The Infinite Banking Concept

I must begin this course by saying that this is a difficult topic to cover within the current financial environment, the infinite banking concept is a strategy to structure a specialized whole life insurance policy such that it becomes a powerful vehicle for warehouse and capital. Such a policy can be used to hold a cash reserve fund in a manner that is completely liquid, yet compounds annually. It can be used to grow capital for future investment purposes and a tax advantaged way. It can be used as a personal pension plan to provide far more income in retirement and Social Security or any other national pension system can. And probably most powerful, the IBC strategy can be set up for infants so that they have a large pool of capital waiting for them in adulthood that grows year after year in a self-sustaining manner. The problem I run into when I talk about this concept has to do with people's preconceived notions on life insurance. Whole life insurance has been spurned and ridiculed as an anachronistic relic by many a financial guru over the past 20 years or so. And indeed, as those who understand the fiat monetary system now, traditional whole life policies are heavily disadvantaged by our currency's gradual loss of value. Here's the thing. An infinite banking policy is not a traditional life insurance policy. In fact, the purpose of structuring such a policy has very little to do with actual life insurance. What we are interested in is structuring a financial vehicle that will compound capital in several advantaged ways, yet provide complete liquidity to us at all times. When the gurus downplay whole life insurance, they typically tell people to buy term and invest the rest. They are assuming that the cost of life insurance subtracts from the funds available for investment and with the traditional policy that's true with an IBC policy, we do not have to choose between. The two typical ABC policies are structured such that only 40 percent of the premium paid supports the base life insurance policy. That's where traditional policies stop. Here's what I mean by this. When you set up a traditional life insurance policy, you pick a death benefit, say five hundred thousand dollars, and then you pay a monthly premium to support your five hundred thousand dollar life insurance policy. Well, with an ABC policy, only 40 percent of the premium goes to support that death benefit and the other 60 percent purchases, additional paid up insurance. This does two things. First, it grows your death benefit significantly over time. And second, it builds cash value in the policy very quickly. So your life insurance policy is constantly growing and it is constantly building cash. Now, the cash value is simply equity in the policy. It is not physical funds in an account. This gives life insurance, cash value advantageous tax and legal treatment. It grows one hundred percent tax free. To understand how your cash value grows, you have to understand the nature of the life insurance business. First of all, there are two types of life insurance companies, mutual companies and stock companies. Mutual life insurance companies are companies whose corporate structure places policyholders as joint owners of the company. They do not issue stock stock. Life insurance companies are owned entirely by stockholders, and policyholders have no ownership interest within their corporate structure. This is extremely important because mutual companies return profits back to their policyholders who are the joint owners of the company. As I'm sure you know, stock companies return profits back to their shareholders, and shareholders often have different incentives from policyholders. So the ABC strategy only works with mutual life insurance companies, this rules out a number of your household names, including several of the big boys with High-Flying advertisements on your television. Believe it or not, these mutual life insurance companies play a very important role in the market economy, and they have been around for centuries in some capacity. These are very conservative companies who have survived the Great Depression and the Great Recession of 2008 with few bankruptcies and zero bailouts. These companies employ actuaries who are very good at estimating annual expenses, and then they invest the difference between their premiums received and their expenses incurred and extremely conservative, high quality assets. This is where they make their money and it is how they are able to pass returns onto their policyholders. Now, these are not the companies dealing in derivatives and complex securities. As you saw in the news in 2008. Those were all stock companies. Mutual companies are quietly buying top rated bonds, 20 percent down conventional mortgage notes, and they hold a ton of cash. Naturally, this deployment of capital plays a large role in the conventional bond and mortgage markets, in addition to the advantages passed on to policyholders. OK, so that's how mutual life insurance works in a nutshell, here's how your ABC cash value grows. First, a significant portion of your premium flows into cash value because 60 percent of it is buying additional paid up insurance. Second, the life insurance company pays policy dividends annually, which directly builds your cash value. Now, there are two points I need to make here. First, this is a long term strategy and growth is very slow in the first several years. On the flip side, growth is very significant in later years. We'll illustrate this with the real example in the next lecture. Second, policy dividends are not guaranteed, but mutual life companies pay a dividend every single year unless they are in serious financial trouble. These dividends are small in the policies early years, but they become quite substantial later on. This creates two different classes of projections which your life insurance company will provide to you when considering an IBC policy. They are guaranteed cash value and non guaranteed cash value. Simply paying the policy premium guarantees that your cash value will be an exact dollar amount at each year of the policy. So you can see right up front what your minimum cash value and minimum return on investment will be before taking out a policy. As you will see in the next example, your policy will grow consistently year after year, even before a dividend is paid. This guaranteed ROIC will not while you and there is a even period, but it shows that you are not 100 percent dependent on policy dividends with this strategy. Now, the second projection, which you will see in the example is the non guaranteed cash value projection. This shows you what your cash value would be in any given year. Assuming dividends are paid out each year at the current dividend rate. As you will see, dividends really unlock the power of this vehicle as a means of warehousing capital so you can generate an internal rate of return within an ABC policy, maintain full liquidity and guess what? There's no risk to principal whatsoever. You know what? You're guaranteed minimum cash value is at every step along the way. Now, let's talk about liquidity and how to access the capital within the policy. You can withdraw cash value tax free up to the point where cash value withdrawn equals the total premium paid into the policy. After that point, withdrawals would be taxed naturally. Withdrawals reduce the amount of cash value remaining within the policy, which also reduces the amount of dividends received on the policy. So a better way to access the cash value is to borrow against it. This is done internally through your insurance company with either a quick phone call or a brief form. Policy loans are extremely advantageous relative to Standard Bank loans, and these loans are always tax free as long as the policy is structured properly. Also, policy loans do not reduce the amount of cash value within the policy. And if your insurance company is a non-direct recognition company, they also do not reduce the amount of dividends received on the policy. Now, policy loans do, of course, reduce the amount of capital available to you. But the fact that you can access the cash value without reducing the internal return on the cash value is a powerful concept. What this means is that you can basically use the same capital twice, once within the policy to generate a small return and again a second time for whatever purpose you like outside of the policy. This is why these policies are great vehicles for warehousing capital. You can access the capital for outside investments or expenses, but the cash value will continue to grow steadily within the policy. Year after year. We will talk more about how to strategically use policy loans later in the course. But I need to mention real quick that the policy loans come with no repayment schedule. In other words, you are under no obligation to ever pay the loan back because any policy loans outstanding will be subtracted from the death benefit when that inevitable day comes. That said, it is extremely advantageous to pay these loans back. We'll talk more about this in the strategy section. So if any of this seems a bit confusing, I think the following example will help clear everything up for you. What I want to mention before we move on to the example is this. These policies are fully customizable. You can set them up to be as big or small as you want. You have to be committed to paying the premium with outside funds for at least five to 10 years. But after that, the policy will be sufficiently capitalized such that you can either let annual dividends or a policy loan pay the premium going forward without hamstringing future growth. Also, this strategy is most powerful when the underlying policy is taken out on an infant because premiums are much lower in that scenario. The next example would demonstrate the policy I set up for my daughter with the intent to sign it over to her upon her maturation. But adults can also set up policies on infants to keep for themselves. The only rule is the adult must have an insurable interest on the child. They structure a policy to insure. OK, so let's move on to the example.