Infinite Banking – Episode 454

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[00:00] Call Shannon Maldonado, the founder of Yowie, a souvenir shop with artisanal items and pieces selected by artists. I chose Shopify because after trying other platforms, this was undoubtedly one of the most intuitive. For me, it was important to think about where we would be in the future. All the tools to analyze sales, such as inventory management, are right there, on our dashboard. Start your free evaluation at Shopify.com. Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. In our last episode, we talked about alternatives to cash. So where you can put your money and where it makes sense and when to do it. And then we dipped in this little thing called becoming your own bank or infinite banking.

[00:51] And it’s called a bunch of other things. You may be familiar with it. You may not. Today, Kim is going to get to the bottom of it. Well, it was introduced by a man named Nelson Nash, who has since passed on. He wrote a book called Becoming Your Own Banker. And as you said, Spencer, there are literally probably 20 different iterations that I could rattle off at the top of my head of people that have used that concept in a variety of ways, some of them accurate, some of them maybe not so much. And it is a very catchy title. So I’ll explain what it is as it was when I met Nelson in 1995, give or take, when the book was literally just an email and email was brand new. And this man that I had never heard of named Nelson Nash called me and said, I have a book that I’ve written and I would like to email it to you.

[01:47] Well, it was so big and email was so new that the book like jammed up the email system and, you know, everything kind of cratered. And finally, after some tech people got involved, I got my hands on this 80 page book and it had some very unique perspectives in it from a philosophical standpoint. While it also had some age old, like literally 150 to 200 year old facts about how a life insurance contract works at a mutual company that is dividend paying. So those are some critical distinctions that Nelson was making in the book. And I read the book and I was like, yes, this is what I’ve been talking about all along. This is such a well written book and we got it out to our clientele. Again, this is the mid nineties and I’ve been forever grateful to Nelson for his work since.

[02:42] And unfortunately, as is often the case, there have been some marketing people that got ahead, got a hold of said book and got ahead of themselves a little bit and started to focus a little too much on the debt aspects of the becoming your own banker idea. And then they also got a little confused as to how mutual companies actually work. And then unfortunately, some of those got ideas got elevated even further. So there was this whole bunny rabbit trail that just really caused a lot of misunderstanding out in the marketplace. And some specific words got used that I think caused either even further confusion and I’m super sad about all of that. Nevertheless, there are some very factual things, very specific things that I can lay out today that will be valuable for people if they own whole life, if they’re looking at owning whole life, if they’ve never heard of whole life.

[03:39] And so whole life is the product and the strategy or the idea or the application called becoming your own banker or infinite banking or the numerous other terms that are out there. So whole life’s the product. Banking is the idea. Do we need to lay the land of anything else before we delve into those two things? I think that is the principle. That’s the foundation that we’re going to work from from here. Yes. So whole life the product important couple distinctions, one from a mutual company to from a dividend paying company. Sometimes it’s called participating. So these are like the Guardians, Mass Mutuals, New York Life, Northwestern Mutuals, Penn Mutuals, I could rattle off maybe five or six others quickly.

[04:26] They are not like a stock company or sometimes they’re actually mutual companies, but they’re not participating. They don’t pay dividends. I’ll be specific and then and without poking fingers at them. There’s a military company, as an example, that doesn’t pay dividends. And there’s another military life insurance company that does. So you have to get really clear when you’re talking about whole life that you’re talking about whole life from a mutual company that is participating or dividend paying. So again, that’s the product. And most of those companies have been around well over 100 years, some of them close to the 200 year mark. Then there is the strategy. Now I have always believed that whole life the product which builds two things. One is called cash value. You can think about it like a savings account.

[05:18] And the other is called the death benefit or the face amount, which is what pays when somebody dies. Note when right death guaranteed event guaranteed payment very important structure there. So we have cash value and death benefit. Well, the banking strategy. So products are what you buy strategies are what you do the banking strategy that is applied to whole life the product is focused on borrowing against the cash value to then do things. Now, in my opinion, the cash values first job should be to solve emergencies and that means that you want to leave it there as a savings account as a liquid account on borrowed against so that it is available to be borrowed against to solve emergencies. So how quickly less than seven days usually at what rate five or 6% fixed usually can be a little lower might be a little higher.

[06:20] But a very, very viable alternative to the alternative spaces that we use to solve emergencies which are typically savings accounts and credit cards right so a savings account maybe earning 1% taxable. The life insurance earning 4% or so not taxable a credit card obviously charging 12 to 23 I actually just saw one the other day I wrote it down I was so surprised like a 29% credit card good heavens. Yeah. So you have an opportunity to borrow against at a cost of 6% instead of at 25%. So that is the product again, the strategy. First for emergencies. Second, for opportunities and I again I want to reiterate. First you want to leave the cash value alone for emergencies well how much is that it could be 10,000 it could be 100,000 it could be a million Oprah Winfrey’s emergency account

[07:21] or seven million dollars she said that publicly. So, your emergency account for your family is going to be different, but that cash value must be alone left alone first now opportunities. What it means to take advantage of an opportunity by borrowing against the cash value of your life insurance is to very very carefully borrow against it to invest, or possibly to buy a business, or maybe to get yourself some extra schooling, or pay for a marketing program that will help your business. Those are all types of things that one could carefully borrow against that cash value for taking advantage of opportunities. And so now, you want to compare your loan cost to the opportunity of the investment so let’s say I have a marketing program and I believe that it’s going to earn me 20% growth of my business.

[08:18] And I know that my loan cost is 6% but that I can hopefully earn 20 in my business. Well, that’s what you are comparing is the 6% cost to the 20% or maybe I have a real estate deal that’s 12% or whatever the numbers are that’s the comparison that is occurring. When you are borrowing against your cash value to take advantage of opportunities. Okay, so you listed out the principles of this, and I think it’s clear because most people don’t go in depth and explain that it has to be a specific type of mutual company. So, you did really well there. And I think what kind of pulls people in is this fantasy of becoming your own bank. And I’m going to relate it to another trend that we’ve seen and this trend has started to drop.

[09:10] Where for a while they were promoting this process of using home equity and lines of credits and living on that and then paying it back. And it just didn’t feel right. And so this got lumped in unfortunately with that same category. So can you help kind of create a little bit of a chasm between those two. Yes, absolutely. So let’s first talk about the home equity credit line idea of using that for your primary mortgage, as well as a lot of living expenses in order to somehow get your primary mortgage paid down faster. And the only way that those programs are able to pull that off is that more money is run through the system to pay down that debt. Well, there’s value in that if that’s truly your goal, and we could argue whether that’s a good goal or not let’s just set that part of the discussion aside, but you made a very astute comment and that is that essentially your living expenses are run through that.

[10:13] Well, if you’re going to run through your living expenses, if you’re going to run your living expenses through either a line of credit against your home or a whole life insurance policy and borrowing against that to pay expenses and then paying that back. You are going to be adding interest cost to your expenses. So long term, that’s not going to go well, it’s adding cost to your expenses. Now, I’m the first to admit, I have absolutely borrowed against the cash value of my whole life insurance to make payroll in times when my business was not doing well. And then, in times when it was doing better, I got those loans paid back. Do I want to do that on a consistent basis. Absolutely not. Like that was an emergency to get that payroll paid and there are other businesses that have survived because of the cash

[11:03] value of life insurance and their and its ability to keep that business going. And there are absolutely people that have survived by borrowing against their home equity line of credit to keep their business going. But let’s not get confused with this idea that I agree sounds kind of cool but like you said it well something just doesn’t feel right about it. Well, that’s because there’s something not right about it. And that’s something not right, whether we’re talking about the home equity line idea or the life insurance idea is the fact that you cannot survive long term by adding interest cost to your expenses. Does that clear it up? That does clear it up. And really, I think a lot of it comes down to the good habits that you have, the longevity, the wisdom of it.

[11:51] Because it’s sold this insurance practice sold in a way that you’ll be able to become your own bank and in every single thing you run through there the gas you fill up in your car, who knows in the future that might be thousands of dollars a tank. I’m just joking. But you know that expense should be something that you run through your company, whereas you’re looking at it saying use it as a true emergency fund or as an opportunity fund. And that’s what’s differentiating you from a lot of the masses. Yep. And this works and thank you for bringing up the wisdom, I’ve seen it work for over 30 years with clients that have just a little bit of money to save all the way up to clients that have tons and tons to save clients that do million dollar real

[12:40] deals by borrowing against their cash value of life insurance for down payments. Clients that never touch their cash value at all. Like, it’s so important to them to have the peace of mind to know that the liquidity is there, that they can do all their debt and everything else outside and they go and use that. But that life insurance is there as the support as the foundation for all of their other activities. And I have this one client, the bigger his net worth gets and this, this man has invested and done incredibly well in the real estate space. The more liquidity he wants to have because he knows that cash flow issues don’t go away, they just get bigger. Instead of $100,000 to fix a roof, it’s a million dollars to fix a roof because of a bigger building or you know whatever the example is.

[13:31] And so it’s been fun to watch a lot of my clients and some of them use their policies very actively. Some of them just let them sit there but the amazing certainty and peace of mind that is generated from day one of knowing that you have that path to liquidity locked in. And that that path to liquidity will grow and build at the same time your path to investments will grow and build, not as fast, but also never negative is a huge benefit for people. Absolutely. There’s one piece I’m going to tie in with that that we didn’t address but it’s something that you’ve talked about many times is that it’s the guaranteed access to that as well. And what I mean is, for some of the younger listeners out there, they may not have experienced this in a market that starts to turn down. So, you know, mid as actually late 2000s, when the real estate markets popped, people were before that were often using lines of credits and various instruments to be able to leverage cash and do real estate deals or maintenance or whatever it is.

[14:49] And all of a sudden they woke up and logged into their accounts and they saw that those lines of credits were reduced or taken away. Yep. That cannot happen with this. Correct. Correct. And the growth truly is guaranteed. So the guaranteed growth on a whole life policy is probably around two, two and a half percent these days, net, net, net. And then it’s going to be higher than that when dividends are paid. So again, that’s where I got my 4% earlier is dividends included. It’s probably for 4.2 right now. There isn’t another savings account out there that has a guaranteed growth at that level. You might get a CD or something for 2% for one year, but not for your entire life. So that’s an important distinction as well.

[15:38] Guaranteed growth, guaranteed access to cash and guaranteed payment attached to a guaranteed event called death. There truly is no other product out there that has that many guarantees built into it. Boring? Absolutely. And that’s okay. Yes, it is. Well, thanks for just dealing all of this down for us sharing wisdom in one of these, we’ll call it foundational type of episodes. And if you do have additional questions on infinite banking, such as, you know, will it work for you at whatever age it is or income you have and all of those other variables, send an email in to hello at ProsperityThinkers.com. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at PartnersForProsperity.com. If you liked this episode, make sure you subscribe and leave a review.