The secrets to success with the infinite banking concept: Becoming your own banker
By Lew Nason
Insurance Pro Shop
In past articles, we discussed our mission as financial advisors: "Helping average people to learn how to spend, save, invest, insure and plan wisely for the future, to achieve financial independence." What follows is a solid, proven, financial concept that you can use to help you accomplish your mission, while closing more and larger life insurance sales. It's all about helping your prospects, clients, family and friends to minimize the interest that they are paying to others; get the life insurance they need to protect their family; and establish a reserve of safe money.
In 1994, Nelson Nash self-published his book “Becoming Your Own Banker,” based on what he called the infinite banking concept and using participating whole life insurance as the funding vehicle. Since then, there have been several other people who have written books and/or have been promoting the same basic concept. Now, there's “Money for Life,” by Jeffrey Reeves (my personal favorite); “Bank On Yourself,” by Pamela Yellen; and “Discovering Hidden Treasures,” by Dan Thompson, just to name a few.
Understanding the infinite banking concept
The basic premise is that most people are spending huge amounts of money each year on financed debt for large purchases, such as homes, autos and major appliances. During their lifetime, the interest paid to financial institutions for these items can add up to hundreds of thousands of dollars.
Unfortunately, this financed debt is what is keeping most people from saving for their future. The average family is not able to save any money, because they’re spending approximately 34.5 cents of every dollar on interest to finance their lifestyle through banks and finance companies. What if it were possible for these people to recapture the principle and interest that they are paying to banks and finance companies, and they were instead able to put that money away for their future?
By creating their own personal private bank using cash value life insurance, they are able to take loans from their bank. Then each year, as they repay the principle and interest, it's going back into their policy, where it's growing tax-deferred and can be taken tax-free for their financial future.
How the infinite banking concept works
Simplistically, to create your own personal private bank, you'll want to sock away as much money as you possibly can, as quickly as you can, into a good participating (dividend paying) whole life policy. You funnel your money into the whole life policy for five to seven years. You over-fund the policy to just below the modified endowment contract (MEC) guidelines. Then, whenever you need to make a big purchase, you can borrow the money from your own personal bank, instead of borrowing from a commercial bank or credit card company.
Now, you pay the loan back to yourself, plus the interest you would have paid to the commercial bank. You are now making the big profits on your money that the bank would have made.
Consider, whenever you make a purchase, you are financing it. You are either paying interest to someone else — a bank, credit card company, etc. — or, if you pay cash for your purchase, you are giving up the interest you could have earned on that money.
The infinite banking concept isn’t new
Variations of this concept have been used by many of the industry legends for at least 40 years; by people like Mehdi Fakharzadeh, Woody Woodson, John Savage, Thomas Wolff and Ben Feldman. These industry legends would explain to their clients how the safe money they're putting into their participating whole life policy could be used for emergencies, to take advantage of business opportunities, to fund college, to buy a car and much more. However, if you take money out prior to age 65, you’ll want to pay the loan back, plus the interest, so you will have the retirement funds you planned on.
It works better today
As well as the concept worked 40 or more years ago, it works much better today, because of the paid-up additions rider that was introduced in the late 1980s. Today, using a paid-up additions rider, you can dramatically over-fund a participating whole life policy up to the MEC guidelines and make it an exceptional wealth accumulation vehicle.
Why use a participating whole life?
The reason you use a participating whole life policy is that it offers several unique benefits that other investment vehicles don’t offer:
1. It builds a liquid cash reserve of safe money. Generally, it can be accessed within five to 10 business days.
2. Cash value life insurance guarantees your investment principle, and offers you minimum growth guarantees for the life of the contract.
3. You can put in as much money as you want — limited only by the size of the whole life policy — which you can make as large as you need. Not so, with qualified plans.
4. All of the money you put into a cash value life insurance policy builds tax-deferred. You avoid paying income taxes every year, so your money grows faster.
5. You can borrow the money from the policy tax-free, without having to qualify for the loan and without contractual withdrawal penalties.
6. There are no early withdrawal penalties from the federal government. Not so, with qualified plans or annuities.
7. Loans against the policy come from the general assets of the insurance company, and not from the policy cash values. In many cases, you can actually earn more on your money than the loan is costing you.
8. The policy is self-completing, because you have a disability waiver of premium rider that will continue to put the money in for you if you ever become disabled. Only life insurance offers this unique benefit.
9. Life insurance provides a death benefit that gives your family the money you intended to save in the event you can’t be there.
10. In most states, life insurance is not attachable by creditors.
11. Life insurance cash values don’t count as an asset when applying for college financial aid.
There are several reasons why most agents struggle with using the infinite banking concept:
1. The first problem is finding and attracting the people who have the discretionary dollars to fund their own private bank. The prospects must be willing and able to put away large sums of money. Unfortunately, this severely limits the number of prospects available to you. And, it puts you in direct competition with all the companies and advisors working the more affluent markets.
2. They'll tell you the infinite banking concept only works with a good participating whole life policy — possibly because they want to recruit you to sell their products. The truth is, this concept works equally well with a good universal life policy (except for some of the guarantees). And, in some cases, because of the flexibility, a universal life policy will work much better than a whole life policy. For more information about using universal life you should read “Last Chance Retirement,” by Brett Anderson.
4. Most of the organizations that are promoting and training agents on this concept are charging $400 or more per month and/or they want you to contract with their companies (with reduced commissions) . The secrets to making these concepts work for you
The beauty of the infinite banking concept is that with some small modifications, almost everyone can use this concept to truly help their prospects.
As stated earlier, to make this concept really work means putting all the money your prospects possibly can into a good cash value life insurance policy — participating whole life or universal life. Now, if you want to help the greatest number of prospects, not just the more affluent, you must help your prospects to find the money.
You can help them do that by:
1. Helping them to first eliminate their debt. Can you show them the logic behind refinancing their home for as long as they can, or taking out a home equity loan to pay off their debts, thus freeing up those payments to funnel into a life insurance policy? (Missed fortune concept)
2. Showing them how and why to increase all their deductibles and delete any unnecessary riders on their existing insurance policies. Do they have any unneeded policies? Can they use their dividends to pay up their existing policies and/or funnel those dividends into the new policy?
3. Temporarily stopping the contributions to all their qualified plans, except for any amounts that are being matched by their employers. (LEAP concept)
4. Finally, can you help them look for other ways to cut their expenses? Can they get a better long distance carrier for their phone service, etc.?