September 17

Infinite Banking

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Infinite banking… it’s an intriguing name. 

Or maybe you’ve heard a different variation of the same thing such as...

  • Cash Flow Banking
  • Becoming Your Own Bank
  • Your Family Bank
  • Privatized Banking
  • The "And" Asset
  • And, I’m sure there are many more that are referring to the same exact concept...

But, what exactly is this? What does all this mean? 

Let's find out...

More...

In our last post, we explored 5 ways to find inefficient funds within your current budget in order to get started funding a strategy like this infinite banking concept...

In this post, I want to give a very basic overview of what this infinite banking strategy is and how it works, but first I want to warn you...

Things are about to get scary!

If you make it through this initial hit, I think you'll be alright...

But brace yourself...

At its core, this strategy requires…

Whole life insurance!

What?!

Oh my goodness!

I know, I know, it’s crazy...

But, hang in there and you'll see that it's more than that...

It’s utilizing whole life insurance as a way to create your own (sort-of) bank.

It can be a little confusing at first, but by the end of this post, I'm confident you’ll understand!


Whole Life Insurance

Whole life insurance is the type of life insurance that lasts for, well...

...your whole life!

This does not necessarily mean that you pay into it your whole life, in fact, many people will choose to stop paying into it at retirement age, with the death benefit remaining for the insured's entire life.

Term life insurance, on the other hand, expires at the end of the term of the contract that you selected or when you stop paying your premiums.

With whole life insurance, you pay the same premium every single month to buy a death benefit, and when the insured person passes away, the beneficiary receives that amount.

Also, with whole life, there's a savings component that grows with your policy.

Finally, with these type of policies (probably more than most things), not all of them are created equal!

There are thousands of agents out there structuring policies from hundreds of different life insurance companies in thousands of different ways…

All of that has a direct impact on how well your policy works—on how well it actually builds cash!

I explain what to look for in much more detail in this video.

This savings portion is known as cash value.

Many companies will allow you to put in extra money—above the premium required to support the death benefit—to go directly into your cash value.


Cash Value

The cash value within whole life insurance will typically grow at a guaranteed percentage.

On top of that, if you are working with the right type of company, your whole life insurance policy will also pay out dividends based on the size of your policy and the company’s profits from that year. 

As a part of the contractual agreement of your policy, you have the option to borrow money directly from the insurance company based on the cash value that your policy has accumulated.

The insurance company will collateralize this loan against your cash value.

So, basically, what they're saying is...

"Hey, we will guarantee you that you can have up to XXXX amount of money (based on your cash value), no questions asked. In return, we'll charge interest on that loan, and if the insured does pass away, we'll simply subtract what you owe from your death benefit..."

For this reason, the insurance company is protected on this loan. This allows many of these insurance companies to offer these loans with attractive terms...

  • There’s no formal application vetting process, you just say you want it, and within a week, it’ll be in your checking account!
  • They don’t require a specific payback period.
  • They don’t require a certain dollar amount to be paid back routinely.
  • There's no real structure (so, you’re kinda setting your own terms here)...

In fact, in a lot of cases, you could never pay back that policy loan (as is the case for many who use their policy’s cash value as a tax-free supplement to their retirement income). If you plan to do this, you should definitely know what you’re doing or be working with someone who knows what they’re doing.

I want to repeat this...

You are not directly accessing your own money from your policy and instead just taking a loan against your growing cash value. Because of this, your cash value continues to grow as if nothing happened.

You maintain that guaranteed cash value growth at the exact same rate and depending on the company, still receive the full dividend you were getting earlier.

This allows your borrowing power to continue to increase at a compounding rate.

Because of this, you can effectively use your money twice: you can pay off a 20% interest rate card with the money you've built up, while your cash value continues to grow… or you may want to invest in a rental that can get you a 15% ROI (return on investment).

As a part of this "banking" process, most people would put the cash flow from their now freed up minimum payment, or from that income on their new rental back into their policy.

That way, they can wash, rinse, and repeat the process over and over and over again...

To be clear, you don’t have to use the policy loan feature to get access to your money.

But, as a part of the banking process for which a lot of people use these policies, it tends to provide the most benefit. (I’ll go into more depth on this in future posts and videos.)

Honestly, I don’t think banking is the perfect analogy to encompass all the benefits of the infinite banking strategy... but, then again, I didn’t name the strategy...

Nelson Nash did that back in the 1980s. 

There are certainly some comparisons that can be drawn from the banking metaphor to understand this strategy's unique value.

Let’s take a look at some of the basic functions of a bank...

I want to play out a hypothetical situation here to help illustrate just how beneficial this strategy can be so hang with me...


Banking Comparison

You put $100,000 in the bank because you want to be able to access it in the future, but before retirement.

The bank guarantees you a return...

I’ll be generous and assume that they give you 1% on the money that you have in that savings account.

Now, the bank takes that money and lends it out to other people...

If you needed (or wanted) to, you could borrow that money right back out to yourself (assuming the bank would approve you to do so after a potentially lengthy and invasive application process)...

In that case, the bank will charge you interest to do so. Let’s assume some of the best rates and say you manage to get a personal loan at 5%.

So here you are, earning 1% on your $100,000 and paying 5% to borrow, let’s say, $80,000.

Savings: $100,000 at 1% = +$1,000/year

Loan: $80,000 at 5% = -$4,000/year

Though this is a more complex consideration than most people realize when considering the compound effect of your returns, you don't have to be super savvy to recognize that this is probably not the best way to manage your $100,000... 

Remember, these projections are also assuming some of the most favorable rates and that the bank will even allow you to borrow any money!

That’s why almost everybody would opt to take out that $80,000 from their savings account earning 1% in order to avoid paying 5% interest on a loan...

But, what if there was a circumstance when you could break-even or even come out ahead...?

Let’s go back to our example and adjust a few things...

  • Now you earn 5% interest on your account's value.
  • Your loan rate is still 5%.
  • On top of that, the bank tells you that if you choose to take their 5% loan and leave your $100,000 growing at 5% that...
    1. You wouldn't have to pay tax on the growth of your 5% savings.
    2. They also throw in an additional tax-free death benefit.

And... they continue to list several other auxiliary benefits...

Savings: $100,000 at 5% = +$5,000/year

Loan: $80,000 at 5% = -$4,000/year

Especially with all the additional benefits, you might want to take advantage of this unique banking opportunity...

This comparison illustrates what infinite banking can look like ...when set up and executed properly.

To further the “banking” process, a lot of people will treat their cash value as a bank in order to create a level of discipline that will help them further build their wealth.

Even though they don’t have to, they create a timeline for paying back their policy loans so that they know in the future they will have those funds replenished in their cash value, available to leverage out again and again.

For example, they may borrow $80,000 from their policy and calculate a monthly amount that they would need to pay back into their policy in order to get it paid off within a specific time-frame.

Psychologically, I think this is brilliant—especially as people are preparing for retirement... 

It creates a level of accountability and makes people feel like they need to pay themselves back after they use their money, even though they don’t.

There’s a ton of flexibility when this is done right!

  • Putting money in...
  • Letting it grow...
  • Borrowing money against it (when needed or when the opportunity arises)...
  • Paying yourself back as you can afford to...
  • All while obtaining auxiliary tax benefits...
  • A death benefit...
  • As well as several others (detailed in other posts)! 


Closing Thoughts

Despite the fact that this financial strategy is only available through the product known as whole life insurance...

The question of whether or not you can benefit from infinite banking has nothing to do with your current life insurance needs.

There are some clear advantages to this strategy, however, like any other place where you could put your money, there are also cons

Over the next couple of weeks, I will be covering the details of these aforementioned pros and several cons so that you can better evaluate if this is a place for you to routinely allocate a portion of your savings.

I hope this explanation of the infinite banking concept helped you better understand how this strategy works. 

The best way to stay on top of the content and resources that we provide on a regular basis is to subscribe to my channelhit that notification bell, and check out our online community where Stephen and I talk about infinite banking as well as other investment strategies. 

Until next week…

Take care!


Brody Boston

Brody Boston is the infinite banking specialist at Spicer Capital, LLC. Outside of helping serve Spicer Capital's clients, he enjoys reading and staying active in any way possible.


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