The essence of the infinite banking concept is to recover the interest that is normally lost to banks or other financial institutions through the use of participating, dividend-paying, whole life insurance.
There are two aspects of this concept we will look at:
1) What is the Banking Process?
2) Why whole life insurance?
To begin, there is one thing that is very important to understand; Infinite Banking is about banking and financing, not life insurance. Understanding the principles of banking will help you discover that there is a finance cost to everything you purchase. You either lose interest to the bank, or you lose the return on money used to make a cash purchase, forever.
Again, the concept of Infinite Banking is a concept about wealth and banking, whole life insurance just happens to be the product best suited for wealth creation and banking purposes.
What is the banking process?
One of the fundamental principles of wealth is that anytime you can redirect interest that you are currently losing to banks or other financial institutions back to yourself or an entity you own, you are safely and significantly increasing your financial worth. Implementing the Infinite Banking Concept will do exactly that, redirect this interest back to you, with additional growth and tax advantages.
The average American spends 34.5 cents of every dollar on interest alone. On the other hand they are doing everything they can to save even 10 cents of every dollar (average saves 5), a 3.45 to 1 ratio of interest to savings. Instead of searching for a higher rate of return and risking those hard earned dollars, changing the environment in which your money is working will dramatically change your financial status. Imagine a plane flying at 100 miles per hour, a relatively good speed, but the actual speed relative to the ground will be determined by other factors as well such as a 345 mph headwind. How fast is the plane going now? Still 100 mph in speed, but relative to the ground it is actually going in the reverse direction 245 mph. The pilot might as well ground the plane and wait it out, its only doing him worse. Now let’s imagine that he waits for a 345 mph tailwind. He is still flying his plane at 100 mph, but this time with a powerful tailwind that brings his actual speed, relative to the ground, to 445 mph! A 690 mph difference all because the change in environment.
The same applies to infinite banking. In the case of flying an airplane you cannot necessarily change the environment, but in the financial world you can. You see, most financial advisors are trying to increase the “speed of the airplane.” Going from 100 mph to 110 or 120 mph is not the answer to the problem. It’s the environment. Implementing the principles of Infinite Banking will create as radical a change to your financial situation as the change in wind is to the airplane.
Why Whole Life Insurance?
A restaurant that makes French fries might peel potatoes and discard the peels. Even though there is no real use for the peels to them, that’s how potatoes come and they really have no other choice. If that restaurant can make an arrangement with a farmer and sell him those peels as food for his animals then he has made an additional profit to his business even though that was not his goal, it just happened to work out that way because he had a necessity for potatoes, and he profited with all that came with it. You see, he had no choice, he was getting peels either way, and that profit was just an added benefit that he couldn’t get rid of.
The same applies to insurance and its use for the infinite banking concept. The many advantages of creating your bank through dividend paying whole life insurance outweigh all advantages found in other liquid funds, and non-liquid funds for that matter. Insurance is set up so advantageously in reference to taxes and growth that its benefits for banking outweigh those of any other possibilities. Using it as a banking tool is like using the potato itself. The potato peel is much like the death benefit, it’s an additional advantage, and there is no way of getting rid of it. They come together whether you like or not…and of course we like it.
There are 3 important parts to whole life insurance that need to be understood, the premium, the cash value, and the death benefit. Tradition teaches us that you need the most amount of death benefit and the least amount of premium, which in turn creates the least amount of cash value (or none at all for term policies). This creates a system that you continually pay into that never becomes self sustaining; all the emphasis is on death benefit. This is very disadvantageous and is the reason why whole life has a seemingly negative influence on your overall wealth. This is also why most financial advisors have always hated life insurance. For purposes of banking you will need to understand that the emphasis should not be on low premiums and high death benefit, but high premiums, and high cash values, which consequently means low death benefit (initially). With high premiums and high cash values your policy will begin to be self sustaining, and over a period of 5 years your cash values will equal the total amount you have paid into the policy (the government placed a limit on the amount you are able to put in your policy in order to maintain the tax advantages, thus creating the necessity to spread out the “capitalization” of your policy over a 5 year period. These limitations fall under the Modified Endowment Contract Guidelines, also known as the MEC). At this point your policy is self sustaining; no more premium payments NEED to be paid. The policy growth will cover those premiums forever (Side note- in whole life insurance, premiums do not increase, but remain constant for the life of the contract).
Using Your Policy as a Banking Solution
As you start to use your policy as a banking solution you will start to see exponential growth. As a policyholder and banker, you will start to borrow your money from your cash values and pay yourself back with interest. The insurance company will set a minimum interest rate for you to pay back the loan, usually around 4%-6%. This is, however, credited back to your policy. The purpose of charging you this minimum rate is that the insurance company needs to show overall growth in their company, it’s not important to them where it comes from, they just need to show the growth on their books. (Side note- Participating companies are non-profit organizations; they don’t pay out to anyone but their policyholders, which are us. They are not these greedy organizations people think they are, they have no reason to be, they are non-profit!) As you begin borrowing and paying back your cash values will continually increase, and you will be recapturing the interest that you would have normally paid to the banking institution, but this is just where it starts to get exciting.
Understanding Dividends
Every year you are entitled to the company’s growth, or money they didn’t use to pay death claims. Whole life insurance is structured to collect more every year in premium than their actuaries (the engineers of life insurance who estimate how many deaths there will be in the next given year) estimate it will cost. For example, if they determine that it will cost .90 cents to cover the cost of death claims than they will collect 1.00, just in case. If at the end of the year they discover that it only actually cost .80 cents of every dollar then the rest is returned in the form of dividends to the policyholders, minus a small portion of administrative fees and reserve monies (maybe .025 cents).
The average dividend is usually the equivalent of a 4% to 7% return. The beauty of it is that it will be given to you no matter what, it does not depend on whether you are borrowing your cash value or not. So you are essentially going to get the interest you are paying yourself as you finance your purchases, and also the dividend on top of that, creating exponential growth within your policy. And did I mention that the dividends are a “return of premium,” or in other words, TAX FREE!
Car Example
To give you a quick idea of the power of infinite banking we will look at the results of buying a car.
15,000 dollar purchase price
11 purchases- 1 every 4 years
8% Interest Rate
Over the lifetime of these purchases here are the results, and remember, you are doing this either way, so choose which makes the most sense.
Pay Cash
Lose 165,000
Finance
Lose 193,000
Becoming Your Own Banker (Infinite Banking Concept)
With the same amount of cash outlay, and by using your policy as a means to fund your car purchases you will have
$701,000
In cash value available to you.
It’s your choice.
Essentially you have a liquid pool of money growing tax deferred, getting incredible growth possibilities, and the death benefit on the side you get whether you want it or not.
Infinite Banking is an incredible concept and you can see that by using it to become the financier of your purchases you can recapture the interest lost to banks and a lot more. As you can see from our simple car example you can turn things such as debts, interest, taxes, and opportunity cost into wealth.
There no better means of wealth creation, and as the death benefit is passed on to future generations the growth becomes exponential. You will create a legacy of wealth within your family that will last forever.
