property over which they have contractual authority. Unfortunately, the benefits of whole life are relatively unknown to most people (admittedly, even to most financial agents), so the ignorance factor actually works against those of use who understand it — and especially those who understand the Infinite Banking Concept.

$250,000 worth of coverage actually isn’t very expensive. Additional death benefit can be added to whole life insurance at relatively little cost too, if needed. And while it is true that you can buy more death benefit per premium dollar for a limited term, it’s also true that if you begin to accumulate capital — even a small amount — at a young age inside a properly designed dividend-paying whole life policy, it can yield impressive cash-flow in your later years after that limited term.

A whole life policy is not indexed for price inflation. Your savings portion gets destroyed by inflation.

This fly-by-night claim implies that indexing is the only way to hedge against inflation. What if I told you that with a properly designed dividend-paying whole life policy, you could access more and more money from the insurance company to use for your own purposes even while your premium payments remained fixed? Increasing benefits with fixed costs is its own hedge against inflation. I imagine that North’s misunderstanding here is rooted in a deeper misunderstanding of the poorly-labelled “savings portion.” That “savings portion” is actually equity. Would you call the equity in your home the “savings portion” of your mortgage? Probably not, but that’s effectively what North is doing here with what is called the cash value of whole life insurance. Put differently, in an environment of rising prices, you should want benefits that rise in value over time and costs that fall.

Curiously, North suggests exactly the opposite. He would have his readers pay in a higher quantity of depreciating dollars for the same fixed benefit. This means followers of North’s advice would have to work doubly hard to eventually receive the same benefit — in the first instance to earn more dollars, and in the second instance to compensate for the falling value of each of those dollars.

I call it a sucker’s product. You may want to call it something else.

Nelson Nash refers to properly-designed whole life as “a personal monetary system with a death benefit thrown on for good measure.” My mentor James Neathery calls it “the ideal primary residence for your capital.” The optimal “warehouse of wealth,” the “best place to store cash,” and the “ideal entity to protect, build, and use capital” also come to mind. All of these are better, more accurate conceptualizations than North’s blunt refrain.

You can buy term policies on-line at hundreds of sites. Buy the cheapest A-rated company you can find, either annual renewable term (permanent) or level-term (a physical is required after 10 or 20 years — not permanent, but cheap).

Is this life insurance advice? I wonder if North is licensed to give advice on how to buy life insurance. I’m no advocate of state-mandated licensing, but given the option, would you see a licensed or an unlicensed physician to treat cancer? Would you prefer a licensed or an unlicensed dentist to fill your cavities? Furthermore, who would you rather interact with in the event of loss of a loved one, a website, or a person with whom you’ve formed a relationship? It’s curious that North the “economist” suggests trusting ratings agencies too. This piece was written in 2009 — after the financial crisis. Was North aware of the role the rating agencies played in that crisis? Readers might look instead to whether a given company is a mutual company (as opposed to a stock company), and for how many consecutive years that company has paid a dividend.

North persists though, citing another unlicensed, non-financial professional: the television and radio celebrity Dave Ramsey.

If you don’t want to spend money, read this article by Dave Ramsey. He gets to the heart of the matter.

[Ramsey:] Sadly, over 70% of the life insurance policies sold today are cash value policies. A cash value policy is an insurance product that packages insurance and savings togetherDo not invest money in life insurance; the returns are horrible.

Let’s cover some finance 101. An investment involves forfeiture of the use of funds for a period of time. In order to access invested funds, some or all of the investment must be liquidated (sold off).

Cash value life insurance policies have contractual provisions that give the owner the right to access funds from the insurance company at the owner’s discretion while the policy values continue to grow. I don’t know whether cash value life insurance (whole life) is the exact opposite of an investment, but it certainly isn’t one, nor do people who understand it pretend that it is.

We won’t get into the fact that Dave Ramsey’s main suggestion for building capital is to do so through mutual funds acquired with money via tax-qualified plans like a 401(k), or how in the financial crisis many people’s tax-qualified plans took a veritable kick in the teeth to the tune of 30–50% losses, or how in order to get your hands on money you lock up in those plans before age 59.5 you must pay Uncle Sam an additional 10% penalty for the privilege. These are details for another time.

Hilariously, marketing and selective sales-hater North recites the following tagline, which is itself only a couple-decades-old marketing slogan.

His [Ramsey’s] conclusion is my conclusion: “Don’t do cash value insurance! Buy term and invest the difference.”

Note what is missing in the “buy term and invest the difference” mantra: capital formation. Purchasing term means an additional expense — no equity building. Investing the difference (between what you’d pay in whole life premiums versus term premiums) means additional separation from the use and access to funds — again, no equity building. “Buy term and invest the difference” is the Siren song of the financial mega-institutions whose bread and butter is your assets under their management. Buyer (and reader) beware.

I regard anyone who sells whole life policies as morally corrupt. He knows they are losing propositions, but he will not sell term policies that would adequately protect widows and their children in their time of terrible loss. The whole life policies are so very profitable. “Let other men’s widows do without. My widow will do just fine.”

I regard anyone who calls life insurance death insurance, who confuses universal life with whole life, and whose financial philosophy revolves around segregating individuals from control and use of their money as financially ignorant at best and arrogantly insidious at worst. In the very least, people who talk about life insurance should understand the economic legitimacy of risk-pooling, the validity of the law of large numbers and actuarial science, and the morality of familial inter-generational planning.

Murray Rothbard said:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

One could replace “economics” with “life insurance” and the general meaning of Rothbard’s claim would ring true with equal clarity. Back to North…

The reason whole life policies have such high commissions (“loads”) is that companies know that the salesman’s time is very valuable. If he can get in the door to make a sales pitch, the company wants him to sell whole life policies. The company pays accordingly.

The payouts on products between which North fails to distinguish like universal, variable universal, and equity-indexed universal life insurance all typically pay higher commissions than do whole life policies. Of course, the particular level of commission is subject to competition and voluntary choice. If one were to read North’s piece without the frequent digressions into anti-capitalist philosophy, the article would be half as long, and mercifully so.

At any time over the past 20 years, had I died, my wife would have received a tax-free check for a million dollars. It is tax-free money because we paid the taxes on the money before she paid the premiums.

The money would not have gone into my estate to be taxed. She pays for the policy out of her own personal bank account. The money would have gone straight to her — no estate executor, no tax man.

This is the way to buy death insurance. There is no other economically efficient way — from the buyer’s point of view.

All life insurance payouts go income tax-free to beneficiaries. The only difference is that the older owner of whole life insurance who passes nearer to natural mortality — by when North will have dropped his very high-priced term insurance — will leave a much greater sum to the next generation, and will have enjoyed the use of concentrated, guaranteed capital during his lifetime.

The second part of North’s piece addresses my specialty: the Infinite Banking Concept. Apparently someone subscribed to North’s site (I wonder what the moral status of that transaction is in North’s framework), and with impressive politeness invited North to reconsider his rigorously incorrect view of whole life insurance.

A month ago, one of these self-deluded sellers of deception joined this site. He wrote to me two days ago.

[The subscriber:] I just subscribed to your website to learn about your views on money. A close friend and client of mine recommended you to me. So I went by faith and paid the $14.95 for the first month. My main reason to join was to find out what you felt about life insurance. Once I read your thoughts and advice I instantly got offended. I am very familiar with Ludwig von Mises and Murry Rothbard’s works. I have studied “Human Action” intensely. I’m not an economist nor do I want to be. My profession is providing life insurance to clients. About 95% of the type of insurance I provide is whole life. What you said about whole life insurance is true, but it’s not all like that. I suggest that you do some research about what whole life can actually do for a person in their living years…called a living benefit.

He then referred me to websites of some really big-time deceivers. They re-package the lousy product in order to sell to ignorant people with even more money to waste.

The concept is called “infinite banking.” It’s also called “become your own banker.” It is really “Whole Life for Dummies With More Dollars Than Sense.”

Become Your Own Banker by R. Nelson Nash is the single greatest book on finance you can possibly read. North’s occasional admonishment that those who understand whole life are self-deluded is puzzling given that we can illustrate our concept in black and white in one 10–16 page document. That means I can show my clients guaranteed growth in their capital on paper for every year of their life. Can Dave Ramsey do that with mutual funds?

Here’s the deal. You buy a high-commission policy. Then, after six years, the company lets you borrow against it. You pay the company interest — to “yourself,” the ads claim.

This is wrong on three counts. First, the commission per dollar of death benefit on a policy designed for the Infinite Banking Concept (IBC) is lower than the commission per dollar of death benefit on a whole life policy with standard design by a large margin. Second, a policy owner can borrow against the value of his policy within days of starting the policy. The emboldened “six years” is either a misconception or a lie. Either way, it isn’t true. Third, to get a loan — called a policy loan — from the company, you do pay interest to the company (of which you are part owner). You do not technically pay interest to yourself. Nelson Nash is explicit about that in his book and so is any Nelson Nash Institute Authorized IBC Practitioner worth his salt. That North has droned on about deception up to this point in the article is nothing short of comical.

If you know what whole life insurance is, there is nothing new here. Any whole life policy lets you do this. Then what’s new? Packaging. They sell the same miserable policy to people with more money.

You can find a way to agree that there’s “nothing new” with ordinary, dividend-paying whole life. After all, it’s been around for centuries. But the Infinite Banking Concept does presume a very specific policy design. This means that the premiums are structured in a way they otherwise would not be, and this has big implications for the performance of the policy values. That isn’t just a change in “packaging.”

Go to a CPA. Ask him if you can borrow against any tax-deferred retirement plan. You can if you follow IRS guidelines. You can put in the money and borrow when you want it. You pay interest to your plan — not to an insurance company. You are your own banker.

When we talk about money, it’s very important to be precise in our language. What is means to borrow money from is categorically different from what it means to borrow money against. In the former instance there is a withdrawal whereas in the latter there is collateralization. Withdrawing interrupts what otherwise may constitute compounding growth (positive percentage increases over consecutive years) whereas collateralization does not. To understand the power of compounding (which North doesn’t mention at all) with regard to building wealth and capital, consider reading Rich Man, Poor Man in the Dow Theory Letters. Again, we see North inappropriately implying a comparison of things across theoretical categories and using his conclusions to justify his condescending argument.

This preposterously poor investment plan has been around for 30 years. A critique is provided by two sellers of universal life policies, who complain that the whole life salesmen tell people that the deal is available only to whole life buyers. This cuts the universal life salesmen out of the territory. They deeply resent it. Read their critique here. It’s aimed at insurance salesmen, not buyers. They are furious that the whole life agents are raking in the commission money from rich people before universal life salesmen get to them.

[From the UL salesmen:] Their system is designed to be used with only higher income earners! Their prospects must be willing and able to put away large sums of money. Unfortunately, this severely limits the amount of prospects available to you. And, it puts you in direct competition with all the companies and advisors working the more affluent markets.

Again North relies on patently false assertions. The IBC does not require “high income.” I started my own IBC policy in college at about $71 per month. I have a client considering a policy where he will pay $30 per month. My own clients range from fixed-income retirees to part-time employed graduate students to real estate investors. Rather than a “severely limited” clientele, I can work with anyone who is open-minded, who is willing and motivated to learn, and who understands the importance of thinking long-term. And frankly, I don’t “compete” with companies and advisers servicing affluent clientele, because the IBC is in a whole other league. In fact, the IBC can improve the position of the affluent client who also utilizes the services of other advisers.

That is what infinite banking is all about, from an agent’s point of view.

Well, no, it isn’t.

This re-packaged hustle is what my subscriber wanted to show me, so that I would understand that whole life can be a very good deal for buyers. He wrote:

[The polite subscriber:] The reason I took the time to write you is not to argue about insurance. I want individuals like you who have a following to be speaking the truth about how people can use life insurance effectively. The Lord requires us to seek knowledge and understanding. I pray you take the time to look up the websites. It will benefit you and your life more than you thought possible. Also, give me a call if you would like to speak further about this subject. I’m always wanting to learn about the truth. I have found some great articles written by you. I think you’re doing a great job. Thanks for your time.

I do not like being lectured to by someone I regard as an immoral deceiver of the naive and trusting. When they invoke God’s name, this enrages me as few other things do. That this man thinks I want to hear his self-serving views on this high-commission product is simply astounding.

Maybe North wouldn’t regard this polite individual as an “immoral deceiver of the naive and trusting” if North understood the subject. Note the recurring lapse into the anti-capitalist mindset with the “self-serving” language. Is North doing something other than serving himself when he sells access to his content for $14.95/month? Are his buyers “naive and trusting” too?

I have studied this subject for 35 years. Yet he wanted to straighten me out. The product is inherently deceptive. It offers high-priced death insurance under cover of savings — a savings product as poor as the death insurance portion.

This must be hyperbole. No one who “studies” life insurance for 35 years would consider “death insurance” to be more accurate than “life insurance.” Nor would that studious mind consider the (inaccurately labelled) “savings product” aspect of whole life as “poor.”

I encouraged him to either quit selling the product or quit my site. I called him what I think he is: immoral.

He sent a letter back saying I was mean and that he would pray for me.

This is the second time I have gotten this response from a Christian seller of whole life policies. The first time was about 25 years ago at a Christian conference. Someone knew of my views on whole life insurance. He said I should talk with an insurance salesman in the room. I did. I told him exactly what I thought of his career choice. He said he would pray for me. As I walked away, I said to my companion: “He spells that p-r-e-y.”

I wonder how many more of his paying customers North actively disdains. This is a curious orientation to one’s clientele.

I have watched salesmen peddle these products to the ignorant and trusting for 35 years. I believe that the men who sell this product have what the Bible calls seared consciences. I believe their quest for income at the expense of the ignorant has blinded them morally. I do not trust a man who sells whole life insurance.

I canceled his membership and sent him a refund for one month.

Finally, some justice. Though you could say that North owed this heroic, polite, former subscriber a month’s interest too (ha!).

Here is the latest Gallup poll rating of trusted professions. Insurance salesmen rank #5 from the bottom. They are above Congressmen. If the poll had specified “life insurance salesmen,” my guess is that they would have been ranked lower than Congressmen, though possibly above used car salesmen.

Perhaps life insurance agents have a poor reputation because writers who don’t understand life insurance publicly bash the product and the people who provide it. Whether the ranking North mentions is cause to conform to his diatribe and ignore his errors is another matter.

Parents: please show this article to your teenage children. I have placed it in the public-access portion of my site. Send it to a married daughter. Your son-in-law may have bought a whole life policy. If he dies, you may have your daughter and her children living with you a year later, after the money from the whole life policy is gone.

Parents, if you show North’s article to your children, consider showing them this response too. Furthermore, consider discussing your situation with someone who is actually in the industry. Someone who understands what life insurance is in the first place, who understands the importance of building capital, and who understands the various types of permanent life insurance may offer a more comprehensive perspective than what North provides.