Saturday, March 05, 2005

Saturday Special/Recommended Reading: The Infinite Banking Concept

As Marc Cram, CFP notes,
The average American is paying out 34.5% of every disposable dollar toward interest. If they are saving 10% of their income (twice the average saving rate in America) they are in a 3.45/1 ratio of interest to saving. Rather than fighting to get a higher rate of return on their savings and investments it might make more sense to change the environment in which their money operates and capture all of that lost interest by creating their own bank. There is only one source of money in our banking system. It circulates from banks to lenders to borrowers to banks and so on. We finance everything we buy. You either pay interest to someone else or you give up interest you could have earned.
But what if you yourself were your own bank?

Ideally, you would need to have a funding vehicle. Then you would need to fund it. Building equity could take time, a lot of time. But once your bank was funded you could begin to make loans to yourself (or others) and you would need to pay the bank back. By borrowing and repaying at current or better interest rates you will be building a banking machine that will eventually be able to handle all of the banking needs a family might have; cars, education, homes, whatever. You would be able to create an asset pool that would take the place of Social Security, retirement plans and other market driven assets. It would be a tax free growth vehicle and it would be a source of tax free retirement funds.

This vehicle is called the infinite banking concept.

The idea works as follows: you stash away as much money as you possibly can, as quickly as you can, into a good participating (dividend paying) whole life policy. The money is funneled into the whole life policy for five to seven years. You over-fund the policy to just below the MEC guidelines. Then, whenever you need to make a big purchase, you can borrow the money from yourself, instead of borrowing from the bank (or a credit card company). Now you pay the loan back to themselves, plus the interest you would have paid the bank. You make the big profits the bank would have made.

What I tell my clients is that the money they put into their participating whole life policy could be used for emergencies, to take advantage of business opportunities, to fund college, to buy a car or first home, and much more. But because of the paid-up additions rider that was introduced in the late 80s, you can dramatically over-fund a participating whole life policy and make it an exceptional wealth accumulation vehicle. Furthermore, you can put in as much money as you want… based on the size of the policy, which you can make as large as you need. (Not so, with qualified plans). All the money you put into a cash value life insurance policy builds tax deferred. You avoid paying income taxes every year, so your money builds faster. You can borrow the money from the policy tax free. There are minimum guaranteed interest rates. A life insurance policy rate of return will beat a CD anyday, liquidity concerns notwithstanding.

You even have a disability waiver of premium rider that will put the money in for you. This makes the plan self completing, if you ever become disabled. Let's say that you go out for milk and never make it back home--life insurance provides a death benefit that gives your family the money you intended to save, in the event you can't be there.

Life Insurance makes a great college funding instrument because cash values generally don't count as an asset when applying for college financial aid. You can borrow against the policy's built up cash, or if you don't need to because of an unforseen scholarship, you also have that luxury (unlike 529 plans) and colleges won't raid your policy.

Sounds like a sweetheart deal, right? It is, except this program is designed for high income earners. But it makes a ton of sense anyways; as I told a friend Wednesday, you work for three people--the bank, your employer, and the government. This idea allows you to cultivate and mold your own financial destiny.

This is the basic premise of what I'm reading this weekend--R. Nelson Nash's seminal book, Becoming Your Own Banker. You wont' find this book at your local Barnes and Noble--the only way to get it is online at

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