John is the son of a client and has a young family. He reached out to us because he had been approached about overfunding a whole life insurance policy and borrowing out the cash value to execute Dave Ramsey-style debt snowball. This concept – overfunding and borrowing back out – has been marketed under several names over the years – Banking on Yourself, Infinite Banking, and now Debt Snowball.
I’m not going to get into the pros and cons of the concept…you can Google Infinite Banking and see pages and pages on both sides of the argument. And is this concept good or bad? I don’t know…is a hammer a good or bad tool? It really depends on what you are trying to accomplish. If you are trying to cut a piece of lumber it’s not so great, but if you are trying to drive a nail, it’s pretty awesome.
We always start with the question of “What is a simple and cost-effective strategy that a person can use to meet their objective?” In this case, John wanted to pay down his debt quickly and build a reserve uncorrelated with the stock and bond markets that he could use or collateralize in the future.
After reviewing the sales material he had been given, we showed him other strategies he could use on his own – without us or an insurance company – and meet his objective with less cost and complexity.
Is the Banking on Yourself concept right or wrong for you? I don’t know…only you can decide that. Our advice to you, as with any major financial decision, is to determine what it is you are trying to accomplish, run the numbers on alternate strategies, then decide for yourself.
Securities and advisory services offered through LPL Financial, a registered investment adviser. Member FINRA / SIPC.
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your advisor prior to investing.
Dave Ramsey is not affiliated with Paul Peeler, IFG or LPL Financial.