Do you want to be your own banker?

Buying an 'infinite banking' life insurance policy may not be the best way to build long-term wealth for retirement.

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By Walter Updegrave, Money Magazine senior editor

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

NEW YORK (Money) -- Question: An adviser has been telling me about a concept that he calls "infinite banking." Apparently, it involves using a life insurance policy to become my own banker. It seems like a good idea, but something doesn't seem quite right to me. Do I have cause for concern? - Matt, St. Louis, Missouri

Answer: This concept that your adviser is touting has nothing to do with banking, at least not in the sense that any normal person thinks of it. And the only thing "infinite" about it, in my opinion, is that it represents yet another in the seemingly infinite number of ways people can come up with to induce you to invest in life insurance.

Now, I want to be clear. I have nothing against life insurance. Virtually everyone who has family members depending on him or her for their livelihood should have a life insurance policy, as it's the only financial product that can replace income when a breadwinner dies.

I think the best way for the overwhelming majority of people to get the valuable protection life insurance affords is through a low-cost term policy, although in some circumstances other types of policies can also make sense.

The downside

What I do object to, however, is advisers employing mumbo-jumbo and financial sleight of hand to convince people that they should be plowing money into certain types of life insurance policies when they're likely better off in more conventional investments or simply funding regular old retirement plans like 401(k)s and IRAs.

When you strip away the gibberish surrounding pitches like infinite banking, it basically comes down to this: You should invest in cash-value life insurance because it pays dividends (which aren't taxed as long as they remain within the policy) and you can borrow against the policy. Somehow, these dividends and the ability to borrow are supposed to make you a banker. Right.

At its core, this spiel is similar to other questionable life insurance sales tactics I've written about, such as the "7702(a) Private Plan" pitch, which essentially couches life insurance policies as an IRS-approved retirement plan.

I don't know what, if any, specifics this adviser discussed with you. But what these sorts of sales presentations tend to gloss over are the high costs of investing via life insurance and the fact that borrowing from a policy can have serious downsides. (See more on those drawbacks.)

To be honest, I don't think this sort of proposal is worth a lot of serious consideration. But if you're sufficiently intrigued by it and the adviser has given you concrete figures and projections, you can always hire a financial planner on an hourly fee basis to do an independent analysis.

Lower life insurance costs

Ultimately, I think what you'll find is that your best shot at building long-term wealth for retirement and your overall financial security is to keep your life insurance costs down by buying a term policy. That will free up more money that you can then contribute to tax-advantaged retirement accounts like 401(k)s and IRAs (preferably investing that money in low-cost investments like those on our Money 70 list of recommended mutual funds and ETFs).

So the next time this or any other adviser starts telling you he's going to let you in on some little-known and unique strategy that will put you on the road to riches, just remember: There is no magical path to financial success. There are, however, an infinite number of ways you can get hurt looking for one. To top of page

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