becoming your own bank by Nelson Nash summary

October 21, 2022

take-aways

The opportunity cost of money
- This is the first principle we learn from the book, which says that everything a person buys is financed – either by borrowing from a lender or using your own money – otherwise received on the funds.
- Nash further teaches us the concept of EVA (economic value added) – which proposes that you use your funds as a cost of capital. By doing this, you stop paying interest to others and start saving money for yourself.
- Also, having in mind dividends — or how Nash defines them — a form of principal’s return can merely impact your success with IBC. The key is to understand the amount of money you would usually be paying other companies – and deliver it to yourself. That way, you ensure you’re not paying the interest to anyone else.
Borrower & Lender concept
- One of the estimations is that it is required to implement IBC for at least five years to generate enough cash value to begin financing purchases. It will take even longer if the purchase is more prominent (for example, a car or house).
- If you want to establish IBC from the ground level and leave it to the next generations, you should know that this is a long-term investment and a project that will require the next generations to continue where you stopped. It takes 20 to 25 years for the average individual to fully assemble their banking system that can finance everything using life insurance
R. Nelson Nash asks: “what if we deemphasize the death benefit and focus more on the living benefit?” In other words, can a whole life policy be structured so that it has a minimal death benefit but we can stick a lot of cash into it to maximize the cash value and use the money while we are alive?
be dedicated for at least 7 years to maximize the compounding effect of the cash value
Benefits of infinite banking concept
- Being able to reduce your debt as you increase your savings
- Building a college fund without sacrificing to do so
- Easily creating an emergency fund
- Recapturing the cost of business and professional expenses
- Recapturing the cost of the interest you currently pay to financial institutions
- Enjoying financial freedom as well as a secure retirement without worrying about market fluctuations
- Having a guaranteed tax-free death benefit
- Having access to tax-free withdrawals, loans and growth
- money growth
  - it’s important to remember that the infinite banking concept is a capital accumulation strategy, which means that your cash value will be increasing throughout your life - even when you’re taking loans.
- savings
  - We all need a place for our savings – in this case, there is no better safety net than a whole life insurance policy. You know you are guaranteed your life, and your beneficiaries will get the death benefit. Additionally, you know that while you are still alive, you can access your savings anytime and manage them in the way you need.

becoming your banker

Any transaction involves money flow, but where does that money come from? It comes from one pool of money managed mainly by banks, insurance companies, corporations, and a few individuals worldwide. The cash flows from the pool to help us meet our needs are primarily out of our control and back into the banking system.
The concept of infinite banking is strategically using your whole life insurance policy from a mutual insurance company as a personal endless banking system. In other words, Infinite Banking is essentially being your banker.
It means you can borrow the money using your policy’s cash value as long as you own a whole life insurance policy. By this logic, as long as you pay your premiums regularly (thus ensuring you grow your cash value), you won’t need to borrow money from a bank again.
The infinite banking concept works on a couple of principles. Your end goal should be to build the value of your bank, which can be done by repeating the process of lending and repaying money stored in your cash value of a whole life insurance policy.
The Infinite banking concept has money benefits. Some include freeing yourself from banks and worrying about loan rates and possibilities. If you like to be entirely in charge of your finances, the infinite banking concept will allow you just that – to become your banker.
If you wondered what the infinite part of infinite banking relates to – it goes back to the whole life insurance payout. As you know, a whole life insurance policyholder is guaranteed a payout on their deathbed as long as they’ve been paying the premiums regularly. That means that after the policy owner passes away, the beneficiaries will be given the payout and an opportunity to continue the infinite banking concept.
You “finance” everything you buy. As a result, either you pay interest or lose out on the interest you could have earned.
Create an entity. An example of an entity would be a life insurance policy. These are always created to have value. The person who owns the policy has absolute control over how the money is lent and borrowed. The insurance company can only invest money if the policy owner does not use the money and pays interest instead. At the end of the year, the company analyses the policy’s value, and a dividend is declared, which cannot be taxed. “Dividend is then used to buy additional paid-up insurance at cost. Then the result is continuous compounding of an ever-increasing base.”
How does Infinite Banking Work
- Infinite banking concept consists of the following:
  - Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance industry
  - Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy
  - Tax-Free Loans were taken out against your whole life insurance policy’s cash value to use for your financial expenses
- This concept allows you to borrow the money against your cash value like you would borrow from a bank. Additionally, you are also ensuring that your whole life insurance policy is earning dividends at the same time.
- The primary purpose of IBC is to help you gain freedom in your finances, meaning you have complete control of your savings and are guaranteed that your money won’t decrease in value. Not to mention the tax-free benefits that come along with it. When you put everything on paper, you can understand why becoming your own banker is appealing.
- Comprehensive guide to life insurance
- high early cash value, dividend-paying whole life insurance

Creating Your Banking System Through Dividend-Paying Whole Life Insurance

First, he stresses that everyone is aware that they finance everything they buy; either the interest is paid to someone else, or you give up the interest you could have earned instead.
He then explains the concept of Economic Value Added (EVA). EVA is the amount of profit left over after the cost of the company’s capital is deducted from the operating profit. Before this concept was introduced, companies were borrowing capital from banks and paying interest but treating their capital as having no value. Once this concept was understood, profitability increased.
Creating a product begins with engineering, and the engineers of the life insurance companies are actuaries. They deal with the people who have been through a policy screening process, work with a theoretical lifespan and provide that information to rate makers. These people determine what the company will need to charge the client to pay the death claim. These matters are then turned over to lawyers to make contracts sold to clients. Finally, administration workers hold these matters all together.
To make an insurance plan work, the policy owner makes payments, and the company uses that money to produce the benefits promised in the contract (e.g., by investing in real estate). However, the policy owner has total control over how the money in the policy is invested. Therefore, money can only be invested by the insurance company if the policy owner does not use the money and pays interest instead. If the owner does not do so, the company has access to an increasing pool of money.
Sometimes, the policy owners die, and the money is given to them from this pool of money. However, policies are generally made to benefit the company. “That is because the cash value is guaranteed to reach the face amount of the policy by the age of 100 of the Insured. There is an ever-decreasing “net amount at risk” for the company” (pg. 37).
Essentially, the contracts are designed to do well no matter what. So once the dividend is declared, the policy can never lose value in the future.
There can be periods where expected earnings are lower; businesses would turn to stockholders in this case, but this does not work for life insurance. Instead, capital is added to counteract this. For example, if accountants report that they have collected $1.10 from someone’s policy but found they only needed 80 cents to deliver the benefit, then the directors would decide what to do with the 30 cents. Most would put a portion of this into a contingency fund for unexpected risk and distribute the remaining dividend. Distributing the dividend is not a taxable event. If the client used the dividend to purchase additional paid-up insurance, it would result in an “ever-increasing tax-deferred accumulation of cash values that support an ever-increasing death benefit.”
sun life cash value loan options
- it seems like accessing the policy’s cash value using a collateral assignment is interesting
6 ways to capture cash value life insurance

problems

understand Parkinson’s law
- Northcote Parkinson was a British essayist, lecturer, and economist who shared observations about human nature limitations. Some of these observations include the following:
  - Work expands to the amount of time given to finish it. So, for example, if you are given an assignment due in three days, it is not surprising that it will be completed later on the third day.
  - Enjoyment of luxury becomes a necessity. Once you have gotten used to luxury, we view it as necessary. For example, cars used to have no air-conditioning. That was fine when there were no alternatives, but few would now pick a car without this feature.
  - Expenses to rise based on income. When we have more money, we often view more things as necessities and spend that extra money on them.
Willie Sutton’s Law
- The Willie Sutton Law stems from a story of an interview with the robber. In the story, a reporter asked Sutton why he robbed banks. According to the reporter, Sutton replied, “Because that’s where the money is.”
- Essentially, when trying to diagnose, do, or achieve something, you should choose the most apparent option or route to do so. Essentially, it is a reminder to focus on things that produce the best results most easily and effectively.
- Nash notes that one of the biggest thieves in this world is the Internal Revenue Service. He explains it as follows:
  - If a person goes up to another person in the mall, puts a gun to their head, and tells them to give them all the money in their wallet, those witnessing the situation will view it as theft. However, if the same people gathered beforehand, and Nash explained how they would divide the contents of the wallet among them for an hour, this would be viewed more as democracy.
  - He explains how taxation can be viewed as a parasite-host relationship.
The Golden Rule
- The premise of the Golden Rule is “those who have the Gold make the rules!”. This chapter expands on this idea.
- Most people are so focused on living in the moment that the concept of creating personal capital through savings has lost much of its value. Therefore, someone else must provide the capital to live our lives, which comes at a high cost.
- He illustrates this idea through the Japanese company Panasonic wanting to build a plant in Mexico. Mexico required that Mexican people own 51 percent of the business to make a plant there. As a result, Panasonic pulled out of the agreement. Panasonic had the “gold” in this scenario, so it made the rules.
- Essentially, those with capital tend to have more control over decisions. If you have more cash, good opportunities tend to arise. However, people are still reliant on someone else to supply the capital. Similarly, there is a tendency to look for government solutions to a problem out of their control (e.g., obtaining a loan to afford college). This way of thinking is widespread and needs to be overcome for success.
The Arrival Syndrome
- This chapter discusses what Nash calls “The Arrival Syndrome.” He views this as one of the most limiting mindsets someone can have because we lose much of the ability to receive inspiration. It means that people do not try to do better or think differently because they already know what we need to know.
- To illustrate this, he uses the example of Ed Deming, a well-known business consultant. He is known as the person that taught Japanese businesses about quality. He first tried to preach his ideas to American companies but was brushed off because they believed they were already doing what Deming suggested. Therefore, he brought his ideas to Japan, which was a success. As a result, many business schools now accept and praise him and his ideas
Use It Or Lose It
- This chapter focuses on the last aspect of human nature that must be dealt with to be successful in becoming your banker. It is difficult to get out of our comfort zone; however, it is necessary.
- Nash views his teachings of the Infinite Banking Concept to argue that the world is round when most believe it is flat. It is a relatively simple concept to explain, but it becomes more difficult if you are part of the paradigm that thinks the world is flat.
- To accept a different paradigm, you must develop new habits and ways of thinking. For example, Nash finds that some get caught up in interest rates when learning about the Infinite Banking Concept. Instead, it is understanding money flow and charging interest to yourself and what you own. Doing this with minimal taxation can significantly improve your financial situation.
Creating The Entity
- When actuaries begin creating an insurance plan, they look at many factors that will affect the value of the plan. This includes mortality rates, illnesses, mental health concerns, etc.
- One of the main things factored into the equations is the theoretical lifespan of individuals. Actuaries look at things such as mortality tables. If the rate that participants with an insurance or pension plan have died is better than what is shown on a mortality table, better dividends will be given to policyholders. This is the desired outcome.
- When creating a plan, cost calculations begin with how much it would cost to cover someone for their whole life. This is called single-premium life insurance. However, many do not choose this option. Instead, they choose term insurance. This involves renting a single premium life insurance for a particular time frame, but the death benefit is contingent on the individual dying within that time frame. This is like other forms of insurance (e.g., fire insurance), except those are more for “what-ifs.” Death is something you know will happen at some point, and it is just a matter of “when” it will happen.
- Nonetheless, Nash notes that particular life insurance policies have more value than some may notice. They have fewer qualities in common with standard insurance plans and more in common with banking. “A better name would have been “a banking system with a death benefit thrown in for good measure’” (pg. 68). The idea of the Infinite Banking Concept stems from this idea that there is a lot of nonsense in the market because things are not classified correctly.
- Nash compares this to the common potato. In the late 1500s, conquistadors of Spain were in South America looking for gold. They did not find gold but instead found potatoes. However, when potatoes were brought back to Europe, they were considered poisonous due to their scientific classification. However, over time they realized the value of the potato for consumption and medicinal means. A similar misunderstanding happened with the tomato plant as well.
- When choosing a plan to begin creating an entity with, it is best to select a close plan close to the Modified Endowment Contract (MEC) without crossing it. These are plans that are not treated as life insurance by the IRS. Therefore, these plans will be subject to taxation.
- For this reason, it is best to choose a plan in the middle of the scale (figure on pg. 70) and add Paid-Up Additions to it. The base policy and the Paid-Up Additions will pay dividends that can be used to buy more Paid-Up Additions insurance.
problem with current banking system
- Typical average young man is 29 years old and makes $28,500 per year after taxes — that is all he can spend. What does he do with the after-tax income? 20% is spent on transportation — 30% on housing — 45% on “living” (clothes, groceries, contributions to charitable causes, boat payments, casualty insurance on cars, vacations, etc.). Many of these items are financed by credit cards or bank notes. The balance is financed by paying cash for them — thus, giving up interest that could be earned otherwise. He is saving less than 5% of his after-tax income! (At the time of this writing, he is saving absolutely nothing!) It is the first time in the history of America that this has happened. This scenario has all the ingredients for an impending disaster!
- The typical financing package for an automobile for this hypothetical person is $10,550 for 48 months with an interest rate of at least 8.5%, producing a monthly payment of $260.00 per month. It is a fact that 95% of the cars traded are not paid for. This means, at the end of 30 months, that 21% of every payment is interest – and this is a perpetual factor. It never seems to dawn on him that the volume of interest is the real issue, not the annual percentage rate.
- This young man can qualify for a 30-year fixed-rate mortgage of about $93.000 at 7% APR with payments of $618.75 per month and closing costs of about $2,500.00. The problem is that he will move to another city – maybe across town- within five years – or even refinance the mortgage. Something happens to a mortgage within five years. During the 60 months, he has paid out $39,625, including closing costs but only $5,458 has gone to reduce the loan. This means that $34,167 has gone to interest and closing costs. Divide the amount paid out into the interest and closing costs, and 86% of every dollar paid out goes to the cost of financing! It is worse if he sells the house in less than five years. This situation is also perpetual. He thinks he is buying a house, but all he is doing is making the wheels of the banking business and the real estate business – in that order – turn. But all the “financial experts” are advising him to indulge in this activity.
- Now, add up all the interest he is paying out, and you find that 34.5% of every dollar paid out is interesting. For the average All-American male, this proportion never changes. Let’s assume that he is saving 10% of his disposable income (which he is not doing!). This would mean that we have a 3.45 to 1 ratio of interest paid out as compared to savings.
- Everything you do in the financial world is compared with what everyone else is doing. In America, most folks are doing the equivalent of flying with a 345-mile-per-hour headwind. Isn’t it obvious, if you have a 345-mile-per-hour tailwind, that the difference between you and them is 690 miles per hour? In all three examples, the airplane’s capability is the same — 100 miles per hour.
- Translate this example into the financial world, and it is pretty obvious what is happening. Many financial gurus are concentrating on encouraging people to “get out of debt, ” which is a wonderful thing to do. In our airplane analogy, flying with no headwind is equivalent. But, I have yet to hear one of these folks recognize that the most profitable thing one can do is to create the perpetual “tailwind” to everything that you do financially. It seems that this thought never registers in their consciousness.

how to start building your own banking system

Expanding the System to Accommodate All Income
- When someone receives a payment, they will often deposit it into someone else’s bank. Even if you have your bank account, the institution lends your money to others, and the interest you pay means the money will be gone forever.
- Through infinite banking, the same process will occur, except the individual will make loans to themself and pay them back to the policy. It is the same payment as a banking institution, except it happens tax-free, and the interest never leaves the account.
- So far, Nash has looked at using the life insurance banking system to finance cars, but it can be used to finance most things. You can use the same process to finance comprehensive and collision insurance. To self-insure, you must determine how much more you need to put into life insurance policies to assume the risk. This can be determined by getting a quote from an auto insurer. If they quote $750 annually for a $500 deductible, you will pay your life insurance $1,000 for zero deductible. This can also be applied to a house mortgage. If enough money has been accumulated to pay off the mortgage, you can borrow and pay it off while making sure you pay the policies you would have been paying the mortgage company.
roadmap with milestone

equipment financing

Nash explains other examples where the individual can use the life insurance system to finance equipment for his logging business. This can be done by borrowing from the cash value within the policy. In each scenario, the individual must set up a loan repayment plan that equals or exceeds what the individual would be paying to the finance company he used in the past. Doing this enables more cash flow which becomes capital and can be lent to more people.
It is also essential that the individual does not finance from too little capital. To avoid this, it would be optimal for the individual to add additional policies to finance from. It is also important to continue to capitalize on the policy for four years or longer.
Another strategy to improve the capital is to backdate the policy for six months. Pay the premium now, but ask the company to date the policy six months ago so there will be less time before you can use the policy to cut out the finance companies from the business equation.
The next improvement would be self-insurance with comprehensive and collision damage. It is also advisable to self-insure for liability. By doing this, the individual would be making tax-free what the finance company and the casualty insurance company are making.
The individual would also benefit better from owning the policies himself instead of putting them under the ownership of the company or corporation. The individual can purchase the trucks himself and lease them to the company.
All interest in these scenarios has been paid by withdrawing additional dividend credits. The system can further be improved by selling the equipment down the line. In the end, the individual in this example would have over $3,500,000 available at age 66.

capitalizing your system and implementation

A great way to get started is to find a consultant or coach familiar with the Infinite Banking Concept. They will be there to help mentor you in the process. It is also a good idea to organize or join a club of like-minded people that meets periodically to support each other.
However, the most important thing you can do is get started as soon as possible. “The longer you wait, the more you have penalized yourself.”
The Cost of Acquisition
- Many businesses realize that it is necessary to finance a business, but they do not address the cost of acquisition of finance. Unfortunately, it is often costly to do this.
- Nash looks at the example in the book “Iacocca.” Lee Iacocca shared that he would not have gotten involved in Chrysler if he had known how bad off it was. To get out of it, he had to get a government-backed loan. To get this, he had to gather the highest-paid members of the company to persuade lobbyists. Months later, they had succeeded in doing so.
- However, they only had the government’s back guaranteed. They also had to get money from the bank and only was given one-third of the amount at a time. Then, when the next third was needed, they had to go through the same costly and time-consuming lobbying process.
- This example shows the cost of the acquisition of finance, the cost of finance. The ones that paid for all the activity were Chrysler customers.
“But, I Can Get a Higher Rate of Return”
- When someone is introduced to the Infinite Banking Concept, many know they can get a higher rate of return from a different investment. However, that is not the point of becoming your banker. The focus is not on the investment yield. Instead, it is on how to finance things you buy with your banking system.
- Nash demonstrates this idea through the following example:
  - Investor “A” invests $100,000 for one year and earns 20 percent. So the net yield would be $14,000.
  - Investor “B” builds cash values of $100,000 into a dividend-paying life insurance plan, then borrows from the system for eight percent and makes the same investment. The net yield would be $8,400. However, this investor would earn $8,000 from the banking system, so that the total yield would be $16,400. There will be a delay when first setting up the banking system, but it will be beneficial in the long run.
A Different Look at the Monetary Value of a College Degree
- In this chapter, Nash looks at the value of a college degree. Growing up, he was told that getting a degree would offer more monetary value, but he suspects this may not be the case.
- First, he looks at where the desire for everyone to get a college degree originated. He traces it back to World World II. Many students wanted to get their degrees because they feared that those returning from war would return to civilian life and ruin the economy. Therefore, getting a college degree became more of a necessity. Nonetheless, the cost of getting one has risen past the economy’s inflation.
- To look at a degree’s monetary value, Nash compares the cost of a degree to the importance of teaching a child to use dividend-paying whole life insurance.
- For his example, he assumed that the college degree would get $20,000 per year for four years. If you put the same amount into the high-premium policy, the dividends would be used to pay the base cost for the premium after four years. If that individual retired at 70, the plan’s cash value would be around $2,457,303, and $145,000 dividend credits could be withdrawn for retirement purposes. If the individual was insured to 85, they could have withdrawn a total of $2,175,000; if they died that age, they could also get a death benefit of approximately $2,175,000.
- Nash does not believe that a college degree would produce as high of a financial result. The insured individual could further benefit by using the policies to finance cars, mortgages, and the like.
- “So, in evaluating the financial benefits of the college degree at $80,000 vs. putting that same $80,000 into high-premium whole life insurance, I don’t believe the degree is as valuable. The probability of the college-educated person ever learning the benefits of “banking” through whole life insurance is not very good.”
- Nash notes that this does not mean he is against higher education but believes being educated on using life insurance policies to your advantage will likely provide more value.
What if I am Uninsurable?
- For some people, it may not be insurable given various circumstances. Nash offers an alternative an individual could do instead to get the benefits of being his banker while being uninsurable.
- He provides the example of a 50-year-old father who cannot be insured. Yet, he has a 23-year-old daughter who is in excellent health. He puts $20,000 per year into a policy on her, $10,000, and $10,000 into a Paid-Up Additions Rider.
- After 20 years, they decided to stop premium payments and draw out $28,500 per year in passive income from the cash values of the Paid-Up Additions. This is tax-free and equals the base cost for the policy.
- After another 15 years, the father is 85, has taken out dividend additions, and wants to continue getting tax-free income. He can do this by switching to policy loans. If he dies at 85, he will receive $1,110,726, which will be given to his daughter.
- The policy is still there for the daughter to finance parts of her life. However, if she chooses not to, she would still be able to surrender the dividend additions for $150,000 for the rest of her life. If she dies at 90, this would mean she has received $3,150,000 in passive income and will give future generations a $2,378,391 death benefit.

Examples

grocery

Nash looks at getting into a business where you are simultaneously a consumer and a seller. An excellent example of this is a grocery store because everyone consumes groceries, and everyone around you is a potential customer.
When you begin studying the grocery business, you find the things necessary to succeed in this field, including a good location, high-quality merchandise, attentive staff, fully stocked inventory, etc. All of this will cost a lot of money.
Once the operation is set up, the difference between the “front door” and “back door” helps determine how you will live. For example, if you sell a can of peas for 60 cents at the front door, and replace it at the back door for 57 cents, then you must turn the inventory 15 times to break even; this is the interest you must pay on the money borrowed to set up the grocery operations. If you turn the inventory 17 times, you make a profit; turning it 20 times in a year can help pay for early retirement.
Next, Nelson asks you to imagine if you were a male, married with children, and your wife bought groceries at your store. Would she take groceries from the front or back? Many admit that the wife would want to go out the back door instead. However, this behaviour is theft and can encourage more theft among employees and customers.
Many believe that they can do whatever they want with their business. However, the ones that pay for this theft are the customers getting their merchandise from the front door, and your business will need to sell more products to make up the deficit. The more you make, the more the IRS will take from you; this is another reason people want to go out the back door instead.
If there is a situation where the profits from the grocery sales are not subject to income taxes, one of the incentives to go out the back door is taken away. The only reason left is the human instinct to use the back door. However, in this scenario, you and your family (plus some others) are captive customers. If you charge wholesale prices, you are not creating more proceeds for retirement income. Charging the retail price on the peas can help you buy more cans to sell to other customers. If you continue to do this for an extended period, it will create a profit. This will also create more value and income when selling the business.
When you sell your business many years later, you compete with others that have not obeyed these principles. He and his family members took goods out the back door. His record books will never look as good as yours. He will probably have gone out of business some years ago. Even if he is still around, can you guess which business will bring the better price? Yours! With the proceeds from the sale, you can buy a considerable annuity and have income deposited monthly directly to your bank account at retirement time.
Grocery stores are in the business of moving groceries to customers. When you sell something, you must replace the item to sell again. If you own the store, don’t steal the peas. Banks are in the business of “renting money” to customers. When they lend money, they must get it back with interest. If you own the bank, don’t steal the money!

Questions

what is the case for whole life insurance?
- attributes of a theoretically perfect investment would include things such as safety (meaning the asset’s price would not likely drop), liquidity (meaning the owner could turn the asset into its “fair” market value quickly if needed), high rate of return, tax advantages, a source of income (i.e, not merely appreciation in price), uncorrelation with the stock market, a hedge against price inflation, and protection from creditors in the event of bankruptcy
- gold is an excellent inflation hedge, but it does not provide a flow of income, its appreciation can be taxed as a capital gain, and the government has confiscated gold in the past. Real estate too is an inflation hedge, but it can be very illiquid and its value too can be quite volatile. And the stock market, through promising a high rate of return, also comes with the risk of massive short-term losses.
- becoming your own banker frees you from paying taxes while borrowing against your cash value from a whole life insurance policy
does “buy term Insurance and invest the difference” is a better option
- You will find many differences when comparing term insurance with whole life insurance. Of course, one of them will be the price you would have to pay for both of these policies. And in those calculations — at first glance — it seems like the most logical option to choose the cheaper one – a.k.a. Term insurance, and just invest the money you would save for not buying a whole life insurance policy.
- What does this mean? It means that IBC and whole life insurance are not only about life insurance but are a mechanism for you to capitalize your cash value over the years – and with a whole life insurance policy, years equal to the total years in your life.
- whole life insurance is more expensive than term life insurance. However, once term life insurance expires, renewing is very expensive. At the same time, it’s easier to maintain the whole insurance coverage or the dividends of the whole life participating dividend-paying policy could pay for the premiums after certain periods (7-10 years).
- someone who ops for a 20-year term policy and invests the difference in a mutual fund composed of stocks and bonds may accumulate wealth at a faster rate, but he is taking on far more risk than the person building up a whole life policy.
- if whole life insurance is too expensive, term insurance could be started first, and then can be converted to participating dividend-paying whole life insurance later on.
what about other tax-qualified plans, such as my 401k could bring a higher rate of returns?
- IBC exists — as mentioned before — to help you take control over your finances and build your cash value over the years. That means that becoming your own banker is a capital accumulation strategy.
- So the most critical question you should ask yourself right now is – how will I be using this asset? Because if you want to build your capital over the years and have more freedom over your finances – you will start implementing the infinite banking concept. On the other hand, if you plan to provide appreciation or cash flow, an investment strategy will be enough for you. But don’t expect to have a higher return rate using a self-directed IRA, as an investment strategy can never be compared to a capital accumulation strategy and the rate of return it has.
- similar to whole life participating paying dividend whole life insurance, tax-qualified plans such as 401(k) enjoy tax advantages. However, it has restrictions such as when the money can be withdrawn, the limit, the tax bracket at the time of withdrawal, and when the money must be withdrawn (to avoid penalties), which makes these tax-qualified plans far less liquid than the cash values of the whole life policy.
- we should be suspicious when the government offers a “solution” (i.e. tax-qualified plans) to a problem that the government itself created (i.e. high tax rates). The government could raid these 401(k)s for the reason that the Americans would be better off if the government assumed their volatile stock portfolios and instead guaranteed them retirement benefits down the road.
won’t I get ripped off by the huge agent commission?
- it is important to note that a whole life policy configured according to Nelson Nash’s philosophy actually minimizes the proportion of the initial premium payments going to the agent commission. This is why it is important to obtain a whole life policy from an agent who truly understands and believes in the IBC mindsets; other agents would have a natural incentive to steer the client away from the proper configuration, and into a policy where the cash value’s growth is stunted in the beginning.
If you are interested in starting an IB policy, what should one look for in the insurance company?
- First, you want this company to be a mutual or a mutual holding company [MHC] and NOT a stock company. Mutuals and MHC are designed so that profits go back to the policyholders as excess dividends. MHCs have a majority shareholder, where the company could be converted into a public corporation. There are smaller companies, but the Big 3 Mutuals are New York Life, Mass Mutual, and Northwestern Mutual. Metlife is an example of a stock company, hence one I would avoid because the dividends go to the shareholders, not the policyholders.
- you want the cash value to grow as if you never took a loan out, even if you did. This is called non-direct recognition. The company pays the same dividend rate on the total cash value you have in the policy to all policyholders. If the company does direct recognition, it will traditionally have 2 dividend rates, one for the cash that stays with the company, and a lesser rate (possibly 0%) for the money that you have taken out as a loan.
- look for an insurance agent that understands the IB concept. Make sure they are licensed in your state to personally write the policy for you and not his or her boss, who is licensed in all 50 states and they feed every policy through them. Also, make sure that the policy follows at a minimum the 1:3 rule - the death benefit of the term life rider is at least 3 times higher than the death benefit of the base whole life policy. Ensure that at least 75% of the total premium you can put in every year is going towards the PUAs (the turbo) versus the base policy.
if too many people practice IBC, won’t the government shut it down?
- if millions of American households begin investing in large policies, they will raise quite an uproar if the politicians threaten to remove their special tax treatment. This is why it’s crucial for practitioners to spread the word to their friends and families. It is also crucial for people to practice IBC responsibly and not cheating on their taxes in a complicated scheme involving whole life policies.
What if the insurance company goes broke?
- Even though whole life insurance guarantees cash surrender values at various ages of the policy, of course, it is possible that the insurance company will poorly manage its assets and be unable to meet its contractual obligations. However, both state regulations and the entire tradition of life insurance make it a very conservative asset, relative to most others. Even if a particular company goes under, the rest of the industry will typically assume its operations to ensure that policyholders are made whole. It is in the interest of the industry to maintain the public’s trust that “life insurance” is a very boring and bedrock institution.
what about hyperinflation?
- you might not feel comfortable with dividend-paying whole life insurance as it is a dollar-denominated asset
- In case you want to have an exit strategy, that is always something you can do to increase your safety net. An additional thing that might be useful for you to know – if the comes to a devaluation of the US dollar, you can always ask a life insurance company to pay you your cash value (at a rate defined by the contract). In fact, if you still wanted to practice IBC, you might open up a new whole-life policy once things had settled and people were more confident in their projections of long-term interest rates.
- “a person is not “investing” in whole life, but is rather headquartering his wealth in a whole life policy”
- large increases in consumer prices will dilute the purchasing power of a contractually specified death benefit. On the other hand, large price inflation will also reduce the burden of future premium payments.
A policy loan is only an additional cost
- Getting a policy loan is a simple procedure with no limits or requirements – what is up to you is to let your bank know how much money they should direct to one of your accounts, and you will be able to use it.
- It’s important to know that you are borrowing against your cash value by doing this, which means this is not a loan as we’re used to. From the insurance company’s perspective – this is an asset they are giving you, for which they expect you to pay your interest. This is the root of your cost for a policy loan.
- On the other hand, the possibilities you have do make it worth it. Besides the fact that you can take the loan any time you want and in any amount you need, you also do not have to return it. And additionally, even though you’re borrowing, your compounding cash value continues to grow.
why can’t I ‘bank’ by borrowing against my house or other assets?
- you can take the loan any time you want and in any amount you need, you also do not have to return it. And additionally, even though you’re borrowing, your compounding cash value continues to grow.
- when someone requests a policy loan on his whole life cash values, they don’t ask the purpose, they don’t run a credit check, and they don’t care if the applicant has any income at all. They will grant the loan with a contractual rate of interest, and if the applicant decides to stop making payments, the outstanding balance will grow but the insurer will not object.
- The bank doesn’t really want to seize somebody’s house or boat when he defaults on a loan. The bank would much rather get its money back in the form of checks in the mail, rather than in the form of an extremely illiquid asset.
- The insurance company, on the other hand, is quite content to let the balance on a policy loan rollover at interest, because it will instantly get its money back when the insured dies and the death benefit must be paid on the policy. At that point, the insurance company deducts the outstanding loan balance, with a simple keystroke as it were - no need to put a house up for auction, hoping to get a good price on it.
What went wrong with my dividend-paying whole-life policy?
- reasons for losing term rider
- the original insurance contract was built with the base policy being actual whole life (WL), and the rider is term insurance. The idea is that the dividends on the base policy buy little bits of paid-up instances every year. These are generally called paid-up additions, or PUAs. The PURs reduced the amount of the term.
- it’s helpful to visualize this WL policy as three different policies: (1) the base WL policy, (2) the PUA policy, and (3) the term policy. The base policy and the PUA policy each have their own cash value and death benefit. The cash value, as you understand it, is really the sum of the cash values of the two WL parts of the policy. Some ledgers differentiate this, and some don’t very well.
- Early in the life of the policies, the base policy earned dividends in excess of the term policy, and the extra went into the PUA policy. Later in life, the term premiums got more expensive than the dividend credited, so the cash value of the PUA policy was tapped to pay them until it was driven into the ground. With no PUAs to pay term premiums, the term portion lapsed
What are the cons of the participating dividend paying whole life insurance?
- Costs - the costs are extremely high, but they are hidden in the premium of the policy. There is a reason why there is a big difference in the first 3 years between the cash value available and what you put in. The costs are administrative costs, agent commission costs, reserves for the death benefit, etc. The premium does not change as long as the policy is in effect, so one can see by the increase in cash value that this becomes more efficient over time. When compared to a mutual fund, where the expenses are disclosed upfront, as the asset base grows over time in the mutual fund, your costs get larger with each passing year.
- The Cash Value is technically not your money, but the insurance companies. You have first access to the cash value and dividends accumulated, but you have paid an annual premium to leverage your savings, and in return, have a death benefit on top of the cash value. The reason I can say this is one can request a loan to get to the cash value. You don’t loan to yourself, but an outside company does. You do have the ability to pay back the loan in your time frame. How is the insurance company so confident that you will pay back the loan? There are 2 sure things in this life: Death and Taxes. Since we know the inevitable will happen to all of us if there are any outstanding loans (which have high collateral due to all the money put into the policy), the death benefit will be reduced accordingly to your heirs.
- If you take out a loan from the insurance company at 6% and you get credited on your cash value balance for 5%, the agent may tell you the net cost of the loan is 1%. That’s garbage. The cost of the loan is the cost, no matter where you take a loan from. If you can get a car loan for 1.9% from a credit union, why would you want to pay 6%? The agent may say to you if you have a variable cash flow, that even though you are paying 6%, you get to pay it back on your terms, that is a fair statement. What’s also fair is no credit checks are done, and all you need to do is sign one piece of paper to get the loan started. However, if you are disciplined and pay your bills on time with no late fees, then always go with the cheapest loan option
- The second concept is paying more interest than on your stated loan. If you have been putting in the maximum allowed premium every year and taking out a loan, the most you can pay is the loan plus the interest to the insurance company. That’s it and nothing more. This is what Nelson Nash describes as a psychological trick. He says to pay all you can for 7 years and then you may start taking out loans. The dividends and cash value built up will help pay the premiums, and the loan you took out from the insurance company at 6% interest should be paid back at 10% interest.
- Money that is in savings are dollars that you want to know will be there liquid and guaranteed without having the risk of the stock market or real estate market determining what the value should be at just the wrong time in your life. You have ultimate flexibility with the money, but to think you will compound this money at 10-12% a year is not what these policies are designed to do. I mentioned in the last article that the rate of return will be about 4.25% per year over 30 years, growing tax-deferred and when structured properly, can be used for a tax-free retirement while still passing on a death benefit to your heirs

Quotes

“So, in evaluating just the financial benefits of the college degree at a cost of $80,000 vs. putting that same $80,000 into high-premium whole life insurance, I don’t believe the degree is as valuable. As a matter of fact, the probability of the college-educated person ever learning the benefits of “banking” through the use of whole life insurance is not very good”

“If you are in command of the banking function, you do not have to go through all this expensive erosion. The Infinite Banking Concept does exactly that! You can make timely decisions. There is no cost of acquisition. You are in competition with others who must go through the erosion that has been outlined”

“If you are in command of the banking function, you do not have to go through all this expensive erosion. The Infinite Banking Concept does exactly that! You can make timely decisions. There is no cost of acquisition. You compete with others who must go through the erosion that has been outlined”

“By doing it this way he can have an interest deduction for the policy loans used to purchase the equipment (the loans are for business purpose)—he can depreciate the trucks over a reasonable time—and he has a “captive customer” to lease the equipment to that is sure to make the lease payments”

“This is the essence of what The Infinite Banking Concept is all about recovering the interest that one normally pays to some banking institution and then lending it to others so that the policy owner makes what a banking institution does. It is like building an environment in the airplane world where you have a perpetual “tailwind” instead of a perpetual “headwind”

“[T]he objective should be simply to get as much money as possible into a policy with the least amount of insurance instead of trying to put as little money in and provide the greatest amount of insurance (initially). It is the exact opposite of what one thinks about when purchasing ‘insurance’”

“Just like EVA [Economic Value Added], to be effective, The Infinite Banking Concept must become a way of life. You must use it or lose it!”

“[T]his is probably our hardest job—to get people to open up their minds and take an in-depth look at just exactly what is going on in the business world and correctly classify what is seen”

“Succumbing to these feelings produces a huge burden on your financial future—the price must be paid. You will always be at the mercy of the ones who have the gold!”

“Economic problems are best solved by people freely contracting with one another and with government limited to the function of enforcing those contracts. And the best way to do so is through the magnificent idea of dividend-paying whole life insurance!… And only the people who care about others that are dear to them participate in the idea”

“Creating your own banking system through the use of dividend-paying life insurance is much like co-generation. All the ingredients are already there in place. All you have to do is understand what is going on in such insurance plans and tap into the system”

“Government is a parasite and lives off the productive taxpayers, the host. It is self-evident that if the parasite takes all the produce of the host, then both parties die” (pg. 52). Therefore, the government resorts to an exception to the rule (e.g., 401-K plans), but even with those, the government still controls much of what you do.

“Parkinson’s Law must be overcome daily. If you cannot do so then just go ahead and give up—you are destined to become a slave! That’s the bad news. The good news is—if you can whip Parkinson’s Law you will win by default because your peers can’t do it—and everything you do in the financial world is compared with what they are doing”

“It will take the average person at least 20 to 25 years to build a banking system through life insurance to accommodate all his own needs for finance—his autos, house, etc. But, once such a system is established, it can be passed on to future generations as long as they can be taught how the system works and suppress their baser instincts to “go out the back door of the grocery store”—or in a word that is more descriptive—steal”

“This book is all about how to create your own banking system so that you can control 100 per cent of your needs—becoming your own banker! Give it your close attention ,and it can make a radical improvement in your financial future”

“There are only two sources of income—people at work and money at work”

When you use traditional banks, they get the total value of your money. However, if you create your own banking system, you will be deposited into your own bank and reap the full benefits. Nonetheless, this takes time, closer to 20 years for some, so it is something you must commit to. It can benefit future generations if you do.

Wealth will reside somewhere. It is up to you where you want it to reside. With life insurance plans, “you can do any of the other things in life that you desire”

“You finance everything you buy. You either pay interest to someone else, or you give up the interest you could have earned elsewhere. There are no exceptions.”

“Your need for finance, during your lifetime, exceeds your need for life insurance protection. If you solve your need for finance through life insurance cash values, you will end up with so much life insurance; you can’t get it past the underwriters. You will have to ensure every person in which you have an insurable interest” (pg. 158).