When it comes to designing an infinite banking plan, Nash suggests studying mortality tables to see where most of the dying occurs. He cites statistics which show that if you take 900 people who are living at age 45, 75% of them will not die until they have passed age 65. With increasing lifespans, these numbers may be even more tilted toward deaths occurring after age 65 in the decades since Nash wrote the book. He points out that when people discuss the “need” for life insurance, they typically focus on the time between age 21 and 65, even though comparatively few people die within this age range.
Nash points out that life insurance started out as term insurance, with insured individuals paying higher and higher premiums as they aged and became more likely to die, until they reached the point at which they could no longer afford to buy insurance at all. Thus, whole life insurance was created, beginning with the insured’s current age and extending all the way to age 100. From Nash’s perspective, this type of whole life insurance policy had more to do with banking than anything else, making it equivalent, in his view, to “a banking system with a death benefit thrown in for good measure.”
Dividend Paying Whole Life Insurance is a “a banking system with a death benefit thrown in for good measure.”
This misunderstanding, or misclassification, as Nash sees it, was key to his discovery of the infinite banking concept. In building an IBC plan, Nash recommends that shorter payment periods on life insurance policies are better. However, he doesn’t see a need to pay so much of a policy upfront that it is classified as a MEC (modified endowment contract), thereby losing certain tax advantages granted to life insurance policies.
PUAs
Instead, Nash suggests utilizing several policies to create a comprehensive IBC system, using as a base policy a policy that has standard premium payments over the course of an individual’s life, and then adding a rider that allows Paid-Up Additions (PUA) to the policy.
You can then vary how much is allocated to the new policies in relation to the base policy, with the MEC cut-off line at one end and the base policy at the other end. The objective, according to Nash, is to get close to the MEC line without crossing it, reducing the amount of immediate death benefit while emphasizing the banking aspects of the system by creating greater cash value.
An added advantage of this approach, Nash says, is that it is likely to end up generating greater death benefit at the time death is most likely to occur than would be the case with other plans. Using this strategy, the base policy generates dividends, as will the PUA rider, which can be used to buy further Paid-Up insurance, enhancing the “infinite” aspect of the system.
Such an approach can also be called “overfunding life insurance”, with a goal of getting the maximum amount of money possible into the policy with the least insurance attached to it.
Essentially, the goal for the purpose of infinite banking is to acquire the policy which is highest in cost without being designated a MEC; in other words, minimizing the death benefit of a policy while seeking to maximize its cash value.
A properly designed Infinite Banking policy maximizes cash value growth and minimizes the initial death benefit.
Once you have adequately capitalized your IBC system, Nash says, you can then access the funds within the system and pay back interest to yourself, rather than to a finance organization. While it takes time to build up enough capital in the system, Nash reminds that the same would apply if they were starting up a business or a bank of their own.
Reviewers Note: Properly designed life insurance for infinite banking may have cash available to borrow against starting in month one. However, it will typically take about 5 years before the policy begins earning interest and dividends greater than your initial contribution.
To illustrate the power of the IBC, Nash outlines several different scenarios for acquiring the funding to purchase or lease a series of cars over a 44-year period. According to Nash’s calculations, using dividend-paying life insurance to take advantage of the guaranteed return plus the potential for dividends offered by these policies proves to be the most effective use of capital as compared to other methods.
IBC included; these methods are as follows:
§ Leasing a car each year over 44 years: This method is the most expensive of all, according to Nash, given the high fees involved
§ Borrowing the money from a bank or finance company: In this method, interest is paid to the bank and thus benefits the bank and not you.
§ Paying cash for a new car every four years (by setting aside enough money in savings to be able to afford a car): This is similar to the “sinking fund” method but does not take full advantage of the possibility of earning interest and potentially dividends on your funds over time.
§ Investing money in bank CDs over seven years to build up enough money to purchase a car: While this does earn interest, you are using someone else’s bank to do so, therefore the dividends earned by the bank accrue to the bank’s shareholders, and not to you.
§ Using dividend-paying whole life: In this scenario, you can benefit from the strong dividend-paying ability of life insurance companies, some of whom have paid dividends yearly for more than 150 years. Nash’s illustration of this method in the book shows the withdrawal of dividends, rather than taking a policy loan, to generate funds to purchase a car. However, Nash says that his preferred method would be to use policy loans, because of the compounding power generated by using dividends to buy further Paid-Up insurance. If you use loans, you don’t restrict the policy’s ability to grow via interest accrued on your existing cash value and dividends.
Delayed Gratification
Nash explains that buying a life insurance policy is like starting a business – which generally involves a delay before profitability kicks in.
Because you, and not the life insurance company, are the owner of the policy, you have full control over how the capital built up in the policy is used.
Thus, Nash dismisses claims that life insurance is a poor method of accumulating wealth since it takes time to build up equity in your policy. In the long run, Nash says, the retirement income that is generated by the IBC method can far outstrip that generated using alternative methods. This, he writes, is “the real power of the life insurance method.”
By Nash’s calculations, the IBC system outlined in method 5 continues to pay retirement income from dividends until the cost basis is recovered and thereafter from policy loans for many years longer than would be the case using the CD method described in method 4, which runs out of funds after a few years of paying retirement income.
At the same time, it leverages to you a significant death benefit to your heirs when you pass away. By capturing the interest that an individual would normally pay to someone else and the dividends generating by controlling the lending process, the IBC method, according to Nash, enables a policy owner to significantly improve their financial position over the long-term.