In our continuing series on the infinite banking concept® we wanted to lay out a framework of how banking with life insurance actually works. If you are already convinced that using life insurance as your own personal bank is the way to go, then why not give us a call today for a complimentary strategy session.
Now for you readers who are not yet convinced at the utility of being your own banker, consider the infinite banking pros and cons in light of the following article about using life insurance as your own personal bank.
Being Your Own Banker with Life Insurance
Disclaimer: We are not advocating that you are actually creating your own bank or that you are actually becoming a banker.
Rather, we are advocating a concept of taking back control of your money. You want to adopt a new paradigm of thinking, so that you think like a banker thinks and use your personal finances in much the same way that a bank would.
The following 7 step plan to building your own bank using life insurance as your home base will help shed light on how you can find financial freedom and independence away from banks, Wall Street and the rat race prevalent in the USA today.
7 steps to creating your own private banking system:
- Step 1: Cash Value Life Insurance
- Step 2: Life Insurance Riders
- Step 3: Fund your Bank
- Step 4: Finance Your Purchases
- Step 5: Recapture Your Money
- Step 6: Repeat
- Step 7: Plan Your Estate
Step on is the “capitalization” period.
The good news is that a properly funded insurance policy will begin to accumulate cash value almost from day one.
In Nelson Nash’s book, Becoming Your Own Banker©, he recommends you spend years in the capitalization phase. However, the good news is when properly funding a policy the cash value in the policy builds quickly and you will have access to the cash value sooner rather than later.
A lot of people falsely equate infinite banking with life insurance, which leads many people to ask “is infinite banking a scam.” However, there are many different vehicles you could use to start your own private banking system utilizing the strategies taught in the infinite banking concept®. Some examples would be a checking or savings account, CD, Mutual Fund, Bonds, etc.
Although you can use different vehicles and assets when practicing an infinite banking strategy, the best asset to use is life insurance. And when we say life insurance, we mean cash value life insurance with an emphasis on CASH.
One of the primary benefits of using dividend paying life insurance to create your own private banking system is because of the tax advantages provided under IRC section 7702.
Under the code, neither the policy interest accrued or the dividends paid are reported as taxable income. The cash value grows tax deferred and is accessed tax free via policy loans.
As Tom Wheelwright of Rich Dad Advisor fame so eloquently says, the tax code is a series of incentives. And thanks to IRC 7720, cash value life insurance is one such incentive.
Now there are many different carriers in the marketplace that provide good cash value policies. However, in our experience, choosing a policy from the top dividend paying whole life insurance companies will often (but not always) be the best choice for a policy designed for infinite banking.
We say often, but not always, because we at insuranceandestates.com believe that each person is unique and each person has unique goals and objectives. Often participating whole life will meet those individual goals and objectives, but other times, some type of universal life insurance might be the better fit. The key is that we assess who and what is the right fit—for you—based on your specific goals and objectives.
Your Goals and Objectives
Typically the main goal of an infinite banking policy would be to maximize cash value and minimize the initial death benefit. The reason we do this is so that more of your premium goes into your policy. That means less premiums for us, the agents. And that is fine with us, because our goal is to help our clients out and put their needs above our own.
Now some people might want a large death benefit. Now while a “banking policy” is not designed to have a large death benefit at first (although over your lifetime it will grow and grow), a larger death benefit can be acquired through one of the life insurance riders discussed next.
Properly designed permanent cash value life insurance may include any or all of the following life insurance riders to maximize cash value at the onset of the policy.
Paid Up Additions Rider
Paid up additions can be defined simply as additional insurance that is paid in full at the time of purchase.
The Paid-Up Additions Rider allows the policyowner to purchase more death benefit and increase the policy’s’ cash value growth.
One way this comes in handy is when the annual dividend offered by participating life insurance companies is used by the policyowner to purchase paid up additions.
Life Insurance Supplement Rider
The Life Insurance Supplement Rider (LISR) blends low cost term life with permanent life insurance. The term life portion goes down as you make your payments, until only permanent life insurance is left.
Additional Life Insurance Rider
The Additional Life Insurance Rider (ALIR) allows the owner of the policy to make increased premium payments in order to purchase additional participating paid up life insurance, increasing the policy’s death benefit and cash value growth.
Term Life Rider
Not to be confused with the LISR above, the Term Life Rider or Renewable Term Rider offers straight up term life insurance that can be, but won’t automatically be, converted to permanent life insurance sometime in the future.
The term life rider is a fantastic option for young adults just starting out who want to practice infinite banking and want a sizeable death benefit to protect their family. The term rider provides additional death benefit coverage that can be converted to permanent coverage down the road.
Guaranteed Insurability Rider
The Guaranteed Insurability Rider (GIR) is not necessarily going to increase your cash value growth initially. Rather, the GIR is a guarantee that you can purchase additional insurance without having to answer health questions or take an exam.
This is a great option when considering life insurance for children as it provides them with an option to increase their coverage down the road.
Your policy is now set up so you need to fund it, i.e. put money into it. Now the idea is to over-fund your policy right before the point, but not to the point, where the life insurance policy becomes a modified endowment contract.
The IRS has rules that prevent someone from putting too much money into a life insurance policy because such a policy may be seen as a tax haven. The goal is not to “MEC” the policy. However, we do want to fill it up to the brim with as much cash as possible. That is why we need some or all of the riders listed above.
And you may qualify for backdating your policy to save age, which allows you to fund the policy with more money in the first year than you normally would be able to.
Once you have built up enough cash in your policy it is time to put it to use.
Please note: for a true banking policy to work properly you want to borrow from the policy rather than withdraw money. When you withdraw, you are depleting your cash value. When you borrow from your policy, your cash value continues to grow.
Financing your purchases is the part of the entire banking on yourself strategy where it gets really fun and why life insurance is a good investment.
You see, as you build up a nice amount of cash in your policy, you are now able to utilize that cash value as collateral through a policy loan. The company lends you money using your cash value as collateral and in turn, you use the money to do anything you choose.
When you use your cash value as collateral and take out a policy loan, the money in your account continues to grow via compound interest. The implications of this are that your money is working for you in your policy and your money is also working for you as you use it for various pursuits.
Here are some suggestions on what to do with policy loans:
Buy Cash Flow Assets
The primary asset that come to mind when I think about cash flow is real estate. Real estate can create cash flow and offer additional tax incentives. Now here is where the infinite banking policy really makes sense.
Infinite banking simplified is about loaning yourself money and recapturing that money. As you use your policy loan to make a down payment on an investment property, you can then use your monthly cash flow from the property to pay back your policy loan, with interest.
And don’t cheat yourself here. Charge yourself the current interest rate that a lender would charge you.
As you use your cash flow to pay back your loan with interest, you are increasing your death benefit and cash flow growth.
By doing this you are creating even more opportunity for personal financing down the road, which makes this one of the best real estate wealth building strategies.
Loan Money to Your Business
One quick disclaimer, we are not offering tax advice so please consult a tax professional.
One great way to maximize your cash value is to use the policy loan to loan money to your business. Then have your business pay you back with interest for the loan you made to your business.
You then recapture your own interest and replenish your policy. And your business may be eligible to write off the interest payments, making you even more money. Talk about a win-win!
Purchase Large Ticket Items
Why pay all cash, or worse, finance through a bank, when purchasing large ticket items, such as vehicles or education? Instead, loan yourself the money.
Then recapture the interest that you would have paid a banking institution or that you would have lost had you paid cash and not recouped your money.
And the best part of personal financing is that you are the banker! You get to choose what interest rate you pay yourself back at, if you choose to pay yourself back at all. However, when utilizing the strategy of infinite banking it pays to pay your policy loan back with interest.
[I.E. Put it Back in Your Bank]
It takes a disciplined person to implement an infinite banking strategy, especially when it comes to recapturing your principle and interest on your loan.
For those strong willed individuals that can do this part of the strategy the sky is truly the limit on how big your banking policy can get.
Just know that this step is probably the most important step in becoming your own banker. If you don’t pay yourself back, you are basically “stealing the peas” as Nelson Nash would say.
Paying back you loan is a critical step in the process because it is the plan of action that yields amazing returns over your lifetime. As you continue to build your banking policy, you continue to store up cash that can be utilized for tax fee income via loans.
A Brief Point About Interest Rates
One primary way banks make money is via interest. You deposit your money with a bank and the bank pays you interest, currently somewhere around .005% in most major banks.
The bank takes your money and loans it out for much higher interest. Even if the bank loaned your money for 3% the bank’s profits are 10 times greater than what the bank is paying you. Does a 1,000% return sound good to you?
Now instead of the bank making all the money, you as the borrower, the lender, and the bank, get to make all the money once reserved for banks utilizing the fractional reserve system.
And guess what happens to your life insurance policy once you start recapturing principle and interest? Yep, it grows and grows!
Now, here is another reason to grow you personal “bank”. Life insurance creditor and bankruptcy protection, depending on the state you live in.
If you live in a favorable state, the money in your policy is protected from creditors.
After you pay back your policy loan you don’t want your money to sit idle. Instead, you need to repeat steps 1-5 again and again and again.
Each time you go through the steps to building your own bank you will have more and more capital to work with.
This is a far cry from parking your money in some government designed fund and putting your life on hold. That is why we consider the 401k plan a scam on certain levels.
Rather, enrich your life in the here and now and start banking on yourself today by employing infinite banking.
We need to add an additional step here because after you entire legacy of wealth building, you will have a sizeable estate to leave behind.
Proper estate planning at this point is critical for passing on as much of your legacy to your family as possible.
There are a myriad of ways to best do this, while you are alive and upon your passing. However, the important thing is to plan ahead so that your family can receive the full extent of your disciplined work.
With your estate in order, your cash value continuing to grow, and a guaranteed death benefit passing to your heirs, you will be in a strong financial position to create a lasting legacy.
Disclaimer: The Infinite Banking Concept® is a registered trademark of Infinite Banking Concepts, LLC. InsurancandEstates.com is independent of and is not affiliated with, sponsored by, or endorsed by Infinite Banking Concepts, LLC.