How many of us could have imagined that one day there would be an infinite banking concept, or how we like to call it – an opportunity of becoming your own banker? Most probably only a few of us.
Luckily, some people had enough knowledge and a strong vision to develop an infinite banking concept. One of them was R. Nelson Nash — a financial specialist — and the author of the book ‘Becoming Your Own Banker: Unlock the Infinite Banking Concept.’
In his book, Nash explains the value of a whole life insurance policy to financial security and teaches us how we can build up funds that could allow us to cut out or ‘eliminate’ a middleman in our finances and, therefore, become our own banker.
In this Book Review 2021: Becoming your own banker, you will find the summary of the main messages from Nash’s book, as well as the most important things you should know about the infinite banking concept.
Becoming your own banker is a simple system that is supposed to allow you to capitalize on the infinite banking concept to increase cash value. It is a concept that enables you to take out or borrow money from your life insurance policy instead of going to the bank or other people or institutions for the same service.
An important note you should be taking here is the following – this concept only makes sense if the rate you would need to pay to take the loan is lower than a rate you would be paying somewhere else to borrow the money.
Nelson Nash was an interesting and knowledgeable man with vast banking, life insurance, and real estate experience. When you take a look at his experience from this perspective, you’ll be able to see that he got exactly what he needed to develop the infinite banking concept.
They don’t say for no reason that in our darkest times, we manage to find the best solutions. This happened to Nash as well. Apparently — back in the 1980s — Nelson Nash found himself in a situation of having to pay a 23% interest for $500,000 worth of property.
Facing this kind of challenge and going through it would put him in a massive financial crisis, so he had to find another option.
He then realized that there was an option for him to borrow against the cash value in his whole life insurance policy via policy loans with a much lower interest rate than the 23% he was supposed to pay to real estate.
Since technically, there are no limits for the amount of cash being borrowed as a policy loan, the only thing that was supposed to be taken care of was ensuring that the built-up cash value is as high as possible.
So Nash found himself revising his finances and financial system to boost the premiums he was paying for whole life insurance products, leading to the immense cash value.
Eventually, he had success, and so the concept of borrowing the money against the cash value in the whole life insurance policy (with tax-deferred advantages) was born. And today, we call it – an infinite banking concept.
The concept of infinite banking is about strategically using your whole life insurance policy from a mutual insurance company as a personal endless banking system.
In other words, Infinite Banking is essentially being your own banker.
It means that you can borrow the money using your policy’s cash value as long as you own a whole life insurance policy. By this logic, as long as you pay your premiums regularly (thus ensure you grow your cash value), you won’t need to borrow money from a bank ever again.
The infinite banking concept works on a couple of principles. Your end goal should be to build the value of your own bank, which can be done by repeating the process of lending and repaying money stored in your cash value of a whole life insurance policy.
The Infinite banking concept has money benefits. Some of them include freeing yourself from banks and worrying about the loan rates and possibilities. If you like to be entirely in charge of your finances, the infinite banking concept will allow you just that – to become your own banker.
If you wondered what the infinite part of infinite banking relates to – it goes back to the whole life insurance payout. As you know, a whole life insurance policyholder is guaranteed a payout on their deathbed, as long as they’ve been paying the premiums regularly. That means that after the policy owner passes away, the beneficiaries will be given the payout and an opportunity to continue the infinite banking concept.
As you’ve probably guessed, the main mastermind behind the infinite banking concept is a person we’re writing today about: R. Nelson Nash.
His competencies allowed him to follow Carl Menger’s work — the Austrian School of Economics founder — who proposed the “Subjective Theory of Value,” an idea of different people valuing the same thing in another way.
Nelson Nash used this and personal circumstances he found himself in to develop a concept where individuals could rely on themselves to achieve their financial goals and what they value the most, instead of having to rely on other people and institutions.
That is how the Infinite banking concept was born.
As you can see from our Comprehensive Guide to Infinite Banking, there are three simple infinite banking elements.
Infinite banking concept consists of:
- Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance industry
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy
- Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses
This concept allows you to borrow the money against your cash value in the same way you would borrow from a bank. Additionally, you are also ensuring that your whole life insurance policy is earning dividends at the same time.
The primary purpose of IBC is to help you gain freedom in your finances, meaning you have complete control of your savings, and you are guaranteed that your money won’t decrease in value. Not to mention the tax-free benefits that come along with it. When you put everything on paper, you can understand why becoming your own banker is an appealing choice.
Internet is a magical thing where you can find a lot of useful information. Unfortunately, not everything you see is reliable. That’s why you’ll probably find different articles questioning whether Becoming your own banker is a scam or not.
Which — when you think about it — is expected, since the infinite banking concept itself gives many benefits that make you question if it’s really possible or scam.
We’ll try to break down some of the most common myths and help you better understand the infinite banking concept so that you can make the best possible decision for yourself and your finances.
When you compare term insurance with whole life insurance, you will find many differences. Of course, one of them will be the price you would have to pay for both of these policies. And in those calculations — at first glance — it seems like the most logical option to choose the cheaper one – a.k.a. Term insurance, and just invest the money you would save for not buying a whole life insurance policy.
In theory, this sounds good. In practice, however, this doesn’t make much sense.
If you take a more in-depth analysis and compare what amount of money you would save with term and whole life insurance, you will understand how vital the time component is. And when you compare term and whole life insurance, you know that the time is “on a whole life insurance’s side,” as it is up until your death.
What does this mean?
It means that IBC and whole life insurance are not only about life insurance but are a mechanism for you to capitalize your cash value over the years – and with a whole life insurance policy, years equal to total years in your life.
Although investing through IRA (Individual Retirement Account) is still a way to save and invest your money, some crucial differences need to be stated.
For starters, investing and saving money are two different things – which are often standing in each others’ way. When we talk about using a self-directed IRA, we’re talking about an investing strategy, which is not a purpose of infinite banking concept or becoming your own banker.
IBC exists — as mentioned before — to help you take control over your finances and build your cash value over the years. That means that becoming your own banker is a capital accumulation strategy.
So the most critical question you should ask yourself right now is – how will I be using this asset? Because if you want to build your capital over the years and have more freedom over your finances – you will start implementing the infinite banking concept. On the other hand, if you plan to provide appreciation or cash flow, an investment strategy will be enough for you. But don’t expect to have a higher return rate using a self-directed IRA, as an investment strategy can never be compared to a capital accumulation strategy and the rate of return it has.
Many people choose the infinite banking concept to gain freedom and complete control over their finances. Now, can you imagine having that kind of control while investing in real estate, knowing that inflation could change your cash value almost over the night?
You probably felt an unpleasant feeling in your stomach while reading that. Now imagine that happening to you. You would probably want to avoid that.
Luckily, becoming your own banker not only brings you higher safety, but it also gives you other advantages compared to real estate. Take taxes, for example – while with real estate come property taxes, becoming your own banker frees you from paying taxes while borrowing against your cash value from a whole life insurance policy. Now when you do the math, what brings you a higher rate of return?
But are they? A standard tax-qualified plan gives you security in a way that you know the exact percentage you will have to pay as a tax, no matter how diversified the investments are. But this comes with some limitations as well.
If you find yourself accessing your savings before the age of 59.5, you will also find yourself paying 10% tax for doing that. That means that every time you want to use your own money, you will lose an additional 10%. Considering the uncertain factors around us and the fact that you probably will need to access your savings before the age of 59.5, this would mean that you would, from the start, agree on losing your own money.
You might not feel comfortable with dividend-paying whole life insurance as it is a dollar-denominated asset. Although understanding your concerns, let’s just take a moment and remind ourselves that the US Dollar is the reserve currency of the world (meaning that the vast majority of international trade is denominated in dollars), so most probably – you are safe.
In case you want to have an exit strategy, that is always something you can do to increase your safety net. An additional thing that might be useful for you to know – if the comes to a devaluation of the US dollar, you can always ask a life insurance company to pay you your cash value (at a rate defined by the contract).
Getting a policy loan is a simple procedure with no limits or requirements – what is up to you is to let your bank know how much money they should direct to one of your accounts, and you will be able to use it.
It’s important to know that you are borrowing against your cash value by doing this, which means this is not a loan as we’re used to. From the insurance company’s perspective – this is an asset they are giving you, for which they expect you to pay your interest. This is the root of your cost for a policy loan.
On the other hand, the possibilities you have do make it worth it. Besides the fact that you can take the loan any time you want and in any amount you need, you also do not have to return it. And additionally, even though you’re borrowing, your compounding cash value continues to grow.
Fortunately, this is not true. We say fortunately because, even though IBC gives you freedom and control over your finances, you can still count on your bank to check your accounts and help with administrative work, which is a relief.
However, when you compare IBC to other possibilities, it is non-negotiable that by becoming your own banker, the level of your dependence on the banking system is the lowest possible.
Well, this is not far from the truth. The thing is – if you want to be successful in managing your finances and enjoy the freedom IBC brings with itself, you need to know how to handle your finances.
That means you will need to learn about an alternative view of money, cash flow, and capital. But don’t think of this as something impossible – becoming your own banker is real and possible for everyone who cares enough to learn. There are even many experts offering their knowledge for people who want to implement the infinite banking concept.
This might be true in some cases. But if you tried using banks to access your capital, you most probably have found yourself in some kind of trouble and couldn’t access it in the desired way. Well, with IBC, that problem goes away – and guess what? It is a safer option when it comes to easy and secure access to the capital.
We already concluded that Nelson Nash is a genius – there is no doubt. But just in case you don’t have time to read his entire book, we’re bringing you the essential lessons summarized.
This is the first principle we learn from the book, and it says that everything a person buys is financed – either by borrowing from a lender or using your own money – otherwise received on the funds.
Nash further teaches us the concept of EVA (economic value added) – which proposes that you use your own funds as a cost of capital. By doing this, you stop paying interest to others and start saving money for yourself.
Also, having in mind dividends — or how Nash defines them — a form of principal’s return can merely impact your success with IBC. The key is to understand the amount of money you would usually be paying other companies – and deliver it to yourself. That way, you ensure you’re not paying the interest to anyone but yourself.
The entire IBC is built by having both borrowers and landers. What is an important lesson Nash teaches us is that it will take a couple of years to run major purchases with our personal bank.
One of the estimations is that it is required to implement IBC for at least five years to generate enough cash value to begin financing purchases. If the purchase is more prominent (for example, car or house), it will take even longer.
If you are looking to establish IBC from the ground level and leave it to the next generations, you should know that this is a long-term investment and a project that will require the next generations to continue where you stopped. It takes 20 to 25 years for the average individual to fully assemble their own banking system that can finance everything using life insurance.
We can find this in almost every book about personal finances or a successful business, and it is not a coincidence.
One of the main messages Nash is sending us is to never allow our costs to follow our incomes. He says that everyone who is not able to put spending urges aside and save money is destined to be a slave to their own finances and can never earn the freedom the IBC brings.
If you want to become your own banker, your costs can never consume your income!
There are many benefits of becoming your own banker, and now we will cover the main ones.
What is the most liquid asset? Well, cash, of course! Becoming your own banker allows you to maintain cash flow and liquidity all the time and makes you lose any worries regarding this.
Taking a loan any time you need and setting all of the requirements that come with it gives you a lot of safety and advantage. Being your own banker means that you are in charge of loan possibilities.
We talked about different ways you can invest your money and get a return on the investment. But what is characteristic of infinite banking is that this way, you will avoid taxes that need to be paid in other cases.
It’s important to remember that IBC is a capital accumulation strategy, which means that through your entire life – even when you’re taking the loans, your cash value will be increasing.
We know that we all need a place for our savings – in this case, there is no better safety net than a whole life insurance policy. You know you are guaranteed for your life, you know that your beneficiaries will get the death benefit, and additionally, you know that while you are still alive, you can access your savings any time and manage them in the way you need.
We hope to bring you closer to Nelson Nash’s philosophy about the Infinite Banking Concept. If you take with yourself the book’s main lessons and start working on them, we believe that you will be on your way to becoming your own banker! Best of luck, and let us know how it turns out for you!