Why the Infinite Banking Concept? Getting Down to the Basics
Insights“YOU FINANCE everything you buy. You either pay interest to someone else or you give up interest you could have earned. There areNO exceptions.”
This is a quote from R. Nelson Nash, the words that made me realize what I thought was the best way to purchase goods really wasn’t.
When you pay cash for a car (just an example) it doesn’t hurt as bad as financing it through say a traditional bank, why do you think that is?
You don’t directly see the financing cost!
Up to age 25 I believed that the best way to finance something was to pay cash for it. I was eliminating the interest a bank would charge me, and since my savings didn’t earn anything, I didn’t see any cost to this method of purchase.
I realized I could have funds in the market, but that wasn’t a place I felt comfortable leaving money. I believed my best rate of return would come from educating myself and investing in what I know, not hoping for a strong market.
If you’re an entrepreneur, real estate investor or business owner, you have likely had the same experience.
Fortunately, I came across a book, Becoming Your Own Banker, and learned what I thought to be true about finance was all wrong. I say fortunately, I’m glad it didn’t take me another 10 or even 20 years to read Becoming Your Own Banker.
Becoming your own banker.
When people read about the Infinite Banking Concept, they are very intrigued until they learn it is implemented with whole life insurance. Once the phrase whole life insurance is thrown into the mix, the confusion begins.
My advice to you is to step back and forget about the life insurance aspect until you grasp what you’re working towards when you implement the IBC. After you get a handle on the IBC, then you can dig into the life insurance aspect.
Let’s go through an exercise right now. This won’t matter what your occupation is. Everyone can benefit from implementing the IBC. The IBC is very simple and I will prove that right now. We are looking at the things implementing the IBC will improve, which everyone needs and does already:
1) What do you currently do when you receive a paycheck? My guess is it goes to a bank. You receive some interest on your money for your deposits, but the profits are shared between the stockholders of the bank. Would you like those profits to be shared with you?
2) How do you currently finance your purchase of goods (cars, home remodels, computers and other business equipment for example)? Do you use 3rd parties to finance these items? You’re at the mercy of their terms: loan amount, interest rate, how long, collateral, and don’t forget the paperwork. Maybe you are using cash. You don’t see it so it doesn’t hurt, but there is a lot of opportunity cost you’re giving up by doing this.
3) Do you have liquid capital in a place where you’re guaranteed to have more money than you put in? If your money is in qualified plans, there’s a good chance you will have penalties for access, and if you’re in a market correlated financial product, you have no way of knowing what the value will be tomorrow.
The IBC system.
The IBC is a system to accumulate capital and use as a financing tool to recapture lost opportunity cost. It is a better means to perform the banking function in your life.
Nelson, being trained as a forester, was always looking at how things are classified. You use the major characteristics. Nelson wrote this in Becoming Your Own Banker about whole life insurance, “When you look at the proportions of the whole activity it is obvious that the banking qualities became much greater than the death benefit quality of the policy.”
If you directed your paycheck to a properly structured IBC policy with a mutual company, you will receive guaranteed interest and a share in the profits if dividends are declared by the company. Dividends aren’t guaranteed, but we work with companies that have paid them for more than 100 years running.
How do you purchase goods?
You are first in line as a borrower when you are a policyholder with a mutual company. Your money will stay at work for you, earning the guarantees and dividends when declared, while the insurance company gives you a policy loan from their general account.
Using policy loans is the best method we’ve found at Cash Value Solutions to recapture opportunity cost!
Do you have liquid capital with a guarantee to have more money than you put into the system?
Whole life has the strongest guarantees of any financial product on the market. With IBC policies we are turbocharging cash value growth, and not only are you guaranteed to have more money than you put in, but you can earn dividends on top of this. Again, dividends aren’t guaranteed, but once paid they become part of your guaranteed value and can never be taken away.
How the IBC solves problems.
With the IBC, you’re solving problems that you may not even be seeing with your financial construct.
There are so many advantages to performing the banking function with life insurance, including strong guarantees, the ability to earn dividends, high liquidity, financial control, tax advantages under current tax law and an efficient way to transfer wealth to the next generation income tax free.
If you’re struggling with everything the IBC can give you, stop digging so deep and look at the simple things first. Once you get these down you can keep going another layer deeper, and if you need help, reach out to an authorized IBC practitioner.
At Cash Value Solutions we want this to be a simple, easy process for you, and we’re not just here to sell life insurance.
Below is a graph showing potential lost opportunity cost when paying cash.
This graph depicts what your money would have continued doing if you hadn’t withdrawn all your money for a purchase. This is what I didn’t even realize was happening when I was paying cash, until I read Becoming Your Own Banker.
Remember: You finance everything you buy.
Using policy loans, you collateralize the cash value when you make a purchase, and pay back the loan with interest. That is what the upside-down stair steps are depicting (payments back with interest). You are creating a place where you can mimic the behavior banks use with deposits and loans, just in a place that is more advantageous for you.
You have to play honest banker though. Would a bank make a loan and not charge interest? I don’t think so. The repayment terms are set by you, not the insurance company, and while you pay some interest to the insurance company, you are recapturing it and then some by keeping your money at work!
Here is a different example with numbers if you are very analytical.
|
Compound vs. Amortized Interest $50,000.00 | ||||
|
Compound Interest Earning 4% |
Amortized Interest at 5% | |||
|
Year |
Interest Earned |
End of year Balance |
Interest Charged |
End of Year Balance |
|
1 |
$2,000.00 |
$52,000.00 |
$2,410.19 |
$46,046.23 |
|
2 |
$2,080.00 |
$54,080.00 |
$2,207.92 |
$41,890.19 |
|
3 |
$2,163.20 |
$56,243.20 |
$1,995.30 |
$37,521.53 |
|
4 |
$2,249.73 |
$58,492.93 |
$1,771.79 |
$32,929.36 |
|
5 |
$2,339.72 |
$60,832.65 |
$1,536.85 |
$28,102.25 |
|
6 |
$2,433.30 |
$63,265.95 |
$1,289.88 |
$23,028.17 |
|
7 |
$2,530.64 |
$65,796.59 |
$1,030.29 |
$17,694.50 |
|
8 |
$2,631.86 |
$68,428.45 |
$757.39 |
$12,087.93 |
|
9 |
$2,737.14 |
$71,165.59 |
$470.55 |
$6,194.52 |
|
10 |
$2,846.62 |
$74,012.21 |
$169.05 |
$0.00 |
|
Totals |
$24,012.21 |
$13,639.21 |
||
This table demonstrates how using a policy loan is the most advantageous way to access your funds, rather than paying cash.
You have $50,000 of cash value in your policy and have quit funding it for the sake of simplicity. You decide to take a policy loan for the full $50,000 at 5% interest to make a down payment on a rental property, and will pay yourself back over a 10-year period.
Over that 10-year period you pay $13,639.21 to the insurance company in the form of interest. Since your money stayed in the policy and compounded without interruption at 4%, the cash value grew from $50,000 to $74,012.21, which is a $24,012.21 gain.
If we take that $24,012.21 gain and deduct the interest we had to pay to the insurance company ($24,012.21-$13,639.21=$10,373.00), we actually had a net gain of $10,373.00. All $24,012.21 is yours though, you recaptured the lost opportunity cost (in this case $13,639.21)! This is the power of properly structured, dividend paying whole life insurance!
For simplicity, we used structured payments back to the insurance company for the loan. However, these terms are controlled by you, and as long as you have enough CV to cover the interest accruing on your loan, you decide when and how much to pay back on your loan, or if you pay it back at all. The banker is you, and there is no outside institution calling you for a payment.
Now that’s control!