When trying to understand the Infinite Banking Concept things can often get confusing to the point of giving up. Borrow money here, pay yourself back here, become the bank, and it goes on. And although these are valuable ideas, it can sometimes feel like dragging your feet through the mud.
What most people want to know is where is my money going and how does the underlying investment function.
So, we are going to tackle the essential core of the Infinite Banking Concept and how the underlying product, cash value life insurance, helps us improve on these three investment essential: growing money safely and competitively, reducing taxes, and having access to money.
But first let me go through a very, very quick explanation of the book “Becoming Your Own Banker,” the book that started all of this.
Nelson Nash’s “Becoming Your Own Banker – The Infinite Banking Concept”
This book is definitely worth reading. It focuses on being the banker yourself in your own financial life. Instead of putting money into an investment that you can’t control, the idea here is to put money into a life insurance policy. Then, when you need money for major expenses, you borrow it out at the life insurance company interest rate and pay yourself back at a higher interest rate to increase growth.
Already this may sound confusing.
The reality is this: “Becoming Your Own Banker” is a great concept and something everyone should study, especially if you are a business owner, real estate investor, etc.
But we can go on and on about borrowing and paying yourself back.
However, this isn’t solving the real problems individuals face.
Here are the two biggest major factors in almost everyone faces in their financial plan: Not saving enough money and losing money in the market.
Where many people ask: “How should I buy my car?” We ask: “Which car should I buy? How can I save more money?”
Where many people ask: “How can I earn more in my investments?” We ask: “How can I stop losing money in the market, pay less taxes, and still grow my wealth?”
By saving more money and stopping the holes in our financial portfolio we can have a much greater impact on our financial future compared to any other strategy.
And this is where high cash value whole life insurance comes into play–the underlying investment for the Infinite Banking Concept.
The Benefits of High Cash Value Whole Life Insurance
Even with R. Nelson Nash in the book “Becoming Your Own Banker,” whole life insurance wasn’t the goal.
The reason we focus so much on whole life insurance is because it fits so perfectly into what we are trying to accomplish.
Nelson Nash saw this too.
If there was a better place to put our money that would accomplish these same goals we would change the products we use tomorrow.
The reality is, as of right now, high cash value whole life insurance is the only investment that meets our three essential investment criteria.
That is: growing our money safely and competitively, lowering taxes, and having complete access to our money.
So, let’s look at exactly what high cash value life insurance is and why it fits these three criteria. We also want to be critical, so, after we go through the benefits, let’s look at the downsides and where this product restricts us.
#1 – Growing Money Safely and Competitively
Admittedly, our first criteria can be broken down into two different pieces. Even though high cash value life insurance accomplishes both of these—growth and safety—in the same way, we must look them individually.
Our number one rule is don’t lose money (you can learn more about our philosophies on money by downloading our free “10-Minute Retirement Guide” here).
Without getting too deep into market research, etc. let’s just say losing money has a much greater impact on your financial portfolio than growth does.
This is what we call average vs. actual returns.
The reality is this.
If we have $100,000 in our investment account and we earn 50%.
We have earned $50,000.
And then we lose 50% on our money (now $150,000).
That means $75,000 in losses.
We end up with $75,000.
You can have the losses first or last it won’t matter. The fact is, when it comes to your investments, losing money has a much greater negative impact on your investments than growth ever will.
And to make matters worse, the “average” return on your investment is 0%.
So, we have an average growth of 0% but we lost 25% of our money.
This is the illusion of Wall-Street investing.
So, the lesson here is don’t lose money.
Whole life insurance solves this.
Whole life insurance has a guaranteed minimum growth. This means that, even if the company paid nothing in dividends, you would still have growth.
(And by the way, the companies we use have paid dividends for over 100 years—through the great depression and multiple recessions—which adds to the safety factor.)
So, when it comes to safety, whole life insurance meets our criteria for safe growth. But keeping money safe doesn’t sound flashy. People are more concerned about what they will earn.
The point of investing is to grow your money. Simple whole life insurance, as you probably know, isn’t a great place to grow money.
This is where the “high cash value” in high cash value whole life insurance comes in.
By structuring a whole life insurance policy differently, we can, in essence, load the policy up with cash.
Thus making it an investment.
By doing this we give the life insurance policy a higher cash value as well as increase the dividends we earn per dollar.
This is how we structure the policy to earn competitive growth.
A Mass Mutual study on historical policies showed that, from 1981-2008, a 10-pay policy on a 50 year old grew at 6.52%.
When accounting for taxes saved, which we will do shortly, that growth becomes even more competitive.
And this policy wasn’t even a “high cash value” policy—it was just a standard 10-pay while life insurance policy.
Through proper structuring, this policy could have likely earned even more.
This is what we mean by competitive growth. Sure, there is always a possibility that we can earn more in the stock market. However, there is also a possibility, and substantially more so, that ourselves, or our advisors, will often have losing years in the stock market.
Talking about funds trying to beat the market index, Warren Buffet said this:
“The bundle of hedge funds had compound annual returns of 2.2 percent in the nine years through 2016, compared with 7.1 percent for the index fund.”
The pros can’t beat the market, that’s how hard it is.
High cash value life insurance offers us competitive growth without the risk of market loss.
We couldn’t fit this all in one page so continue this article below.