I agree with all the reviews that criticize this book for its anecdotal, infomercial tone- the writing is more irritating than informative, and I was annoyed by all the come-ons that insist only the author's website and stable of very special "Certified Advisors" can construct such an insurance policy for you. If it's really so old and established, surely a fee-only, non-commissioned insurance broker, lawyer or other third-party professional could help you construct your own plan and not be confounded by the concepts in this book (as the author claims). For $15, I expect that I am paying for solid information I can use, not a drawn-out advertisement. Thank goodness I checked it out of the library first. It gets three stars for presenting an interesting financial tool, but gets docked 2 stars for the bad presentation and shameless self-promotion. But here is the plan boiled down, as best I understand it (and I'm no financial whiz- if this is totally wrong, someone correct me):
You take out a whole life insurance policy with a mutual/ participating insurance company (this means you are automatically a shareholder in the company as well as a policyholder, as opposed to insuring with a commercial, publicly-traded company in which you only own your policy and have no stake in the company unless you also buy stock- kind of like a credit union vs a bank, so you receive dividends on the cash value of your policy). Your policy allows flexible paid-up additions riders (PUAR) to be paid in addition to your premiums, up to the IRS limit per year. Your policy also must allow non-recognition loans, so that you can tap your cash value for policy loans without sacrificing the dividends paid on the total cash value of the policy (including the amount you took out on a loan). So if you take out a $3,000 loan on $10,000 in cash value, you will still receive dividends based on the full $10,000 as long as you are repaying your loan (or at least the interest).
Essentially, every month you will pay your insurance premiums for your base policy death benefit (using totally arbitrary numbers, say, $500 a month for $250K in death benefit), plus a PUAR payment, let's say $250, that buys you additional, fully-paid death benefits, but does not increase your base premiums, so even though your death benefit continues to rise, your premiums remain the same. So you're on the hook for the $500 in premiums, but you put in $750 to accelerate your cash value. So after a few years you may in fact have a $275K death benefit, but still only have a $500 premium obligation. There's no magic here- you paid cash for that additional death benefit, but it is paid in full, rather than stretched over time like your base $250K benefit. The PUAR allows the cash value of the policy to increase faster than in a typical whole life policy, and your dividends are based on this cash value. Dividends are tax-free as long as they remain in the policy, so you are encouraged by the author to use them for purchasing more PUAR insurance year after year. The more PUAR you purchase, the higher your cash value, the higher your dividends, the more PUAR you can purchase the next year etc., etc.. Essentially, you are compounding your dividends, as you would compound interest in an interest-bearing investment. But you have to be careful- there are IRS limits on the amount of PUAR you can put into a policy, and you can lose tax benefits if you overstep those limits.
It takes some time to build enough cash value to take out a large enough loan to buy a car or take a vacation, but once you do, you can take policy loans out against your cash value and then pay them back to your policy with interest. This is supposedly how you "get back every penny" on your major purchases. But wait- you are still paying those premiums and PUAR payments at the same time you are repaying the loan with interest, so let's pretend you are now paying $750 a month to repay your policy loan in addition to the $750 you are paying to keep the policy in effect AND increase the cash value with PUAR payments. Essentially, while you are "paying yourself back", you are paying double ($1500 a month). Yes, the money is coming back to you (going into the cash value of your policy), more or less (the interest is not credited to your account, but you get a portion of it back in your dividend), but you will have that much less to live on during those months. Boiled down, this is a forced savings plan, and essentially you could do this much on your own with a bank account if you have iron discipline to continue high payments without a contract over your head. Fortunately there is a little leeway here- you can always stop PUAR payments during loan repayments if your policy gives you that flexibility (though your cash value will increase more slowly), and if things get really tough, only pay the interest on your loan and not the principle (though if you die, your death benefit will be reduced by the outstanding loan amount). Plus you are getting your dividends in full, as opposed to a bank account where you would lose the interest on any amount you took out.
So if you could double-pay yourself using a bank account, what's the real benefit? Your insurance benefit, the non-recognition status of your loans and the tax benefits of receiving dividends without increasing your income tax obligations (as opposed to bank interest, which is taxed). Eventually you will have such a high cash value, thanks to your PUAR payments, that at some point the dividends will be enough to pay the premiums in full for your original, basic benefit (your $500 a month for $250K death benefit), and the plan can be free-standing- you won't need to shovel in the cash every month to keep the policy in effect, but it also won't grow in cash value as fast unless you continue your PUAR payments. It will still increase, just more slowly. There are tax and legal protections for life insurance policies that will benefit you, as well as guaranteed benefits for your beneficiaries. Ultimately, you have to decide if you can live with the pinch and pain of overfunding a life insurance policy, particularly in the early years when you accumulate almost no cash value, and then during loan repayments, to also get the insurance, tax, and legal benefits. But I would definitely consult a trusted lawyer, accountant or insurance professional to understand the real ins and outs before signing on to the plan.
