My first piece of advice on this is don't make this harder than it needs to be.
Becoming your own banker should not be difficult. And yet, the way it's often explained and implemented leaves people scratching their head. Here's how to keep things simple, while still benefiting from a deceptively powerful financial strategy.
Setting Up Your Policy
Setting up your own "IBC policy" is a matter of first figuring out what your financing needs are, then solving for those needs with an appropriate amount of whole life insurance. Additionally, the life insurance policy should be purchased from a mutual life insurance company, as opposed to a stock (public) company. Mutual insurers are owned by its policyholders, which is important, since it entitled policyholders to both interest and dividends from the insurer.
Anyway, here are the 5 basic steps you must follow if you want to succeed with this:
Step 1: Fund Your Whole Life Insurance Policy
Don't skimp on this step. I mean it.
The number one reason people fail with IBC is because they're afraid to capitalize their policy with sufficient premiums. Plan on paying at least 10% of your income into a policy. That's to get it started. You'll probably have to increase that amount over time.
If that sounds like a lot of money going to the life insurance company, it's because it is. It's supposed to be. This is the foundation for everything else you're doing, so you need to put a lot of money into your policy. You can always borrow against it when you want or need to. But if there's nothing in there to begin with, you're not going to be much of a banker, are you?
A lot of people fight this because they're conditioned to think of insurance as an expense, not an asset. To be successful with this, you have to flip that mentality around. If you're still having trouble with the idea of paying so much money into a policy, remember this: the whole idea here is that you're becoming your own banker. You have to build up your system. Part of that system is the life insurance policy.
So, don't be afraid to put a lot of money into it.
Step 2: Wait For Capital To Build Up
This is the "boring" part, and the step everyone wishes they could skip.
No one wants to wait. They want to get to the "fun" stuff—borrowing. But, being patient pays off. Your "banking system" is always going to be slow to start. You have to just accept this. The cash value needs maybe 3-5 years to grow before you start borrowing. I realize this money is burning a hole in your pocket, but being patient will help you tremendously in the long-term. Don't rush the process, trust it.
Step 3: Borrow When Opportunities Arise
While you're waiting, you're going to start seeing a bunch of opportunities pop up.
I promise.
It will happen.
People with money always have opportunities presented to them. They never have to chase them down. I suppose that can be both a good and bad thing. But, let's assume it's a good thing for now.
In Nelson Nash's book, Becoming Your Own Banker, he writes about the many opportunities a person might encounter, from equipment financing to unusual real estate deals to maybe starting a car leasing company to service all the high income doctors and lawyers in town who like to lease a new vehicle every 3 years (gotta keep up appearances, right?).
Step 4: Repay Your Policy Loan
Something that never gets talked about enough is repaying policy debt.
For whatever reason, life insurance agents are in love with the idea that "you don't have to repay these policy loans!"
OK, that's technically true. You don't have to repay policy debt, but there's another side to this. If you don't repay it, the loan grows. See, the life insurance company ain't stupid. It wants its money, which is ultimately your money (they owe it to you, which is why they want—to pay off policyholders). If you're not going to repay policy loans, they're going to force the payoff by adding the accrued loan interest to the total outstanding policy loan principal at the end of the year. And, when you die, the death benefit is reduced by an amount equal to the outstanding loan principal.
Repaying policy loans solves this problem, and it ties in nicely with another of Nelson Nash's ideas: don't steal the peas. In other words, imagine you own a grocery store. And in this store, you sell all kinds of stuff—canned peas, for example. Regular customers who come in the front door pick up a can of peas and they pay for it at the checkout. But suppose you, being the owner of the store, take a can of peas for yourself and walk out the back door. You're essentially stealing from yourself. Maybe you can get away with it now and then. But eventually, you're going out of business with that kind of behavior.
It's the same with policy loans. Don't steal from yourself. Repay the life insurance loan so they can pay those dividends back to you.
Step 5: Buy More Life Insurance
A major part of becoming your own banker is expanding your "banking system". Unless we're talking about a lone country bank, when do you ever see a bank that only has one branch office? You don't. There's always a dozen or so within so many square miles. And, these days, they not only have physical branches, they have an Internet presence. Meaning, they're everywhere.
Translation: don't forget to keep buying life insurance policies. I see so many policyholders buy one policy and call it good. They think this is all they need. Or they get distracted and go do something else.
No. This is not the way.
You stay focused and keep expanding your "banking system" to accommodate more and more of your financing needs until the life insurance company refuses to sell you anymore life insurance.
What Is The Infinite Banking Concept®?
Now that I've covered the big picture "how to", let's dig a bit deeper into this concept, shall we?
According to its discoverer, R. Nelson Nash, IBC is all about "how much of the banking function do you control as it relates to your needs". The Infinite Banking Concept® was born out of this initial seed idea. Along with this idea, Nelson Nash formulated several other important ideas in his book, one of which was "you finance everything you buy". You either pay interest to someone else or you lose interest on your savings when you pay cash.
Think about that for a moment. You cannot get away from interest cost. You can only run away from an interest payment(i.e. paying interest to someone else). The cost of money follows you around. You'll always pay it, either out of pocket or as realized opportunity cost.
The more you control the banking function in your life, the more opportunity cost you recognize, the more interest you can "recapture" from the system and the better off you are.
Can You Really Become Your Own Bank?
Yes, you can (in a manner of speaking).
With that said, you have to realize something about how this works in practice.
The life insurance industry refuses to acknowledge the infinite banking concept as an official way to use life insurance. Unofficially, however, I've spoken to lots of General Agents and even folks at the home office who say they really like the idea. The entire financial world is built around the idea of retirement planning, and here's this idea which runs contrary to the mainstream way of doing things. It's a very creative use of life insurance, doesn't really hurt the insurance industry or life insurance companies, it's not in any way illegal or immoral, it, and it empowers the policyholders.
Everyone wins.
At the same time, a lot of so called financial experts poo-poo this idea, which I think only helps make it more popular with folks who've been burned (usually more than once) by the financial industry and by financial planners (especially the full-of-themselves, narcissistic, "award winning" types). In my humble (but honest) opinion, a big reason why your typical financial professional doesn't like IBC is because the policyholder remains in control of his money, not the financial professional. There's a sort of role-reversal there.
Many (most?) financial planners love a top-down approach to financial planning. They want more regulatory control over the financial industry (to "raise the bar" and keep competition down), and specifically the financial planning industry. They are in love with their credentials and the prestige of it all.
The Infinite Banking Concept® is antithetical to that business model because it brings everything down to the "you-and-me" level.
Usually, with traditional financial planning, the client hands over all money and control to the financial planner, who does "top down" advice giving and planning. With IBC, the policyholder is in control and the financial professional is more like a consultant—very much a "bottom up" approach.
Why Would You Want To Become The Bank?
People hate banks, so why would you want to become one?
Well, technically, you're not becoming one. You are acting like one, though, in the sense that you're borrowing money and managing the loans. Difference is, you're acting as both the banker and the borrower.
This is an easy concept to understand, but a difficult one for a lot of folks to wrap their head around.
Normally, you pay interest to a bank or lender you don't have any ownership interest in. That bank then takes that interest and distributes it to its real owners—the stockholders. Now, instead of playing that game, what if you cut out the 3rd party bank and used your own company (or a company you had an ownership stake in)? Instead of the shareholders earning all the interest and dividends, that money would be sent to you. You'd be the one profiting.
Bam.
There you go. That's why you'd want to do infinite banking. When you buy a whole life policy, you become part owner of the mutual insurance company, and are thus entitled to both the interest earned from investments plus any share of the business's profits (dividends). Dividends on whole life policies are paid meritoriously, meaning the more insurance you own, the more premium you pay, the more dividends you can potentially earn.
And, on the borrowing side of things, policy loans are more efficient and, almost always, a lower cost way of borrowing money compared to traditional loans.
How Much Money Do You Need To Start Your Own Bank?
People who have never bought life insurance before understandably don't know how much they should be putting into a policy. Don't overcomplicate this. Treat your whole life insurance policy like you would any other asset or savings account (even though it's not a savings account).
There are two things to keep in mind when funding a policy...
1. Deciding On A Dollar Amount
Your initial premium should be something you can comfortably afford. Ideally, this will be 10% of your net income, but if you feel you can do more, then do it. Most insurance companies will allow you to pay up to 25% of your income into a policy without additional underwriting. Some have hard limits on the percentage of income you can put into a policy.
2. The Option To Change Premium Payments
If your policy is designed to be flexible, you won't be locked into that initial premium forever. You might be able to increase that premium or add one-off (unscheduled) payments now and then. And you definitely should be able to lower the amount when needed (e.g. when repaying policy loans).
Bottom line: The policy should be flexible enough for you to add money to it within a specified range, rather than a fixed amount that can never be changed.
Final Thoughts
I get that this isn't for everyone. Some people won't be able to afford the relatively high premiums required. Others simply don't like whole life insurance for one reason or another. And, even if you really like the idea and can afford it, it still might not be the right thing for you to do.
A couple of "for instances" for you:
- Smokers;
- People with more serious health problems; or,
- Anybody who would be rated substandard might not like the way their whole life insurance plan performs.
I've seen some illustrations where the substandard rating is so bad, the policy never generates a positive IRR on cash value, ever. In those cases, whole life insurance isn't the answer unless you want a permanent death benefit.
Or, if your time horizon is less than 10 years, this concept probably won't work well for you.
Really, you need to think long-range, have the ability to make payments for decades, and be willing to enter a whole new world where retirement is not the norm, and where you become personally responsible for all your own financing needs.
It's a tall order.
Again, this is not something everyone is ready for. This whole new world is scary for a lot of folks. And for some, it might be a bad idea. But, for the right person, it might be just what they're looking for.