So, let’s walk through the basic building blocks of Infinite Banking. You’ll see how creating a personal bank with Infinite Banking fulfills the promise of being a golden key that unlocks and improves every other area of your financial life.
Infinite Banking: A Process That You Do
IBC is not just a concept it is a whole cash flow system, or process, of money management. It has two critical components:
The product design itself: a Specially Designed Whole Life Insurance Contract (SDLIC), AND
The way it’s used: the strategies to utilize the contract to do the most with your money
Unfortunately, the way most people think about using whole life insurance policies has caused them to see far less than its potential. They look only at the features of the product, without considering how to use it. Instead of using it to its fullest capacity, they do the equivalent of buying a U-Haul that could provide transportation and income, and then leave it parked in the garage. Just like an income-producing truck, SDLIC is meant to be used.
Please understand, buying a product, no matter how good it is, will get you nowhere without the right strategies to use it. And the right strategy, no matter how ideal, will get you nowhere without the right principles.
The reason I emphasize this point is that everything in your financial life must start with a principle. You need to be crystal clear on what you want to accomplish and why. Then you can design the strategy and system to do that. Finally, you can select the right products that work best to get the job done. But if you start with products before you have a north star in your financial endeavors, you’ll forever be chasing your tail, not really knowing whether you’re getting closer to your goals.
So, The Infinite Banking Strategy isn’t something you buy, it’s something you do. And it just so happens to help you do a lot of things really well. If you have the right mindset.
What Makes Whole Life Insurance the Perfect Vehicle for the Infinite Banking Concept (IBC)?
Let’s break down the four non-negotiable elements of whole life insurance policies, the significance of each, and find out what it does for you.
The main ingredients are:
High cash value
Dividend-paying
Whole life insurance contract
With a mutual company
High Cash Value
R Nelson Nash, the father of Infinite Banking and author of Becoming Your Own Banker, famously says that whole life policies have been misclassified.
The reason? Classification should happen along the lines of the primary characteristics of the thing. And when you think about life insurance, you’re usually thinking about the death benefit that your loved ones get when you die.
But when we look at a whole life insurance policies for Infinite Banking, the cash surrender value takes center stage.
So, what exactly is cash surrender value? It is the portion of your death benefit that is available to access and use while you’re alive.
Cash surrender value is very similar to the equity in a house. The home value itself is like the death benefit. The cash surrender value is like the equity. As you pay down the principal of your mortgage, you build equity. The more money you put in, the more equity you build. Cash value, like equity, is an asset that you can use (except it is much more accessible than home equity).
This cash storage and savings function is the defining purpose of SDLIC when you’re planning to use it for Infinite Banking. You can access and tap this asset for any type of emergency or wealth-creation opportunity that arises in your life.
A Place to Store Cash
The crucial questions become, what is the best place to store my cash during pauses in use, like when you’re building up capital for an investment, waiting for the ideal investment, or holding it in reserves? Compared to how much I put in, how much can I use, and how quickly? How does it grow over time? How confident can I be of its value in the future? And how easily can I get to it and use it?
And you may be surprised to learn that an SDLIC’s cash value outperforms every other savings tool we’ve assessed – from savings, checking, money market accounts, and CDs – with competitive growth rates, more safety, and more access to your capital.
Circling back to the established fact that this is a participating whole life insurance policy, its special design is what allows it to build high cash early in your policy. We aren’t talking about a typical whole life policy that can take decades to slowly build cash like the undetectably incremental process of metamorphosis. Instead, we are using a whole life policy that front-loads the cash value, so your growth is more like the launch track on a roller coaster that accelerates the train to its full speed quickly.
With Infinite Banking, the insurance component that we are maximizing is the cash value, a place to store liquid capital that is better than a traditional bank.
Dividend-Paying
Additionally, the ideal whole life policy for an Infinite Banking Strategy also has maximum long-term growth. Part of this growth is accomplished through receiving dividends, the distribution of excess profits. When dividends are added to your policy, this input adds to the cash value pool.
Whole Life Insurance Policies
As you probably are aware, there are several types of life insurance.
Term life insurance covers you for a specific period of time, usually between 5 and 30 years. It provides a death benefit only. Because term life insurance doesn’t give you access to capital you can use, it cannot be used for Infinite Banking as a place to store cash.
For most of the other types of insurance, in addition to the death benefit, you gain a savings component inside these policies, where a portion of your death benefit is available to you in the form of cash value.
There are multiple types of permanent policies, namely, whole life, universal life, and variable life, with additional variations like equity-indexed universal life, and variable universal life.
Here’s what you need to know:
Whole life covers you for as long as you live. It offers guarantees in mortality charges and interest, with additional dividends on top of the guarantees. The guarantees make it an ideal, dependable tool to use for Infinite Banking.
Universal and variable life do not have sufficient guarantees to be used for Infinite Banking. Universal life is more flexible, with interest earned by short-term money rates, but the mortality charges increase with age. Variable life includes mortality charges that can be either fixed or increasing, with a return that is determined by the stock market performance. Some of the malfunctions that have caused these plans to go awry are an increase in mortality cost that exceeds the growth of the policy, requiring more premiums to be due than originally illustrated, or a stock market crash dragging down the value of an asset that was supposed to have certainty and stability.
Contract
One of the reasons whole life is so attractive is that it offers the guarantees of being a contract. And these guarantees are extremely valuable to you because they lay out the minimum future values you can expect, giving you a lot of certainty for the future.
You have guaranteed premium payments, which are the dollars that you pay into the policy to keep it in force. The premium payments in whole life policies never go up or increase. You’ll never have a surprising moment where you wake up and have a higher premium due just to maintain the performance.
A whole life policy gives you a guaranteed death benefit. When you begin a policy, you’ll see every year from your current age out to age 121 with a guaranteed benefit amount that will be paid out when you die. The age of 121 is a place marker called the age of endowment. It’s significant, because although no one alive today expects to live that long, if you were to do so, you would receive the full death benefit at that time.
Additionally, the whole life policy has a guaranteed cash value. This is the minimum amount of your death benefit that you will be able to access and use. And the guarantees are a rock-bottom value. As long as you pay into the policy as planned, you’ll have at least the illustrated minimums available to you in any given year. The guaranteed value is based only on the internal growth of the policy from interest. It does not add the highly anticipated dividends, which are subject to the current year’s profitability.
With a Mutual Company
We’ve talked about dividends, but let’s look at what makes them possible: it’s the ownership structure of the life insurance company itself.
With a mutual life insurance company, the policy owners are owners of the company. By contract, the insurance company must pay out profits to its owners. This return of profits is added to your policy as a dividend.
Dividends are shown in a separate section of an illustration because they are not guaranteed. You’ll see an expected dividend payout, which may be more or less, depending on the actual profitability in real time. Although dividends are not guaranteed, they are highly anticipated. In fact, the mutual companies that we work with have paid out dividends every single year, for over 100 years, even throughout the Great Depression.
When you’re a policy owner with a mutual company, these dividends are an extra boost that accelerates your long-term growth.
In contrast, a stock company has stockholders who are the primary stakeholders of the company. In a stock company, profits are distributed to shareholders, not to policyowners.
The reason you want to ensure your policy is with a mutual life insurance company is that they will have a sole allegiance to the policy owners. Everything the company does benefits policyholders directly.