The Infinite Banking Concept

Joe Withrow
A free video tutorial from Joe Withrow
Author, Editor, Investor, Philosopher... in random order
4.3 instructor rating • 5 courses • 12,278 students

Learn more from the full course

The Infinite Banking Concept

A Powerful Way to Warehouse Capital and Build a Personal Pension Plan for Just Hundreds per Month

41:58 of on-demand video • Updated August 2016

  • Become your own bank
  • Never need bank loans again
  • Build a million-dollar pension plan with just $250 per month
  • Finance your child's education 100% without needing student loans
  • How to finance cars... home renovations... and vacations with your own family bank
  • Warehouse capital for business in a tax-advantaged way
English [Auto] I must begin this course by saying that this is a difficult topic to cover within the current financial environment the infinite banking concept as a strategy to structure a specialized whole life insurance policy such that it becomes a powerful vehicle for warehousing 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 than 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 know 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 that 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 what the traditional policy that's true with an IBC policy we do not have to choose between the two typical IBC 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 $500000 and then you pay monthly premium to support your $500000 life insurance policy. Well with an IBC 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 boatin 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 100 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 a strongly 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 IBC 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 in extremely conservative high quality assets. This is where they make their money and it is how they were able to pass returns on to 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 that's how Mutual Life Insurance works in a nutshell. Here's how your I received 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 powerslide 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. Well illustrate this with a 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 Arawa I will not wow you. And there is a breakeven 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 IBC policy maintain full liquidity. And guess what. There is no risk to principle whatsoever. You know what your guaranteed minimum cash value is at every step along the way. Now lets 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 learns later in the course but I need to mention real quick that the policy plans 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 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 lead 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 engine because premiums are much lower and that's an area. 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.