Infinite Banking Concept, Cash Flow Banking, or Bank on Yourself
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Investor · Saint George, UT · Member since 2008 · 10 posts · 22 votes
13yInteresting responses from those who admittedly have only HEARD about the idea but have no practical understanding of how Privatized Banking actually works. Those who think the Infinite Banking Concept is about life insurance (AKA Death Benefit) are missing the concept all together.
Banking is a CONCEPT, not a product. Infinite Banking is designed around the radical idea that YOU (the owner of policy designed for maximum efficiency) should be the First Beneficiary of the policy; with your family being the secondary beneficiaries. As the first beneficiary you have access to guaranteed cash values that form the basis of what will become your privatized financing system. Properly designed and used, a Dividend Paying Whole Life Contract from a Mutual Insurance Company makes an incomparably great base from which to conduct a financing BUSINESS (right alongside your Real Estate Investing Business).
HOLDING your cash in a tax-advantaged environment until you USE it for banking purposes during your accumulation years, then converting profits from your Real Estate into tax free dollars at retirement provides privileged access to cash on demand with non-structured loan repayments... that may even be tax deductible.
When you understand and can emulate the way traditional banks have made money for the past 5,000+ years, you suddenly realize that owning your own tax-advantaged financing system will make your good (Real Estate) investment even better, and that financing may well be more profitable to you than your investment.
Did you spend time learning how to successfully invest in Real Estate? Then you spend time and energy to understand Privatized Banking from someone who has used this concept with REAL deals. For example, with banking, there are two Internal Rates of return, plus the External Rate of Return and the Death Benefit (the Eternal Rate of Return). Learning the benefits and uses of all four, beats solely relying on Real Estate Returns.
216 Replies
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes12y
Life insurance, even whole life is a very important estate planning tool for large estates. However it seems to me that buying whole life insurance and only getting a portion of that back in the way of a loan would delay investing in real estate by a lot. You can use every dollar you save to invest not a small percentage. if you need life insurance buy it, term is much cheaper, if you need a source of income to retire on, that is why I invest in real estate, I doubt life insurance will beat the return rate. you get depreciation or get someone to pay the life insurance for you like renters do. Whole life can be an important tool, I have clients who literally have millions of it, but not so they can use it as a bank.
It has probably changed, but my dad used to sale life insurance and my review of it back then showed that as a way to make money, it worked if you died. not my way to build wealth although I do have a term policy to cover my bank loans, and my mortgages will be paid off by the end of the term and I plan to live off my real estate income.
In any post even someone with only one post can have information that can help. If only guys with a few posts are for and those who have thousands think its bad, I would investigate carefully before investing my money. We have had cases of folks doing phoney accounts for testimonials. I am not saying this is the case, but please be careful.
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes12y
Originally posted by @Ned Carey:
I am intrigued however I have seen no one here say what the advantage is.
You are investing your own money in a policy, you borrow it, and pay it back. What is the advantage of using your own money via a life insurance policy?Here are the Advantages of permanent life:
-Liquidity: Ability to access to your funds tax free via withdrawal or loan without restrictions or special requirements unlike 401k's, IRA's, and other qualified plans which you have to have qualified uses, disability, or limited liquidity
-Flexible repayment terms on loans taken from the policy, payments can be made when you want or none at all, interest costs due can be deferred when your cash flow is tight. The interest accumulates in a separate account that is collateralized by the cash value account so unlike what what most people think the debt or loan account is separate from the cash value account. This allows the cash value to grow unhindered even when you have accessed your money from your policy thereby having the money work in two places at one time (aka ideal for banking concept, arbitrage opportunity exists inside the policy and outside in your investment as well).
-Asset protection and privacy from creditors in an event one has a claim against you since the contract is held in similar fashion to a trust so its not claimed on your tax returns or publicly displayed
-Funds withdrawn or borrowed from the plan can be used for any purpose you can think of with out restriction
-Quick access up to 95% of all funds available in the cash value relatively quick (1-2 weeks) via withdrawal or policy loan
-Excluded from counting as an asset when applying for student loan or financial aid
-High Contributions are allowed unlike 401k or IRA's which have strict contribution, income limits, and rules
- Death benefit creates an instant estate as of today 5.34 Million is the estate tax limit before your assessed with a 40% death/gift tax on assets over this amount
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes12y
There is one benefit I have not seen anyone mention. last I looked whole life policies were an exempt asset under bankruptcy law as it was considered a form of a retirement. I am not sure if the new liquid ones are or not.
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes12y
In the same "infinite banking," or private banking system methodology businesses buy billions of cash value life as well to utilize benefits explained in the infinite banking strategy. If it was such a horrible Idea would all of these companies spend billions on it? (most notable are the largest banks)
- ADAC Laboratories
- Advanced Telecommunication Corp.
- Aeroquip Vickers Inc.
- Alabama Power Co.
- Alfa Corp.
- Allegheny Technologies Inc.
- Allergan Inc.
- Allfirst Financial Inc.
- American Business Products, Inc.
- American Electric Power
- American Express Co.
- American Greetings Corp.
- American Management Systems Inc.
- American Seafoods Group LLC
- Ameritech Corp.
- Amerus Group Co.
- Anadarko Petroleum Corporation
- Appalachian Power Co.
- Arch Chemical
- Aristech Chemical Corp.
- AT&T Communications
- Atlantic Richfield Co.
- Avery Dennison Corp
- Avon Products Inc.
- B. F. Goodrich Company
- Ball Corporation
- Bank Boston
- Bank Of America
- Bank One Corp.
- Barnett Banks Inc.
- Bassett Furniture Industries Inc.
- Be Aerospace Inc.
- Bear Stearns Companies
- Bellsouth Corporation
- Boise Cascade Corp.
- Boston Company
- Boston Federal
- Bristol-Myers Squibb Company
- Camelot Music, Inc.
- Carolina Power & Light Co.
- Carpenter Technology Corp.
- Catskill Financial Corp.
- Central Power & Light Co.
- Ch2m Hill Companies Ltd.
- Charming Shoppes, Inc.
- Checkfree Corp.
- Chemical Banking Corporation
- Citibank, N.A.
- Citizens Bank
- Clark Inc.
- Clorox Company
- CNF Inc.
- Coca-Cola Company
- Columbus Southern Power Co.
- Commercial Intertech Corp.
- Compass Bank (Florida & Alabama)
- Computer Technology Associates Inc.
- Consolidated Natural Gas Co.
- Consolidated Rail Corporation
- Cox Enterprises, Inc.
- CTA Inc.
- Cymer Inc.
- Diamond Shamrock Inc.
- Diebold Inc.
- Dime Bancorp Inc.
- Dow Chemical
- Earle M. Jorgensen Co.
- Eastman Kodak Company
- Eaton Corp.
- ECC Capital Corp.
- Enserch Corp.
- F&M Bancorp
- FiberMark Inc.
- Figgie International Inc.
- Fina Oil & Chemical Company
- First Bank System Inc.
- First Commonwealth
- First Midwest Bancorp Inc.
- Fleet Bank
- FleetBoston Financial Corp.
- Flightsafety International Inc.
- Frontier Bank
- Fulton Financial Corp.
- GATX Corporation
- Georgia Power Co.
- GNC Corp.
- Great Plains Energy Inc.
- GTE Corporation
- Gulf Power Co.
- HCR Manor Care Inc
- Hechinger Company
- Heritage Commerce Corp.
- Herman Miller Inc.
- Hershey Foods Corporation
- Hillenbrand Industries, Inc.
- Hosiery Corporation of America
- Houghton Mifflin
- Household Finance
- Hovnanian Enterprises Inc.
- Hughes Supply Inc
- ICI Americas, Inc.
- Idaho Power Company
- IKON Office Solutions Inc.
- Indiana Michigan Power Co.
- Integra Bank Corp.
- Intermark Inc.
- Iowa First Bancshares Corp.
- Iroquois Bancorp Inc.
- J Jill Group Inc.
- JP Morgan Chase & Co.
- Kansas City Power & Light
- Kansas Gas & Electric Co.
- Keithley Instruments Inc.
- Kentucky Power Co.
- Keycorp Ohio
- Kimberly Clark
- Korn Ferry International
- Laser Master Int’l. Inc.
- Linens N Things Inc.
- LKQ Corp.
- Louisiana Pacific Corp.
- Manor Care Inc.
- Marriott International Inc.
- McDonnell Douglas Corp.
- Media General Inc.
- Medicalcontrol Inc.
- Menasha Corporation
- MidAmerican Energy Co.
- Miix Group Inc.
- Mississippi Power Co.
- MNC Financial Inc.
- Mueller Industries Inc.
- National City Corporation
- NationsBank
- Nestle Enterprises
- Norfolk Southern Corp.
- Norfolk Southern Railway Co.
- Northern States Power Co.
- Ohio Power Co.
- Old National
- Olin Corporation
- Owens & Minor Inc.
- PacifiCorp
- Panera Bread Co.
- Panhandle Eastern Pipe Line Company
- Parker Hannifin Corp.
- Penn Treaty American Corp.
- Penns Woods Bancorp Inc.
- Phibro Animal Health Corp.
- Philipp Brothers Chemicals Inc.
- Phoenix Companies Inc.
- Pinnacle Financial Services Inc.
- Portland General Electric
- Potlatch Corporation
- PPG Industries
- Procter & Gamble Company
- PSS World Medical Inc.
- Public Service Co. of New Mexico
- Public Service Co. of Oklahoma
- Public Service Enterprise Group
- Questech Inc.
- R. R. Donnelley & Sons Company
- Ruddick Corp.
- Ryder System Inc.
- Sallie Mae (Stud Ln Mktg Assoc.)
- Savannah Electric & Power Co.
- Sequa Corp.
- Service Merchandise Co., Inc.
- Shearson Mortgage
- Sherwin-Williams
- Sky Chefs
- Smart & Final Inc.
- Smith Barney
- Sonoco Products Co.
- Southwest Bank
- Southwest Water Co.
- Southwestern Bell Corp.
- Southwestern Electric Power Co.
- Southwestern Public Service Co.
- Star Banc Corp.
- Stauffer Management Company
- Steelcase Inc.
- Sturgis Bancorp Inc.
- Summit Bank of N.J.
- Swank, Inc.
- Tellabs Inc.
- Tenet Healthcare Corp.
- Texas Eastern Transmission Corp.
- Tompkins Trustco Inc.
- TXU Corp.
- TYCO International
- UniFirst Corp.
- Union Bank
- United National Bancorp
- Urocor Inc.
- Vineyard National Bancorp
- W. R. Grace & Company
- Wachovia Corporation
- Walgreen Company
- Wal-Mart Stores
- Walt Disney
- Wang’s International, Inc.
- Wells Fargo, N.A.
- West Coast Bancorp
- West Texas Utilities Co.
- Westar Energy Inc.
- Western Aire Chef Inc
- Western Resources, Inc.
- Westpoint Pepperell
- Winn Dixie
- Winnebago Industries Inc.
- Woolworth Corporation
- Xcel Energy Inc.
- York Water Co.
- Zale Corp.
- 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
I've heard a lot of "strategy" on this, but never seen solid numbers on paper that really make sense, after paying for the policy... Understanding or "beating" the actuarial tables, etc.. Borrowing against it.. (if that's what we're talking about also).. I like the idea.. But someone pitching it to me said they were going to use it to borrow for a car.. Why would you ever do that, when you can go borrow at 1.99 or 2.99% for a car at a bank..? You still need a high-yielding asset to invest in, IMHO..
Would rather invest in & borrow from retirement account, or self-directed IRA, in RE. I don't think I can out-calculate the insurance guys, IMHO..
- Investor · Lafayette/Baton Rouge, LA · Member since 2013 · 1k+ posts · 915 votes12y
Buy term and invest the difference. I don't agree with Dave Ramsey on everything he says, but he also subscribes to that idea.
I've done that for a long time now and that's what I'll continue doing. I have read through some of the commentary here but not all of it. I came across this too late tonight to read it all, but here's my $.02.
When you buy whole life insurance, they buy a one year term policy on you each year to cover your death benefit and the rest goes to expenses and your "cash value." You are sold insurance AND an investment but you NEVER get both. If you borrow from your policy and die, they take out what you borrow from your policy before the rest is paid to your beneficiaries. If you die with no loan from your policy, you lose your "cash value."
I keep my insurance and my investments separate. The cash value of my investments is not affected by my life insurance. If I die, my beneficiaries get my assets and all of my life insurance. If I die after 19 years from now, I won't have any life insurance, but I'll only have one dependent (my spouse). And because I have assets that I was able to buy with money that I didn't pay to an insurance salesman, I can afford to take care of my dependents. If I die any time in the next 19 years, between my assets and my life insurance, my dependents (beneficiaries) will be taken care of. That's what life insurance is for, providing for dependents needs.
I've bought the last life insurance policy I'll ever buy and I hope it NEVER pays a dime to my dependents. That means that I outlive it and I'm around to enjoy the fruits of my life's work and I get to watch my kids and grand children become adults.
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes12y
Originally posted by @J. Martin:
I've heard a lot of "strategy" on this, but never seen solid numbers on paper that really make sense, after paying for the policy... Someone pitching it to me said they were going to use it to borrow for a car.. Why would you ever do that, when you can go borrow at 1.99 or 2.99% for a car..? You still need a high-yielding asset to invest in, IMHO..
Would rather invest in & borrow from retirement account, or self-directed IRA, IMHO..
Generally it would only make sense to use the policy loan on items where a positive spread in interest or arbitrage can be realized if you cannot then you would be right assuming all tax deductions and benefits factored in.
It works well with real estate, non performing notes, equipment financing, factoring for businesses, and basically any purchase, financing cost, or investment that has a higher opportunity cost than the cost from the policy.
so that the difference from your cost of borrowing funds can be re-captured into your own banking system and then rinsed and reused in a similar fashion.
Obviously the above is nice but the key advantage is that when you borrow funds from the cash value its not reduced so it continues to grow as if you never took anything from it. The cash value therefore is still growing with a tax free return that is conservatively 4-7% tax free which is equivalent to 10-14% in a taxable environment in addition to you making your spread and or gain outside in your other investment that you've put your borrowed funds to work in. This in turn allows those same dollars to work in multiple places at one time and provide all the benefits of cash value, death benefit, investment opportunity gains, and other benefits afforded by the policy.
problem with IRA is you cannot borrow from it and you have highly restricted options to obtain money outside the plan and is you had a solo 401k and were self employed you could obtain 50k or 50% the lower of max so if you had 1 million you would have 950k unaccessible outside the plan.
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes12y
Originally posted by @Robert Leonard:
Buy term and invest the difference. I don't agree with Dave Ramsey on everything he says, but he also subscribes to that idea.
I've done that for a long time now and that's what I'll continue doing. I have read through some of the commentary here but not all of it. I came across this too late tonight to read it all, but here's my $.02.
When you buy whole life insurance, they buy a one year term policy on you each year to cover your death benefit and the rest goes to expenses and your "cash value." You are sold insurance AND an investment but you NEVER get both. If you borrow from your policy and die, they take out what you borrow from your policy before the rest is paid to your beneficiaries. If you die with no loan from your policy, you lose your "cash value."
I keep my insurance and my investments separate. The cash value of my investments is not affected by my life insurance. If I die, my beneficiaries get my assets and all of my life insurance. If I die after 19 years from now, I won't have any life insurance, but I'll only have one dependent (my spouse). And because I have assets that I was able to buy with money that I didn't pay to an insurance salesman, I can afford to take care of my dependents. If I die any time in the next 19 years, between my assets and my life insurance, my dependents (beneficiaries) will be taken care of. That's what life insurance is for, providing for dependents needs.
I've bought the last life insurance policy I'll ever buy and I hope it NEVER pays a dime to my dependents. That means that I outlive it and I'm around to enjoy the fruits of my life's work and I get to watch my kids and grand children become adults.
The "either or you," insurance aspect you mentioned above would be true with the traditional whole life policies where there is no "increasing death benefit." You pay your monthly, quarterly, semi annual, or annual premiums untill 100 till the cash value financially reaches the same value as the death benefit, lets say 500k, then the company pays you the 500k at age 100 or if you die earlier your heirs get 500k.
With a dividend paying mutual WL policy you get the death benefit plus cash value and any paid up additions you added to the policy at death minus your outstanding loans so you would get both insurance and additional contributions.
The same is with an increasing death benefit equity indexed universal life (EIUL) the formula would be Death Benefit + cash value - any outstanding loans at death to the beneficiary since you dont receive dividends with EIUL only segment credits based off a stock index, usually the S&P 500 or other.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes12y
Ok @Albert Bui First business' don't die so why would they buy billions of whole life life insurance? Why not start their own bank? They can afford to. You seem intelligent but your argument is all frosting and no cake.
Shoot us some real numbers. I buy $250K of life insurance, term, for less than $70 per month. lets jump it to $2,500,000 for $700 per month and make it for 10 years fixed. That is $8,400 per year, and for 5 years that's about $42,000.
How much does it cost per year for a $2,500,000 whole life policy? Assume I am 55 years old. My guess is that you are looking at about $40K a year but I don't know. Multiply times five years. How much of that can you borrow against that amount in 5 years and how much will you get in dividends? if you take the difference and buy houses worth $100,000 each with 20% down, earning $1,500 per month in rent which earns more? lets see the figures. Feel free to throw in the value of each if you die in 5 years or even 10 years.
?
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes12y
Originally posted by @Jerry W.:
Ok @Albert Bui First business' don't die so why would they buy billions of whole life life insurance? Why not start their own bank? They can afford to. You seem intelligent but your argument is all frosting and no cake.
Shoot us some real numbers. I buy $250K of life insurance, term, for less than $70 per month. lets jump it to $2,500,000 for $700 per month and make it for 10 years fixed. That is $8,400 per year, and for 5 years that's about $42,000.
How much does it cost per year for a $2,500,000 whole life policy? Assume I am 55 years old. My guess is that you are looking at about $40K a year but I don't know. Multiply times five years. How much of that can you borrow against that amount in 5 years and how much will you get in dividends? if you take the difference and buy houses worth $100,000 each with 20% down, earning $1,500 per month in rent which earns more? lets see the figures. Feel free to throw in the value of each if you die in 5 years or even 10 years.
?They dont buy it on the life of the corporation or entity since the entity like you mentioned cannot die. They buy cash value life on the lives of their key executives and directors because they need to have an "insurable interest," or incentive for the insured person to be living IE they help the company produce income, hold the relationships, are valuable assets to the company, etc.
There was regulation back in Aug 2006 that required employers to have to disclose to employee's when they were buying these cash value policies on the lives of Employee's. It was typically purchased on the life of "key men," in the company but in recent years leading up to 2006 companies started buying them on many of the regular rank and file employee's. Winn Dixie is an example where they had approx 36,000 cash value life policies on their rank and file employee's. These policies were in turn called "dead peasant policies," or janitor's insurance since it was no longer insuring lives of key people buy rather the every day worker. There were a lot of ethical/moral issues since some workers who died found out that the employers were getting windfall checks of hundreds of thousands of dollars while the families were not getting anything.
The point of it is these companies like Winn Dixie, Walmart, Bank of America or others keep cash value life so they can leverage all the benefits of cash value life, borrow from, and do what banks do by creating positive arbitrage to fund exec pay, comp plans, finance new buildings, inventory, and operate their businesses. Since the interest paid back to the life policy is used for business purposes the company can write it off. so even if the policy is making 5% but charging 5% interest the after tax cost to the company of 5% might be as low as 3-4% creating a positive spread/gain. The policies are a huge windfall as well to companies at death of the insured.
You can look up the term "dead peasants insurance," on youtube or google and watch/read all about it.
With regards to your questions about life policies the purpose of structure an IBC contract is not to get "protection," however in the in the process you will get your protection. In general, the more life insurance "protection," an insurance agent sells you the more commission they will make. The focus when utilizing IBC strategy is to purchase the "least," protection you can buy and the most "cash value accumulation," possible. To do this you would buy the least death benefit so that the money you contribute each month/quarter/year is not reduced by the cost of the actual insurance as much.
Setting up the policy this way you'll have 85-90% of each dollar you put in immediately available to be accessed via policy loans.
When you fully fund the policy (yes there are caps) it will break even dollar for dollar as early as years 4-6 and everything after that will be gain on top of gain especially if you use IBC strategy to super charge your policies growth.
- Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes12y
I don't see how you can realistically build up much more in cash value to borrow then you put in with maybe a little added on for appreciation. Plus I would bet these whole life policies have crummy appreciation and high fees.
Now here is another thought, Take the money that would have gone to insurance premiums and invest it in a stock brokerage account. Buy stable dividend paying stocks (I like MLP's). Then borrow on margin against the value of of the brokerage account. You can borrow at just over 3.5% (variable) and if you buy stocks yielding 6-7% the dividends pay back the loan for you over time. Then take the cash flow from your real-estate investments and either 1) pay off even more of the $$$ you borrowed or 2) pay off leverage on your real-estate or 3) buy more real estate.
Don't forget to manage your leverage, if you are always borrowing to the max a downturn like we just had will crush you. It is important to have some reserves or even sum unleveraged assets so that if things go to heck you are the guy buying deals at the courthouse. I recommend frequently asking yourself 1) What would happen if I lost my job 2) and my vacancies doubled and 3) I had a major repair to fund.
Prepare for the worst and hope for the best. Good luck.
- Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes12y
The concept reminds me of s great deal on a loan offered to me by a credit union. They would lend me the $5000 I wanted to borrow at a great rate of only 1%. But in return I had to maintain the balance in my savings above the loan balance. For some reason they couldn't see how absurd the concept of charging 1% for using my own money was.
This is the same concept. Investing directly makes much more sense, unless you need the insurance anyway.
- Honolulu, HI · Member since 2013 · 6 posts · 3 votes12y
I own a whole life policy, and it's worked out fine for me. The way I see it, I divide my financial pie primarily into 3 slices: living expenses, investments, and liquid funds.
People who say that whole life is a horrible investment are absolutely correct, that's why you should never buy it as an investment. I find the argument to buy term and invest the rest irrelevant, because whole life for me is NOT an investment. It is a part of my liquid funds. Most experts recommend everyone have between a 6-12 month emergency fund, and many buy and hold RE investors recommend budgeting 50% of your rental income for expenses.
Where do most people park the money for emergencies if they lose their job, vacancies, major repairs, medical emergencies, etc? These funds need to be readily available (within a week) and reliably safe. Checking/savings account? Safe, but they have almost no return. CD's? Better returns (slightly), but penalties if you have to liquidate it early. Whole life? High initial fees & modest returns. Lines of credit? Cheap & relatively easy to obtain, but potentially unavailable if the bank changes its mind. Stocks & mutual funds? Notoriously volatile. You'll most likely need to access your emergency fund if the economy tanks. If your liquid funds are in the stock market, you may have to liquidate your stocks at firesale prices to pay your bills.
In other words, there is no perfect place to park your liquid funds that is safe, quickly accessible, and has a high return. I honestly do a combination of the above, with the CV in my whole life an essential part of my liquid savings. Hopefully, I will never access my CV, and it will earn a reasonable, safe return of 3-6% annually with an additional bonus of a death benefit. I've also overfunded my whole life to the MEC so it pays its own premiums so I have even less to worry. For people still concerned about the poor ROI, I sleep well at night knowing that my heirs will receive more than 10x what I paid in premiums completely tax free from the death benefit after I pass away. The way I see it, that's not too bad of a return. (There are additional benefits, but I will leave that for another discussion)
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes12y
Originally posted by @Bob E.:
I don't see how you can realistically build up much more in cash value to borrow then you put in with maybe a little added on for appreciation. Plus I would bet these whole life policies have crummy appreciation and high fees.
Now here is another thought, Take the money that would have gone to insurance premiums and invest it in a stock brokerage account. Buy stable dividend paying stocks (I like MLP's). Then borrow on margin against the value of of the brokerage account. You can borrow at just over 3.5% (variable) and if you buy stocks yielding 6-7% the dividends pay back the loan for you over time. Then take the cash flow from your real-estate investments and either 1) pay off even more of the $ you borrowed or 2) pay off leverage on your real-estate or 3) buy more real estate.
Don't forget to manage your leverage, if you are always borrowing to the max a downturn like we just had will crush you. It is important to have some reserves or even sum unleveraged assets so that if things go to heck you are the guy buying deals at the courthouse. I recommend frequently asking yourself 1) What would happen if I lost my job 2) and my vacancies doubled and 3) I had a major repair to fund.
Prepare for the worst and hope for the best. Good luck.
If you dont structure the contract correctly (IE you buy too much protection) and dont fund it correctly. There is a fine balance in structuring the contract so that your insurance costs are marginal. Your goal in funding it correctly is to have the interest credit/dividend pay more than "enough," to not only grow your cash value but also to pay for the admin and cost of life or cost of insurance(COI).
When a policy's credit/dividend exceeds its premium payment requirement its said to be self sufficient.
Regarding what you mentioned about you not being able to ever see the cash value being higher than what your contribution originally was, this may be true years 1-10 if you dont fund it correctly. Again the interest credit/dividend is based on your cash value so if you make 5% based off a lower cash value the gain is less than if you made 5% and you fully funded your policy as the example rate of 5% of 1000 is a lot less than 5% of 100,000 as annual example.
The goal is to build the policy's cash value to the point of self sufficiency and from there you no longer need to "feed," premium into the policy, but you continue to build cash value by having "internal," cash value growth annually that will outpace the costs to maintain the policy and pass on an "instant estate," to your heirs. In the interim, you will be able to acquire assets with the opportunities afforded to you through leveraging policy loans and withdrawals.
For contingency planning if your cash value was high enough and you were in trouble you could also obtain policy loans to pay off a loan or provide cash flow to survive when things are tough. Since the repayment terms on life policies are not set in stone you can pay it when things get better. The life policy can help you weather credit crunches like real estate crashes as well. Obviously you'd have to be vigilant about the annual credit vs annual costs of the policy to plan. This is not a set and forget it kind of vehicle.
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes12y
Originally posted by @Bob E.:
I don't see how you can realistically build up much more in cash value to borrow then you put in with maybe a little added on for appreciation. Plus I would bet these whole life policies have crummy appreciation and high fees.
Now here is another thought, Take the money that would have gone to insurance premiums and invest it in a stock brokerage account. Buy stable dividend paying stocks (I like MLP's). Then borrow on margin against the value of of the brokerage account. You can borrow at just over 3.5% (variable) and if you buy stocks yielding 6-7% the dividends pay back the loan for you over time. Then take the cash flow from your real-estate investments and either 1) pay off even more of the $ you borrowed or 2) pay off leverage on your real-estate or 3) buy more real estate.
Don't forget to manage your leverage, if you are always borrowing to the max a downturn like we just had will crush you. It is important to have some reserves or even sum unleveraged assets so that if things go to heck you are the guy buying deals at the courthouse. I recommend frequently asking yourself 1) What would happen if I lost my job 2) and my vacancies doubled and 3) I had a major repair to fund.
Prepare for the worst and hope for the best. Good luck.
The problem with using MLP's is that most brokerages only allow you to leverage up to 50% of the current market value at lower rates and in theory you could operate a banking strategy with this but the risk and disadvantages would be:
- the asset your obtaining leverage against has a value that is an "investment," not a "savings," philosophy so if your MLP drops in value you might have a margin call when the brokerage wants you to maintain a 50% loan to asset value ratio. Atleast with the life policy you can fall back on the cash value which has a floor against loss and the loans taken against the policy has flexible terms for you to pay back the interest and caps to how much the interest can be that are guaranteed. With the brokerage I am sure they will not guarantee you the maximum rate they will charge you.
- tax advantaged growth in MLP's is not available while cash value in a policy is tax free to heirs at death and for you to use during your life as long as the policy is in force. In higher tax brackets you'd to earn a much higher return just to be on equal footing with internal policy returns that are tax free.
The cost of life (COI) and the admin costs from years 1-10 are the barriers to entry to use the advantages of the policy that is not afford other financial vehicles.
- Investor · Thorndale, PA · Member since 2015 · 20 posts · 7 votes11y
I actually own a policy and it works just like they say it does although it requires patience to fund and watch it grow. I've also written about the bank on yourself concept on my blog.
- Real Estate Investor · Austin, TX · Member since 2015 · 37 posts · 3 votes11y
The way I understand it, it's like buying an asset (instead of saving in a bank), then collateralizing it in a loan, to purchase property (or make a down payment). So as you refill your cash reserve, it is still earns interest (and dividends) in the policy.
The concept is not much different than using a HELOC or IRA, but different benefits and different vehicles. That, and uninterrupted compound interest, are behind the concept. Plus tax benefits if you're loaning to your business.
Most people get too caught up in the asset - life insurance, and how long it takes to completely set it up, and overlook how to use it.
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Eric Narciso:
The way I understand it, it's like buying an asset (instead of saving in a bank), then collateralizing it in a loan, to purchase property (or make a down payment). So as you refill your cash reserve, it is still earns interest (and dividends) in the policy.
The concept is not much different than using a HELOC or IRA, but different benefits and different vehicles. That, and uninterrupted compound interest, are behind the concept. Plus tax benefits if you're loaning to your business.
Most people get too caught up in the asset - life insurance, and how long it takes to completely set it up, and overlook how to use it.
I think the key benefit to the strategy that most over look when comparing IBC strategies is that a policy loan taken out is from the life insurance companies cash assets and is viewed as a lien against the cash value so that the cash value is not reduced when you obtain this "policy loan," proceeds.
So when borrowing 100,000 of your 300,000 cash value (CV) your gains/interest credit is still based on the full 300,000.
Some people ask how is this possible? The perception of the life company is that 100,000 borrowed by the policy owner is a "lien," against the policy similar to a loan is obtained against a piece of real estate. The loan in essence does not reduce the value of the piece of real estate nor does it reduce the value of the cash value.
Some may ask well how does the loan work then? Its put into a separate account where it accrues interest silently through negative amortization. The advantage is that repayments of the policy loan interest and principal are paid when the policy owner feels like it and the owner has cash flow control. Obviously, prudent use and maintenance of this loan to cash value balance has to be monitored or the policy could be in danger of lapse if loans or expenses were to be in excess of the interest credit or cash value.
So again to reiterate a long drawn out point, in a checking, or HELOC type product if you were to use your "own money," your interest credit or savings would only be on the remaining portion of money left while you used the proceeds else where. The advantage of the life policy is you have 100% of your CV earning interest while you've leveraged your CV else where as well, in effect your "money," is working in multiple places at one time thereby increasing leverage.
Of course, the leverage if used disastrously could have ill effects on your policy and investments and if used prudently it could exponentially grow your financial position.
- 10yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
Originally posted by @Ned Carey:
I am intrigued however I have seen no one here say what the advantage is.
You are investing your own money in a policy, you borrow it, and pay it back. What is the advantage of using your own money via a life insurance policy?
The advantage is that you can make more money than if you invested directly in the asset. Think about it! If you can put your money into an account where it is earning 7-8% (tax-free!) and you can use that account as collateral for a loan, then ANY investment you make that is greater than the cost of money will ADD to the return on the cash value.
Let's look at the very first premium of an over-funded policy (I'm being conservative)
Assumptions:
Return on Investment: 10.00%
Policy Loan Rate: 4.25%
Cash Value Growth Rate (Dividend): 7.00%
%Cash Value/Premium: 0.85
Premium/Investment $100,000
Tax Rate 28.00%
Scenario 1: Regular Investment (No Insurance leverage)
Investment $100,000
Rate 10.00%
Gross Profit $10,000
Tax $2,800
Net Profit $7,200
Scenario 2: Cash Value Leverage
Premium $100,000
Investment 1 (Insurance Cash Value) ($85,000)
Rate 7.00%
Profit $5,950
Investment 2 (Made with loan of $85,000)
Rate: 10.00%
Gross Profit: $8,500
less Interest Expense: $3,613
Taxable Income: $4,888
Tax: $1,369
Net Profit: $3,519
Total Profit $9,469 (31.5% Higher)
Because you can put your money to work in two places at one time, a single $100,000 premium gives the investor in this example $170,000 of working assets . This works even if there is no spread between the earning rate and the borrowing rate on the policy. (Try it! Plug the numbers into the model above. Try it with only 4% for dividend rate and loan rate.)
Now multiply this out times many years of premiums and reinvestment of the "side fund" gains back into more premium which can be further levered.
Life Insurance is an amazing financial tool.
- Insurance Agent · Maitland, FL · Member since 2015 · 397 posts · 244 votes10y
Life insurance is an amazing pay for unexpected early death tool. Not an investment tool. Your assumptions above are not based in reality because they are missing two aspects.
1. Time Value of Money. You are overlooking the fact that your investment will be locked away for 5 years.
2. Your assumptions on dividend payout and loan rate are not correct for the market. Meaning it does not exist in the real world.
Blease research, a research firm that studies performance of Life insurance markets, shows that the best average that any dividend paying life insurer paid out over the course of 20 years (1991 to 2011) is 4.44%, and that was including guaranteed interest. It was Northwestern Mutual. And during that time their average loan rate was 3.96%.
So this tax free spread of less than 0.5%. Average inflation for the same period was 2.57%.
So in real terms, you would lose about 2% to inflation each year that you did the infinite banking scheme.
There is really a third variable that I did not account for. I have the luxury to sit here in 2016 and do the research on what DID happen. If you would have purchased that policy how would you have known to buy Northwestern Mutual over MetLife. MetLife would have provided a negative spread on the infinite banking scheme. Meaning you lost money in real and nominal dollars.
- 10yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
You must not have ever designed a policy for high early cash value. Nobody would buy this if they had to wait 5 years. They don't. The cash value in a properly designed policy is available immediately and should be roughly 85% of the premium. This means the investor has the potential to have nearly 170% of every premium dollar going to work for them. They will make more money.
Plug any dividend rate you like into this model. You will see it works. If you can put your money into an asset paying 4% and you can borrow against that asset at 4% and use the loan to purchase an asset earning 14% (Real Estate), you will see that you make more (after accounting for the tax advantage).
Plug your NM numbers into the business model. It still works.
This doesn't work with every carrier. Not all companies allow early access to cash value and some penalize with a higher loan rate than earning rate.
Nothing is lost to inflation. The investor will make more than they would have if they invested their money directly into a real estate investment.
The IBC folks don't look at this as a capital budgeting decision like I do. If you can get money at 5%, then you don't invest it into anything unless you can make more than 5 %. Anything you make over 5% is in addition to the gain on the cash value. Period. I don't care what historical rates are, I only care that my cash value earned 13% in my Indexed UL last year while my 4.2% loan made me 18% for a combined gross return of 27%.
Originally posted by @Derek Lacy:
Life insurance is an amazing pay for unexpected early death tool. Not an investment tool. Your assumptions above are not based in reality because they are missing two aspects.
1. Time Value of Money. You are overlooking the fact that your investment will be locked away for 5 years.
2. Your assumptions on dividend payout and loan rate are not correct for the market. Meaning it does not exist in the real world.
Blease research, a research firm that studies performance of Life insurance markets, shows that the best average that any dividend paying life insurer paid out over the course of 20 years (1991 to 2011) is 4.44%, and that was including guaranteed interest. It was Northwestern Mutual. And during that time their average loan rate was 3.96%.
So this tax free spread of less than 0.5%. Average inflation for the same period was 2.57%.
So in real terms, you would lose about 2% to inflation each year that you did the infinite banking scheme.
There is really a third variable that I did not account for. I have the luxury to sit here in 2016 and do the research on what DID happen. If you would have purchased that policy how would you have known to buy Northwestern Mutual over MetLife. MetLife would have provided a negative spread on the infinite banking scheme. Meaning you lost money in real and nominal dollars.
- Charlotte, NC · Member since 2015 · 20 posts · 8 votes10y
Infinite Banking Concept (IBC) is a very simple notion.
The original question asked if anyone has one....I do...and I'm ALL IN .... every cent of my cash flow...
Here is the strategy...
1. Think Long Term
2. Don't Be Afraid to Capitalize
3. Don't steal the peas (A reference to running a grocery store...which by the way...is the best 2 pages I've ever seen on "how to run a business" - so read Nelson Nash's book!)
Back to IBC....
There is a lot of confusion regarding dividend paying life insurance...
for me, the clarifying question to ask is "what is their agenda".... whoever "they" is.....
Really, the hardest part of using it, is finding an authorized infinite banking practitioner that has agreed to show you a bone fide IBC-style policy that conceptually matches what is discussed in the book.
Given all that......
You're not buying dividend paying life insurance for life insurance. Weird huh....
You are obtaining an institutionally sound financial instrument where you can do banking.... a fancy way of saying ... a "checking account" within a small segment of the Life Insurance sector where you have total control and complete access.
This IBC account exists outside the banking sector and wall street and is NOT a government-partnership program....
I could go on.....
Bottom line ... as an investor you simply cannot work with any REALTOR....true?
We all know why....most are specialist in a retail buy/retail sell residential housing market.
We go find an investor savvy or investor friendly REALTOR...or become one yourself (guess who did?)... because they "get you"
Well... guess what...as a privatized banking specialist you simply cannot work with any Life Insurance Agent or Financial Advisor or Retirement Specialist...because most are ... yes...specialist in a retail buy/sell of financial products and tools found in the commercial banking sector, wall street and yes...government partnership programs (think 401ks and self-directed IRAs)...
For a bone fide IBC life insurance policy you go to an authorized infinite banking practitioner....or you become one yourself (guess who did?) .... because they "get you".
One last comment....Dave Ramsey.... genius?
On one point, a critical point....Nelson Nash and Dave Ramsey actually agree and in a profoundly insightful way ...
The goal is simple....imagine living your life with a NON-EXISTING FICO Score...
I didn't say zero....I said NON-EXISTING...as in there's no way to calculate one....
...and they go on further ...
Imagine your children and your grandchildren and your ..... you get the point....
Imagine them never caring about a FICO score and never doing business with a commercial bank for your banking needs....
I know...too much...and yet I haven't even shared the best part yet....
-Robert
ok ... if you've read this far....thanks...
I'll share one more insight as to why I am all in....
As investors, as parents, as just me trying to do what I gotta' do....
regardless of how much money you have...or don't have....
that is...whether you are a billionaire or working part-time in a low skilled job...
The Price of something IS NEVER the issue.....NEVER!
The issue is always "How do I finance this".... cash? terms? both? partners? etc...
True? True. "How do I finance this?"
In fact, as you start to think like a banker...you start to realize that the question "How do I finance this" is applicable to everything... all of Life's Needs and Wants....
I'll stop now .... like I said ... I could go on and on and on .... :-)
Thanks for reading ....
- 10yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
We first need to realize that explanations from people who earn their living selling or advising on this "product" may be biased.
Second, we do not need to dwell into specifics to understand and evaluate the concepts. All this infinite banking terminology, etc just adds an emotional element. Slogans like you can be the bank, your kids won't ever need a FICO score, etc detract from what's really being sold.
So lets see what all this is really about. It is about two things. One is taxes. The other is asset protection. And that is it! Everything else is just noise.
We can get the insurance component with term life. But to add the tax savings component we have to have term insurance. Same as for the asset protection component.
So what other vehicle gives you the same benefits as this whole life/infinite banking program? If you said self directed retirement plans you would be correct. So which is better? Well since they really provide the same benefits, I.e. tax savings and asset protect, then the better one is the less expensive one. So self directed retirement funds plus term life is the better ( less costly infrastructure fees ) option.
Now, once your retirement plan is maxed out, and you still have income you want to shield from taxes and or place into an asset protected vehicle, these insurance related vehicles MAY be worth considering.
On, and one other thing. Why do major companies invest in these term products? And therefore so should you? Well, not necessarily. Consider
1 These major corporations do not have self directed retirement accounts available to them to invest in
2. These corporation are taxed at completely different tax rates then individuals
3. These corporations have different financial and non financial goals then individuals
4. The primary purpose of corporations is to enhance shareholder value. Corporate shareholders are taxed at two levels, first the corporate level, then the individual receiving dividends is taxed. This can be a combined tax rate of in excess of 60%. The max individual rate is 39%. So there are a lot more tax dollars to play with for these major corporations to be invested in these whole life/infinite banking vehicles than for individuals. Further, the amount of "service fees" that these corporations pay on their billions invested is a small fraction of what the individual pays on their $50k or $500k investment. So no, I am not swayed by the argument that if its good for these corps it should be good for me.
As I stated, taxes and asset protection. Everything else is just emotion or noise
- 10yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
i am continually amazed at how resourceful insurance salesman are at rebranding themselves. About 45 years ago they realized most people ran the other way when they heard you were an insurance saleman. So they became "financial planners ". Interesting their " plan" was always overloaded with insurance. Their organization even awarded a financial planning designation. Then people began associating financial planners with insurance salesman. So they became "financial advisors". And once more we were surprised to find that their " advise" was to buy insurance. Now I have just learned that they are "authorized infinite banking practitioners". And their " practice" is that exotic infinite banking product .....insurance!
- Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes10y
Originally posted by @Thomas Rutkowski:
Where do you find a life policy where you would have access to your cash value at 85% within one year? Typically, I have seen life policies with less than 50% cash value available within 1st year.
I have been a licensed insurance agent for disclosure on here.
Mark
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