Though it’s been a hot topic for many years, a quick web search on any major search engine will show you that there is much confusion on the internet about the Infinite Banking Concept. Skeptics say the concept is nothing more than a disingenuous ploy used by unscrupulous life insurance agents to sell a lot of whole life insurance to unsophisticated prospects and clients. This view seems to be predominant on sites frequented by people discussing mutual funds and other aggressive, risk-oriented investment approaches. It’s fairly well known that these folks tend to hold any form of permanent life insurance in low regard and generally adhere to the “buy term and invest the difference” philosophy over the course of their lives.
I might add that it would not be unlikely that many of the commentators/moderators found on these sites are involved in some aspect of the business of selling mutual funds or other securities or are connected in some other way to the securities industry. In my experience, most “financial planners” fit neatly into this group of securities enthusiasts, too.
At the opposite end of the philosophical spectrum are others – most likely insurance agents – who unabashedly tout the Infinite Banking Concept as a “near-miraculous cure-all” for overcoming almost every financial shortcoming in a person’s life. You can almost hear the agent shouting across the kitchen table “Ya gotta just trust me on this, Ben. Load everything you can into this policy and I guarantee you, you’ll want to kiss me 30 years from now ’cause you’ll be a wealthy man! Just look at the numbers here on this proposal – it’s all right here on this page, man!” Maybe you know that agent, too? I’ve met more than a few.
Obviously, an intelligent reader would consider the general context of the site they’re visiting and immediately suspect that either of these positions must be near the two extremes of the spectrum of possibility. Naturally, the truth lies somewhere toward the middle of the spectrum. The challenge of the internet is that both extremes are likely to show up, side-by-side, on the first page or two of your web search! How do you begin to ferret out something rational and close to the truth?
It is my goal in this section of my website to systematically dispel the myths and confusion surrounding the Infinite Banking Concept. At the same time, I am opening the Infinite Banking Concept as a new topic on this blog to begin introducing more details about the concept in future articles so that people can learn about it and decide on their own whether or not it makes sense to them and is something they wish to pursue as a part of their own financial strategy.
With the added goal of teaching the concept without “hyping” it, I welcome a dialogue with site visitors who’d like to ask questions or leave comments for others to ponder – just as long as they are helpful and constructive to other readers. I also welcome feedback so I can learn what areas of the concept are most confusing to readers so I can focus future articles in those areas. So, let’s begin with a quick background and an overview of the concept.
The Infinite Banking Concept was pioneered by Mr. Nelson Nash of Birmingham, Alabama beginning in the high interest rate environment of the late 1970’s and early 1980’s. Based upon his personal financial struggles through those difficult times, Mr. Nash learned to effectively use the cash values from several whole life policies he’d owned for many years to make the best of an otherwise bad situation. As a result, he found that he had substantially increased his personal wealth as a direct consequence of what he’d done – using and repaying the policy loans!
Mr. Nash was so enthusiastic about his experience that he wrote a very popular paperback book introducing his idea and the concept and, essentially, branded it by detailing it in his book. The concept has actually been around as long as permanent life insurance has existed but Mr. Nash can be credited with putting it all together and teaching people how to directly benefit from using it deliberately in their lives.
At it’s very essence, the Infinite Banking Concept involves buying a permanent life insurance policy that is intentionally designed to build large cash values and death benefit over time. As policy cash values build, they become available to the policy owner for loans. Policy loans tend to be available at very favorable interest rates and terms, despite economic conditions and without any need to “qualify”. As long as you have cash values available, one quick phone call and you’ve qualified! The insurance company will put a check in the mail to you for whatever amount you desire up to the extent of your policy’s available cash values. (I’ll offer more details on how policies work in future articles but, for now, just picture policy values continuing to grow and compound over time as premiums are paid.)
So, we now have our permanent policy in place and have been paying premiums into it over the course of a few years and we have some cash values becoming available for us to borrow out.
IMPORTANT QUESTION: WHY ON EARTH WOULD I WANT TO PAY INTEREST TO AN INSURANCE COMPANY FOR THE USE OF MY OWN MONEY?
Sounds crazy, right? Well, not so fast…
This is where we need to shift our economic mind from the micro-economic view to the macro. This is where the actual cost of our alternatives enters the picture and must be accounted for. This is also where we need to learn THE ONE MAJOR DIFFERENCE that a quality permanent life insurance policy offers that sets it a world apart from each and every one of our other options. It is this one critical difference that makes the Infinite Banking Concept possible. The difference is simply this; a properly selected life insurance policy pays you interest or dividends on your cash values EVEN IF YOU HAVE BORROWED THEM OUT. In other words, you’ve now found a way to “magically” make your money work for you in two places at the same time. Take a minute and let the full importance of that sink in, OK?
Now imagine you have a bank account that pays you 5% interest on your funds. If you want to make a purchase of, say, a $20,000 new car and you pay cash for it, you are INCURRING A COST (lost interest) of 5% on the use of your money, correct? Are you not paying interest? Of course you are. You’re paying interest by not receiving it. You’ve chosen to move your investment from an account that was paying you 5% to an automobile that pays you nothing. Therefore, your decision has still cost you 5% interest on your money – in the form of sacrificed interest.
Now, back to life insurance policy loan. If you borrow the same $20,000 for your car from your insurance policy, you will pay interest of, say 6% for the use of your money BUT – and here’s the big difference again – THE INSURANCE COMPANY WILL CONTINUE PAYING YOU INTEREST OR DIVIDENDS ON YOUR MONEY AS IF IT WERE STILL INSIDE THE POLICY. Your mathematical mind kicks in now and quickly calculates that your actual cost with the policy loan is NOT the full 6% but is actually the difference between what you pay the insurance company and what you are receiving back from them. In practice, this “cost” for the use of your money is very negligible (1-1.5%) in the short run and is normally FULLY RECOVERED PLUS A PROFIT in the long run (when the income tax-free death benefit is eventually paid to your heirs).
While this difference in financing costs may not initially strike you as meaningful, consider everything you finance (by paying cash or borrowing) compounded over the course of your lifetime. Then, consider that banks do the very same thing and look at how large they grow. Then, consider that it can be proven that most people spend between 30 and 50% of their annual income on financing charges over the whole course of their lifetime. Then, imagine that some or perhaps even most of that money could be recaptured and compounded into your own pile of wealth and reinvested again and again for your own enjoyment later in life as your resources continue to expand exponentially. This wealth becomes available FOR USE DURING YOUR LIFETIME. These are the possibilities of the Infinite Banking Concept.
Mr. Nash emphasizes that everything in life is financed. Paying cash is just as much a form of financing as is borrowing or leasing. It’s just a matter of how honest we are with our accounting that determines the “least cost” method of financing that we employ over the course of our lives. When the accounting is accurate, it becomes evident that policy loans are a superior means of financing nearly everything in life, perhaps even our mutual fund purchases. But I’ll reserve that topic for another day and another blog entry.
As you might imagine, the Infinite Banking Concept can be quite simple but, at the very same time, it has many nuances and complexities. It also requires a knowledgeable professional insurance agent to help you learn it and apply it in your own life.
That is a thorough overview of the Infinite Banking Concept and should serve to provide you with a working knowledge of it. Please check back often as I fully intend to dig deeper into it to explore its complexities and nuances for the benefit of readers as time allows and creative impulses dictate. Meanwhile, please tell a friend about this blog and check out my other posts on different subjects. And be sure to look at topics that are related to Infinite Banking as I write them (i.e. velocity of money, term insurance, lifetime economic acceleration process, etc.).
I promise to keep working and developing this site to transfer valuable knowledge to my readers so that you can enjoy more wealth and certainty in your life. As always, feel free to contact me with questions.