Secret of the Wealthy: Infinite Banking Intensive E-Course

There are two types of insurance companies, stock and mutual.

For infinite banking, it's important to obtain a policy from a mutual insurance company because the policyholder (you), benefits when the company profits.

When taking a life insurance policy on a child, there are limitations to consider:

The insurance company will set the max amount of death benefit to 50% of the parent's total death benefit, creating a significantly smaller MEC limit.

Since minors don't have to go through underwriting/medical exams, they will get lumped into a juvenile health-rated class that is sort of like group health insurance. This can delay the cash value break-even point 1-2 years compared to an individually underwritten policy of a 30, 40, 50, or 60 year old.

Considering these limitations, it's more efficient to grow the cash value in an individually written policy than transfer the wealth to the minor.

Knowing Your Limits

In order to know how much we can maximize the cash value and receive tax favorable treatment of whole life insurance, it's important to understand the IRS and Company limits.

IRS/MEC Limit

Also known as the MEC limit, 7-Pay Premium, or TAMRA test, this limits the amount an individual can fund into the policy each year.

It is called the 7-pay premium because the IRS is really stringent on the first 7 years of the policy, after that the MEC limit will reset based on age, death benefit, and cash value in the policy.

The IRS limit is based on the age, gender, and total death benefit of the policy (which includes any term riders attached). We can set this limit to whatever we want when designing the death benefit of the policy.

It is a cumulative/rollover limit meaning if you had a $50,000 MEC Limit and you paid $10,000 in one year, you can put in $90,000 ($40,000 + $50,000) into the policy the next year.

In addition to the IRS limit, the insurance company limits how much you may put into paid-up additions which goes towards the cash value of the policy. The limit varies company to company. For example some companies have a PUA ratio limit of 10X the base premium.

Modified Endowment Contract (MEC)

If the IRS limit is surpassed, then the policy becomes a modified endowment contract (MEC), and the policy receives tax treatment similar to a retirement account.

The death benefit is still paid income tax-free (if you have a high net worth then you will need to pay estate tax) and the cash value still grows tax-deferred, but when you take out those gains you will need to pay ordinary income tax. And if you're under 59 1/2, then you have to pay a 10% penalty tax as well.

Also important to note when withdrawing from the cash value in a MEC, the gains are pulled out first. So if you had $110,000 in the policy ($100,000 basis and a $10,000 gain) and you withdrew $10,000, you would need to pay ordinary income tax on that $10,000 gain plus a 10% penalty if you are under 59 1/2.

FAQ:

What can I do if I trigger a MEC?

Most insurance companies give a 30 day window to reverse the MEC status. The policy owner must send an email to the insurance company stating something along the lines of “Please reverse the MEC status for Policy # _______” it was overfunded by accident. Then the insurance company can refund the difference that is above the limit.

If it's past the 30 day window, you can cash the policy out, cancel it, and fund a new policy.

With the 7702 Rule in effect, the guaranteed 4% interest rate no longer applies, in the video below we go over some of the potential impacts, this rule brings to whole life insurance policies.

Policy design is everything, you can have the same life insurance product from the same company, but if you have a poor design you could have drastically different results.

Design Objective

The goal of good policy design is to maximize cash value both upfront and long-term, while not creating a Modified Endowment Contract (MEC) by exceeding the tax favorable limits.

When utilizing paid-up additions, dividends should still be used to purchase additional PUAs to keep the compounding from being interrupted.

Scheduled vs Unscheduled (PUAs)

Scheduled

Pay PUA at the exact same time as the base premium.

Unscheduled

Flexibility to pay PUAs at leisure. Depends on the company, but payments may be limited to a certain number of transactions per year (i.e. quarterly, once a year).

Bank loans may have a lower interest rate, but you need to apply, these loans show up on your credit report and needs regular payments.

You need to weigh the value of the "freedom" with policy loans vs the interest rate difference.

An additional factor is the "asset protection" benefit that goes away if the cash value is put up as collateral.

There has been an increased amount of scrutiny over immediate loans where the home office has been putting a hold on the loan until:

1. The client's bank account information is verified

2. The client confirms that they initiated the loan

The typical rule of thumb is 10 days after the funds clear.

Questions:

• Private Placement Life Insurance, or PPLI (only applies to higher net worth - over 5M net worth)

• Does cash value in a life insurance policy count toward your net worth calculation to determine if you qualify as an accredited investor?

• Can I carry a term life and a whole life policy at the same time?

• Why not buy term and invest the difference?

• Is it true that the guarantee dividend will change by the end of the year and do you know by how much?

            Yes, companies are changing it from 4% due to tax law change. We will cover this during the 7702 section. The amount of change will vary depending on the company.

  
  

• We currently have a term life policy since we have young kids. We only wanted this until our kids are 18. If we started to do the Infinite Banking, would we need to cancel the term life policy?

• Why would you not want to fund it every year when it is compounding and you lose that aspect?

• How much money does someone need to contribute to build up the cash value to make it worthwhile to then borrow against it and use this strategy successfully?

• What happens if interest rates go up over 4%?

• Makes sense why to use IBC policy for an investment opportunity but don’t understand why some folks (not Lane or Tyler) recommend it for liability purchases (car, vacation, etc.). Does it ever make financial sense to use the IBC loan for something smaller (car, vacation) that could be purchased with cash?

• What do you mean by $100K per year policy? Do you mean you pay in that amount in premiums for the year?

• Will the inflation or hyperinflation affect the life insurance?

• So the growth from the investments benefits are not taxed? Vs Investment growth from HELOC money which is taxed?

• Under what circumstances can you access the money if you need it?

• What was the law change and impact on IBC?

• How do you figure out your max death benefit?

• If you are just out of college in your first job when you should consider the WL IBC?

• So is MEC irreversible? Can you MEC a year or two to turbo charge and then get back under the MEC limit?

• Wouldn't it be advantageous to continue paying the premiums even after the 7 years?

• I agree with the 10/90 split too but Nash Institute people are against it. Do you have an opinion about this?

• How is the 90% PUA tax reported?

• Are we supposed to over-pay the policy loan as a way to backdoor fund the cash value?

• You can also use it as Long Term Care Insurance?

• How long is the loan term?

• Can you setup a 1 year paid up policy vs. a 6-7 year policy?

• How does the loan usually need to be paid back? Annually or quarterly?

• Which bank are you working with for the loan?