A Five-Minute Lesson on Life Insurance


We all are well aware of the role that life insurance can play in one’s financial life. Those who are regarded as financial experts have touted different types of life insurance products and/or strategies as the binary “best option” for decades. However, I would submit to you there is more to consider when selecting a life insurance policy for yourself, a loved one or business partner. 

It’s usually best to think about life insurance as a continuum… a sliding scale that can present different costs and benefits as you move down the line. We’ll hit on three points today on said continuum in this lesson. On one extreme end, you have term insurance. This is the most popular form of life insurance due to its very low cost and relative ease of acquisition. The tradeoff of course is that you only have this coverage for a specified “term” that is set to last 10, 20 or even 30 years. When purchasing this type of insurance, people will normally anticipate letting this coverage go at the end of the term if not before. 

On the entire opposite end of the continuum, you have something called single premium whole life. This is designed to deliver a small death benefit and hold as much premium and cash surrender value as possible. This was a popular strategy early in the 20th century, made popular by self-made billionaires such as the Rockefellers, Carnegies and Vanderbilt families. Their intent was to make use of the tax-advantaged nature of life insurance while allocating very little premium dollars to actual death benefit. They wanted the living benefits of life insurance to be amplified above and beyond the death benefit. 

One would think that the design of an infinite banking style solution would, if given the choice between these two, mimic the second type. Well, there is one hurdle that people in current day must deal with that wasn’t an issue back in the early 1900s. Modified Endowment Contracts, or “MEC’s” were created as part of TAMRA in 1988 when the US Congress was seeking to respond to these policies being used as tax shelters. These contracts are created when premiums paid exceed the allowable amount to maintain tax free treatment of life insurance cash value- in other words, too much premium is allocated to cash surrender value and not enough to death benefit. 

Understanding how to toe this line is really a key design feature when designing a policy built to be used for infinite banking purposes. Working with someone designated as an Authorized Infinite Banking Practitioner is critical when seeking to strike the ideal balance between the cash surrender value and death benefit among many other design features. 

To conclude this lesson, let’s pinpoint the final relevant spot on our continuum. The MEC line will fall in different places based upon a person’s age, health, gender, etc. Our objective is to stay just right of that line, which allows us to direct more premium towards cash surrender value and less to death benefit while still maintaining the tax-advantaged value presented by life insurance. Once you have some context about the history and design features of life-insurance, you can focus on the best way to leverage it based upon your desired outcome.