When you ha
ve a product to sell that really doesn't provide much of a benefit to anyone, what do you do?  If you're the insurance industry, you wrap it up in a concept that sounds great and try to get everyone to ignore how awful it really is.  Welcome to "Infinite Banking" or "Becoming Your Own Bank." 

Here's how it works.  You purchase a horrible insurance product with a low rate of return.  The insurance agent pockets a hefty commission for selling it to you.  In fact, some of them even suggest that you stop contibuting to your 401(k) plan and forego paying off debt so that you'll have more money to buy a larger policy (and they make a larger commission).  Now, instead of paying interest on a loan for your house or your car or whatever else you've financed, you borrow money against the insurance policy from the insurance company.  Yes, you still have to pay interest on that loan, too, but the trick is this - the insurance company credits a similar interest rate to the cash balance of the policy that's used to secure the loan.  The interest rates offset each other and voila!  You have a virtually interest-free way to borrow money.  Sounds good, so far, doesn't it?  Well, read on.

The insurance product at the heart of this scheme is almost always whole life.  We've written about it before and it's an awful product with a dismal rate of return.  Here is where the math stops working and the sales pitch falls apart.  The rate of return on the policy is so low that none of the rest of the equation really matters.  You will, over any reasonable amount of time, end up with a lot more money if you invest in a balanced porfolio of stocks and bonds with inexpensive term insurance, indexed universal life insurance or an equity indexed annuity.  We've read the books and we've built the model to see what the returns really look like.*  This is as close to a scam as anything being peddled on late night TV infomercials.

The industry is rife with these kinds of schemes.  We recently heard about a "personal pension plan" from an insurance salesman.  He even tacked a number onto the description, which turned out to be the number for a tax code chapter dealing with life insurance.  And, that's exactly what the "personal pension plan" was - a life insurance policy.  I guess lying about what you are selling to get your foot in the door is a strategy of some sort - a really bad one.

* Scott read the book and built the model in Excel, I just wrote the blog article.