R. Nelson Nash (2012)
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Location 69: The whole idea is to recapture the interest that one is paying to banks and finance companies for the major items that we need during a lifetime, such as automobiles, major appliances, education, homes, investment opportunities, business equipment, etc.
Location 72: As time goes by interest rates are up and interest rates are down— but the process of banking goes on no matter what is happening. It is a well known fact that banks make more money during times of low interest rates than when rates are high.
"The problem in America isn't so much what people don't know; the problem is what people think they know that just ain't so."—Will Rogers
Part 1: Becoming Your Own Banker®
Chapter 1: How the Infinite Banking Concept® Got Started
Location 200: Hardship often helps us to see things to which we are normally blind.
Chapter 2: Imagination
Location 238: "Imagination is more important than knowledge"—Albert Einstein
Chapter 4: The Problem
Location 319: But, if you will check with the sales manager of an automobile agency you will find that 95% of the cars that are traded in are not paid for! This means , at the end of 30 months, if the car is traded, 21% of every payment dollar is interest. Even if he goes the full four years, the portion of every payment made is still 20%! This means that the interest portion of every dollar spent is perpetual. It never seems to dawn that the volume of interest is the real issue , not the annual percentage rate. For a real thrill, go to see the sales manager of the high priced cars and ask him what percentage of the cars that leave their car lot are leased. The answer will probably be 75%, or more! This is worse than financing a car purchase.
You will find that 34.5 cents of every disposable dollar paid out is interest. For the average All-American male this proportion never changes. Let's assume that he is trying to save 10% of his disposable income, which is twice the average savings rate in America. That means that we have a 3.45 to 1 ratio of interest paid out as compared to savings. If you will get this young man together with his peers at a coffee break or some such gathering and have one of them suggest that they discuss financial matters, I can predict what they will talk about— getting a high rate of return on the portion they are saving! Meanwhile, every participant in the conversation is doing the above! What a tragedy! But that is how they have learned to conduct their financial affairs.
Location 350: All of this reminds me of a phenomenon in the airplane world . I have been flying, as a pilot, since 1947, and I learned early on that you could not fly an airplane through a vacuum. It must go through an environment!
Location 353: So picture this situation: You are in Birmingham, AL with an airplane that can fly 100 miles per hour and your destination is Chicago. The only problem is that you have a headwind of 345 miles per hour! Regardless of what your airspeed indicator says, your airplane is moving toward Miami at 245 miles per hour! If you want to go to Chicago, that's a very good time to get your airplane on the ground—quickly! Have some patience and the air mass will move on—they always do. When the HIGH gets directly over the top of you there is no headwind. You are now covering the ground at 100 m.p.h.. And now, the "arrival syndrome"comes into play. You conclude that "you just can't do any better than this. This is the ultimate situation."Nonsense! Have more patience and the air mass will continue to move on. Now you have a tailwind of 345 m.p.h.! Plus your airplane is moving at a speed of 100 m.p.h.. Your ground speed is 445 m.p.h.! That is impressive, isn' it? But, you see, it is much more impressive than most people think. Everything you do in the financial world is compared with what everyone else is doing! Ninety-five percent of the American public is doing the equivalent of flying with a 345 m.p.h. headwind. If you have a 345 m.p.h. tailwind, the difference between you and them is twice the wind! That is a difference of 690 m.p.h.!
Location 370: Most people in this situation concentrate all their attention to trying to make the airplane go 105 m.p.h.! They would do well to spend their energy instead on controlling the environment in which they fly. You can't do that in the airplane world— but you can in the financial world. You can do it by controlling the "banking equation" as it relates to you. That's what this book is about—creating a perpetual "tailwind" to everything you do in the financial world. (There are many "financial gurus" out there who are praising the matter of "getting out of debt" but they never address this fact). This is the unique message of The Infinite Banking Concept.
Location 377: Somehow or another, it never dawns on most financial gurus that you can control the financial environment in which you operate. Perhaps it is caused by lack of imagination, but whatever the cause, learning to control it is the most profitable thing that you can do over a lifetime.
Chapter 5: Creating a Bank Like the Ones You Already Know About
Location 399: In his book, Paper Money, author Adam Smith has this to say: "A banker cannot make a loan unless he has a deposit. It seems a little silly to state that so baldly, but if three college -educated Americans in ten don't know that we have to import oil, I don't feel so bad about saying something bald. Banks do not lend their money. They lend the money somebody else has left there."
Location 427: You must add the "multiplier effect" of bank lending practices. Practically no one is aware that, when you make a deposit of $1,000 at your favorite bank, they can now lend out $10,000 as a result of your deposit. It is called the "fractional reserve lending system," that is, they are creating money out of thin air. (My own description of what they are doing is the world's largest con game). It is all predicated on the theory that "everyone is not going to withdraw their money at the same time." For a complete treatise on what is going on in banking I suggest, no, I beg you to read The Case Against The Fed, by Murray Rothbard
Location 441: Remember this, because in the banking system I am going to tell you about, you can also destroy it by not obeying the basic rules of banking. Loans have to be paid back or you can kill the best business in the world . It's up to you, but don't try to blame others when it happens.
Location 446: There is a much easier way to accomplish the creation of your own banking system and the mechanism has been around for over 200 years. It is tried and true. It is called participating (i.e. dividend-paying) whole life insurance. But the problem is that very few people know how the business works, including the home office folks in the life insurance companies!
Location 460: Creating your own banking system through the use of dividend-paying life insurance is much like co-generation. All the ingredients are already there in place. All you have to do is understand what is going on in such insurance plans and tap into the system.
Chapter 6: Creating Your Own Banking System Through Dividend-Paying Life Insurance
Location 469: The very first principle that must be understood is that you finance everything that you buy— you either pay interest to someone else or you give up interest you could have earned otherwise. The alternate use of money must always be reckoned with. Some call this "opportunity cost." But, it is amazing how people give lip-service to this fact but do not put it into practice in their own financial dealings— the equivalent of thinking that the law of gravity applies to everyone else but them.
Location 490: The engineers in life insurance are known as "actuaries."They are dealing with a field of 10 million selected lives—persons that have been through a screening process. And they are working with a theoretical life span of 100 years. Then they turn their information over to "rate makers"who determine what the company is going to have to charge its clients in order to be able to pay the death claims and make the whole system work over a long period of time. Then the whole matter is turned over to lawyers who make legal and binding contracts that are to be offered to potential buyers through a sales force. The glue that holds this all together is comprised of the administrative folks, executives and clerks, etc. The contract is unilateral—that is, the company promises to do certain things if you meet the standards of acceptability and make premium payments. Read the contract and it will tell you very plainly that you are the owner of the contract—not the company. The Owner is the most important character in the scene.
Location 498: To make the plan work the Owner must make payments into it and the Company (the hired-help) must put the money to work in order to produce the benefits that are promised. Those with the investment responsibility will do so in a number of ways— in financial instruments that are fairly conservative, e.g. bonds, mortgages, etc.
Location 504: But, upon reading the contract (the policy) you will find it plainly stated that the Owner outranks every potential borrower in access to the money that must be lent! And what he can borrow is 100% of his equity in the contract (the amount that the company can lend at any one time). If this is true—which it is—then what this amounts to is absolute control over the investment function of the company as it relates to the owner's policy. In essence, money can be lent to the other places only if the Owner of the policy does not exercise his option to use the money (and pay interest) instead.
Location 524: Furthermore, the policy is engineered to become more efficient every year, no matter what happens (that is, if the Owner does what is called for in premium paying, loan repayments plus interest thereon that are at least equal to or better than the general investment portfolio of the company). That is because the cash value is guaranteed to ultimately reach the face amount of the policy by age 100 of the Insured. There is an ever-decreasing "net amount at risk"for the company.
Location 533: In designing the life insurance policy the rate-makers have taken into consideration the advice of the actuaries that their assumptions are not set in concrete. They include the interest earnings on the premiums paid by policy owners, the death claims expected during a time frame, and the expected cost of administration. Over a long period of time the actuaries can be pretty accurate, but from time to time the results can be better or worse than predicted. There are variations in interest earnings, death claims and expenses of operations and these factors affect the dividend scale declared for the coming year. You can safely say that the real results will never exactly match the table provided at the beginning of the life of a policy. But, once a dividend is declared, its value is guaranteed from that point on. It can never lose value in the future as can the value of securities. (It has always been a mystery to me, why do they call stocks securities when it is possible to lose their value entirely. It all sounds like an oxymoron to me. Maybe it is like Social Security, which has no market value at all?)
Location 542: A significant period of lower than expected earnings of interest, or a period of more than expected death claims and/ or administrative expenses can result in a "downer"for the company. When this happens in a regular corporation it is the function of the stock-holders to "take up the slack."But, in this case, the rate-makers are reminded that "we don't have any stockholders!" So, the rate-makers are cautioned by the actuaries that "if we calculate that it would require $1.00 per year for a given plan, don't collect $1.00—collect $1.10. This extra .10 is the capital that makes the whole system viable.
Location 555: The word, dividend was used by the insurance industry to describe this dispersal and it stuck with us, but the correct classification is a return of premium (or a return of capital) which is not a taxable event in IRS terminology. If the owner uses the dividend to purchase Additional Paid-Up Insurance (no cost for acquisition, sales commissions, etc.) the result is an ever-increasing tax-deferred accumulation of cash values that support an ever-increasing death benefit. And there are no government bureaucrats looking over your shoulder telling you what you can and cannot do. The result is limited only by the imagination of the policy owner.
Location 578: If you will take an honest look at what this young man is now doing— paying over 35% of every dollar of after-tax income to interest alone— it should be obvious that his need for finance is much greater than his need for life insurance protection. If he would solve for the need for finance through dividend-paying life insurance, he would automatically have much more life insurance and recover all the interest he is now paying to someone else. But this almost never occurs because of the mental block implanted by financial geniuses that "life insurance is a poor place to store money." What a limited outlook of just what is going on in the banking world! Again I remind you, if you know what's really happening, you'll know what to do.
I have never seen a monthly list of investments from a dozen of major life insurance companies that did not include finance companies as a place where they have loaned blocks of money. The finance company simply buys blocks of money, adds a fee to it and loans it to consumers that buy cars.
Location 617: Furthermore, I am not describing one life insurance policy. This is to be a system of policies. Have you not noticed that when a grocery store becomes successful in one location, then it tends to establish another store in another location? Have you not noticed that banks have branch offices? There must be a reason for their behavior! Then why not expand your own potential by buying all the life insurance on yourself that the companies will issue? And then on all the persons in which you have an insurable interest? At present, does not all your income go through the books of some banking institution? Don't the banks lend out the deposits of customers? All they do is capitalize the bank (Capital Stock) to make it a safe place for customers to deposit their money and then lend out the money left on deposit. If they don't lend money they will go out of business. It will take the average person at least 20 to 25 years to build a banking system through life insurance to accommodate all his own needs for finance—his autos, house, etc. But, once such a system is established, it can be passed on to future generations as long as they can be taught how the system works and suppress their baser instincts to "go out the back door of the grocery store"—or in a word that is more descriptive—steal.
Chapter 7: Basic Understandings
YOU "FINANCE" everything you buy. You either pay interest to someone else or you give up interest you could have earned.
Location 634: CREATE AN ENTITY— A plan— which you control and it makes money on your loans. One such entity can be a life insurance plan.
Location 640: The amount of money available to the owner is the entire equity in the policy at the time. In the hierarchy of places where money is lent, the owner ranks first. That is absolute CONTROL!
Review – Part I
- The importance of imagination—it is more important than knowledge. Gauss—child prodigy—didn't think like the others and made valuable contributions to the world. Can you add the numbers 1 through 1,000 in your head? (Answer: 500,500).
- The grocery business. The value of learning how to get into a business in which you are a consumer of the same thing that you sell. It requires extensive study of the business prior to start-up. It requires very high capitalization. It requires extraordinary management abilities. When you shop for groceries at your store— don't steal, or your business will fail.
- The money problem. Only money left over after paying taxes can be spent. For the average person in the U.S., 34.5% of that sum goes to pay interest, alone, to finance car purchases, homes, and various other purchases. This money is gone forever. It is making persons in the banking business wealthy. It can be yours to enrich your life forever—if you get into the banking business. Learn the importance of the Economic Value Added concept.
- Creating a bank like the ones you already know about. It is much like getting in the grocery business—except much more difficult. It requires much more capital. You have to get a charter from the Commissioner. When you make loans to yourself at your bank—don't steal. You will destroy the best business in the world.
- How a dividend-paying life insurance policy works. Review Figure 2 (page 34) and make sure that you understand the flow of money. In addition, make sure you understand "the characters in the play". The policyholder is the principal character in every life insurance policy.
- The capitalization phase. It is going to take time and discipline for several years. Don't expect to get rich overnight. But the rewards, later on, are worth all the effort.
Part II: The Human Problems—Understanding Parkinson's Law
Chapter 7: Basic Understandings
Location 690: In Parkinson's Law he says, "work expands to meet the time envelope allowed."
Location 696: He also noted that "a luxury, once enjoyed, becomes a necessity." Can you remember when we did not have air-conditioned automobiles? Would you think of buying one without air-conditioning? Not me! And he said, "expenses rise to equal income." Is it true? Income is limited for us all, but our wishes far exceed our ability to fund them. When a pay raise comes along it is very quickly absorbed by a new definition of necessities!!
Location 701: It doesn't have to be this way—but it is!! Parkinson's Law must be overcome daily. If you cannot do so then just go ahead and give up—you are destined to become a slave! That's the bad news. The good news is—if you can whip Parkinson's Law you will win by default because your peers can't do it—and everything you do in the financial world is compared with what they are doing. In all our efforts at establishing priorities we should begin with a thorough consideration of the truth of Parkinson's Law.
Chapter 8: Willie Sutton's Law
Location 716: You have looked at Parkinson's Law and if you can overcome it you will win by default in comparison with your peers because they can' do it! Now you must face Willie Sutton's Law. I remind you that Willie Sutton (1901– 1980), was a notorious bank robber in our nation's history. When asked why he continued to rob banks he replied, "That's where they keep the money." So Sutton's Law is formulated thusly— wherever wealth is accumulated someone will try to steal it.
Question: Who is the biggest thief in the world? If you answered the Internal Revenue Service you are correct! Most people have this feeling but lack the ability to explain that it is indeed, theft. I explain it this way. Let's go to a shopping mall or some such place where there are lots of people to witness what I am about to do to you. At this point I pull out a gun and place it against your head and direct you to "give me the contents of your wallet or I will blow your brains out!" I can predict with certainty that those who saw this act will describe it as theft—and call for my punishment. But— if you will allow me to gather that same crowd for about an hour before you show up— and let me talk to them about how we are going to divide the contents of your wallet and distribute among them—now they will call the act "democracy in action!"
Location 729: Frederic Bastiat (1801– 1850), a French economist and statesman who wrote an essay entitled The Law in 1850 states it this way:
"The law perverted! And the police powers of the state perverted along with it! The law, I say, not only turned from its proper purpose but made to follow an entirely contrary purpose! The law become the weapon of every kind of greed! Instead of checking crime, the law itself guilty of the evils it is supposed to punish! If this is true, it is a serious fact, and moral duty requires me to call the attention of my fellow-citizens to it."
Location 750: When taxation becomes onerous to the point where government officials sense rebellion they always resort to exceptions to the rule. They invented qualified pension plans, HR-10 plans, 401-K plans, IRAs, etc., ad nauseam. What a classic case of appointing the fox to guard the chicken house! How totally absurd! Did you also notice that all these plans were not installed simultaneously? First it was pension plans which "blessed" one select group of citizens, and then HR-10 plans for another group, etc. Finally it came down to IRAs so that everyone has an exception to the rule!
Location 767: Economic problems are best solved by people freely contracting with one another and with government limited to the function of enforcing those contracts . And the best way to do so is through the magnificent idea of dividend-paying whole life insurance! It has been around for over 200 years. It has stood the test of time. It is not compulsory. It is not a government-sponsored idea! It preceded the income tax idea by a long time. It is private property! And only the people who care about others that are dear to them participate in the idea. What a great group of people to be associated with in business!
Location 780: There are two methods, or means, and only two, whereby man's needs and desires can be satisfied: One is the production and exchange of wealth; this is the economic means. The other is the uncompensated appropriation of wealth produced by others; this is the political means . . .The State is the organization of the political means. —Albert J. Nock, Our Enemy, The State.
The State is that great fiction whereby everyone tries to live at the expense of everyone else. —Frederic Bastiat
Chapter 9: The Golden Rule
The Golden Rule — Those who have the Gold make the rules!
Location 789: As a result someone else must provide the capital that is necessary to sustain our way of life. This strategy carries with it a very high cost, and we all suffer the consequences. It all begins with faulty premises.
Location 794: A few years back Panasonic wanted to build a plant in Mexico to solve the obvious equation. But in the infinite wisdom of the Mexican government at that time, if you wanted to establish such a business there, they required that Mexicans should own 51% of the business. That means that Mexicans control the business. The typical Japanese strategy runs something like this— you put money into a business and you should expect to lose money for five years. When you start making money you should plow it all back into the business for five more years. Only after this time should you expect to take money out of the business. But the typical Mexican outlook on a business venture is to demand a bonus at the very start—like a signing bonus for a star athlete, etc.!! Do I have to tell you what happened? Panasonic pulled out of Mexico and went somewhere else where capital is appreciated and managed with care. Who won and who lost in this story? Panasonic had the Gold, and so they made the rules!!
Location 804: Capital is a responsibility and should be treated with great respect. If not, then all parties involved will lose. It is really difficult to write or talk about this fact, perhaps because it is so blatantly obvious !! When you have a large amount of cash on hand all sorts of good opportunities will appear, and you can also negotiate very favorable purchase prices. So many of life's problems would disappear if this understanding was generally accepted and practiced widely among the population. A word of caution is in order, do not think that everyone must conduct his financial affairs in this manner. It is not a numbers game. Individuals can reap the rewards that such discipline yields. In fact, we all need to remind ourselves that whatever you do in the financial world is compared with what everyone else is doing.
Location 860: People just don't play their proper role in the scheme of things. They have abdicated their opportunity/responsibility as it pertains to the banking function in the economy . They are depending on someone else to perform that job—and that character in the play is making most of the money! And rightly so, because of the Golden Rule— those who have the gold make the rules! It can be no other way!
Chapter 10: The Arrival Syndrome
Location 877: Daniel Boorstin (1914– 2004), the historian, stated it this way, "The greatest obstacle to discovering the shape of the earth, the continents, and the oceans was not ignorance— it was the illusion of knowledge."
Chapter 11: Use It Or Lose It
Location 908: The Arrival Syndrome produces a "comfort zone" that causes people to lapse into their old way of doing things— a lifetime of accumulated information that determines how one conducts oneself. The fact that this conclusion may be based on fallacious information is beside the point! I illustrate the point by telling people, "what I'm teaching is equivalent to teaching that the world is round—when most folks think that it is flat. Technically, that is a very simple thing to explain— but if you are one of those who think it is flat, then it becomes a very difficult problem!"
Location 913: The Infinite Banking Concept is dealing with a totally different paradigm. This amounts to a personal monetary system.
Location 915: In the September 1993 issue of Fortune magazine the story of economic value added (EVA) was reported. Many large corporations had achieved phenomenal success when they adopted EVA. All the concept amounts to is the recognition of the fact that your own capital has a cost of money as well as that which has been borrowed from banks.
Location 922: A follow-up story in Fortune in May 1995 was titled, "EVA Works— But Not if You Make these Common Mistakes." The points made looked like this:
- They don't make it a way of life.
- Most managers try to implement EVA too fast.
- The boss lacks conviction.
- Managers fuss too much.
- Training gets short shrift.
- Accepting a totally new point of reference means that one must develop new habits.
Anytime that you can cut out the payment of interest to others and direct that same market rate of interest to an entity that you own and control, which is subject to minimal taxation (life insurance companies do pay taxes), then you have improved your situation. Just like EVA, to be effective, The Infinite Banking Concept must become a way of life. You must use it or lose it!
Chapter 12: Creating The Entity
Location 940: In designing Life Insurance policies, the beginning point is the work of actuaries, the engineers of the whole process. They are working with a mortality table that is constructed from data on ten million selected lives—people that have been through a selection process— not the "person off the street." The purpose of the selection process is to prevent adverse selection against the company, that is, to cull out those persons who are facing predictable death in the near future. It would not be a good thing for all the people insured to include persons that have a terminal illness, that are contemplating suicide, etc. Cancer patients and people with heart disease fall in the same category. And they are working with a theoretical life span of 100 years.
Location 951: If mortality experience is better than that indicated by the mortality table, then it will reflect that fact by better dividends distributed to the policyholders. In fact, the substantial increase in dividends paid by companies can be attributed mostly to better mortality experience in the past several decades.
By the way, do you know where all this business of retirement at age 65 came from? Franklin D. Roosevelt got it from Bismarck in Germany several years earlier. The whole idea was to "get these old folks out of the work force in order to provide jobs for the younger generation ," as if there are only so many jobs around— a socialist mental hang-up that has no validity at all.
Location 979: When life insurance began (over 200 years ago) it was all term insurance! It paid a death benefit if the insured died during the given time frame. So the insured persons paid ever-increasing premiums (because each year they lived it was more probable that they would die in the current year) and finally quit because the premiums became prohibitive— and a few years later, they died! Perceptive people noticed that this was not like other forms of insurance. They buy fire insurance and it pays a benefit if a fire occurred during the period covered. They buy accident insurance and it pays a benefit if an accident occurred during the period covered. There is a very strong probability that neither of the above would ever occur! But death for a person is not an if— it is a when! Responding to pressures from the market place, life insurance companies created a plan for purchasing the single premium policy with a payment period that began with the current age of the insured and extending to the theoretical life span of 100 years. They called the plan ordinary life. I submit that this was a gross misnomer!
When you classify something it is based on its major characteristics. The "animal" they created had much more in common with banking than it did with life insurance. When you look at the proportions of the whole activity it is obvious that the banking qualities became much greater than the death benefit quality of a policy. A better name would have been "a banking system with a death benefit thrown in for good measure."
Location 1006: The strange thing is that the Europeans went from a condition of thinking that the potato was poisonous to one of large-scale dependence on it. Remember that the Irish experienced mass starvation as a result of the potato famine when a blight wiped out the crop repeatedly. Of course, this change of understanding took place over a long period of time. The world seems to always behave that way! We pick up some screwball idea that is based on a half-truth and let it grow into a monster that blinds us to what is really happening.
Location 1019: Returning to the scale of policies above, suppose that the insured was 25 years old— then the ordinary life policy would be a 75-pay plan. The payment plan could be shortened by buying a life paid-up at age 65 (for the same 25 year old, this would be a 40-pay plan). It could be further shortened to a 30-pay plan, or a 20-pay plan.
The shorter the payment period the better suited it is for the purposes of the Infinite Banking Concept.
Location 1036: When using this type of life insurance to solve your need for banking, it is best to select a plan (the base policy) that is in the middle of the scale (such as ordinary life or a life paid-up at age 65) and add a Paid-Up Additions Rider (PUA) to the plan. By varying the amount allocated to each portion you can place the resultant policy at any point between the base policy and the MEC line. The whole idea is to "snuggle up to the MEC line"—but don't cross it! This will de-emphasize the immediate death benefit but accentuate the banking qualities (the cash values). The irony is that doing it this way will result in providing more death benefit at the point where death will probably occur than any other plan! The base policy will pay dividends and the PUA rider will also pay dividends. These should be used to buy Additional Paid-Up Insurance, which gives more meaning to the infinite qualities of the system.
Location 1044: In describing this design of a policy, some people have called the process of putting a Paid- Up Additions rider on an ordinary life policy "overfunding"the policy. Maybe that can help in the overall understanding, but the objective should be simply to get as much money as possible into a policy with the least amount of insurance instead of trying to put as little money in and provide the greatest amount of insurance (initially). It is the exact opposite of what one thinks about when purchasing "insurance."This is understandable because of the history of how the whole subject developed.
Location 1049: It all reminds me of things such as when Christopher Columbus started his journey Westward from Europe to get to the East; his destination in particular, was India. When his party finally arrived at some islands in the Caribbean they met some people they had never seen before. They called them INDIANS! They weren't—but the name stuck. There are probably thousands of such examples of misclassification that we run into every day but they probably don't increase the quality of our lives. Instead, they limit our thinking and lead us to wrong conclusions. Words are powerful things!
Location 1056: My Thoughts on Universal Life and Variable Life
Universal Life was invented in the early 1980s by E. F. Hutton, a stock brokerage firm that, in my opinion, knew nothing about life insurance. Remember the television commercial, "When E. F. Hutton speaks, everyone listens."Have you heard him say anything lately? They don't exist anymore! UL was nothing more than "one-year term insurance with a side fund of an interest-bearing account."It was an attempt to "un-bundle"the savings element and the life insurance element of a whole life policy—something that can't be done, if one understands the concept of whole life insurance. This happened during a time of high interest rates and it "looked good"in the early years of the policy. When I first saw the policy I ran some illustrations and they kept "falling apart"when the insured attained age 65 to 70. The cost of one-year term became prohibitive at the advanced ages and "ate up the cash fund"from that point forward. Therefore, I never sold one of them when I was in the business—and I surely wouldn't buy one!
Location 1065: Next came Executive Life out in California. They made a "big splash" in the business and ultimately went broke. I understand that policy owners actually lost money with their policies. Does the name, Michael Milken, mean anything to you? He did prison time as a result of his financial shenanigans. Would you guess where he was selling all of those "junk bonds?" If you replied, "Executive Life," then go to the head of the class! Would you like your financial future in the hands of people like that?
Location 1070: Lastly, there came Variable Life, invented by Equitable Life Assurance Society. It was nothing more than one-year term insurance with a side fund of a mutual fund. There are more mutual funds than there are stocks. No mutual fund is any better than its manager. The great preponderance of mutual fund managers had never seen a down-turn in the market until the recent one.
I suggest that you read The Truth About Mutual Funds. Then read The Battle for the Soul of Capitalism by John Bogle, the originator of The Vangard Fund. These two books are vital to the understanding of what goes on in that industry. Also read The Pirates of Manhattan by Barry Dyke. Upon completion of these three books you should be adequately informed to make an intelligent decision as to whether you should consider Variable Life. I was with Equitable Life when Variable Life came on the scene. I never sold one of those policies—and I would never buy one. I do not recommend its use for the Infinite Banking Concept. The tragedy of our times is that the life companies never spent any time on understanding Dividend-paying Whole Life Insurance and teaching the buying public its characteristics.
Location 1091: For banking purposes you want the highest cost life insurance that is possible, but avoid it becoming a Modified Endowment Contract. Minimize the death benefit and maximizing the cash value.
Location 1094: In a dividend-paying life insurance policy, you earn both guaranteed cash value, (interest) and dividends, which are not guaranteed and are based upon the experience of the company. In a well-managed company, the dividends can become enormous over a long period of time.
Part III: How to Start Building Your Own Banking System
Location 1103: There are five legitimate methods of having the use of an automobile over the lifetime of a person. The graph depicted in Figure 5 (page 60) assumes that the car will be replaced at four-year intervals and that the "financing package" each time will be $10,550 at 8.5% interest for 48 months and we will be looking at a 44 year time frame in which to compare the results of the methods.
Location 1106: METHOD A— The FIRST, and most expensive method, is to lease the cars each year for 44 years. It is somewhat difficult to calculate the total cost in this case . We must resort to logic and reason and use the second method as a starting point. At the end of each 4 year period the lessee has no equity to show for the expenditure.
Location 1109: METHOD B—The SECOND method is using a commercial bank (or finance company) to do the job. Calculating the cost in this example is simple ($260 per month for 528 months = $137,280). At the end of each 4 year period, this person has a 4 year old car to use as a trade-in on the next unit. Reason tells you that the first method must be more costly than this one. Otherwise, no one would ever purchase—they would all lease. This would be absurd. One must lease from an owner who had to buy the car. Is the owner a fool? Is he not going to make some money on the activity? Therefore, let's assign an arbitrary 44 year cost of method one at $175,000. By the way, the annual equivalent of $260 per month is $3,030.
Location 1118: METHOD C— The THIRD method is to pay cash for each new car every four years. This results in a total cost of $116,050 ($10,550 for each trade-in times 11 cars). This person had to defer the use of the first new car for four years to achieve this result. He had to save up money for the first four years and immediately start accumulating money again in the same savings account to prepare for the next purchase. This method involves car payments just like the first two methods. It is all a matter of where the payments are made— to the leasing company, the commercial bank, or to his savings account. This is the classical sinking fund method of financing the ongoing need for something.
Also, be aware that we have probably covered 90% of all the population of the U.S. in the first three methods. It should be noted, too, that we are "going the right way"on the graph as we move to the right on the scale of methods—but mid-stream America is going the other way! Leasing is up 35% in the last few years, according to many radio commercials.
Location 1127: METHOD D— The FOURTH method requires some explanation. The first three methods have not addressed the need for capitalization; a pool of money must be accumulated before using it for your own car purchases and it must be large enough to accommodate the needs of some other folks, too. This person accumulates money on a monthly basis in a savings account and buys a Certificate of Deposit (at someone else's bank) in the amount of $5,000 with a yield of 5.5% interest. Show me someone that will do this for seven years just to build a banking system and I will show you someone that has conquered Parkinson's Law. He will win by default in comparison with his peers, because they can't discipline themselves to do so. This person will also attract the attention of the Willie Sutton types—the Internal Revenue Service— and they will take 30% of the earnings. The net effect is that he will earn 4% after taxes. He continues to fund the monthly savings account and annually withdraws $3,030 from it to purchase a new C/D each year. He is playing "honest banker"with himself but he is using someone else's bank to do it. The dividends of the bank are going to the stockholders of the bank. He is earning only the interest that the bank is paying him. There are several "characters in the play"that must be considered:
- The Stockholder or owner of the bank—earns dividends.
- The C/ D holder—earns interest.
- Administrators at the bank (hired help)—earn salaries.
- The borrower of money - An absolute necessity in the whole scene. Nothing happens without him. He pays for the whole works above.
Location 1154: METHOD E— The FIFTH method is using dividend-paying life insurance as a depositary of the necessary capital to create the banking system to finance the automobiles. This person puts the same $5,000 per year, as in the foregoing method, into very high-premium life insurance with a mutual life insurance company.
Location 1162: Notice that in Table (1) the results favor Method D up through year 14—but from that point on the difference favors Method E in an accelerating fashion. There is a very simple explanation for this effect. Hardly anyone takes into consideration that the Banker in Method D that issued the C/Ds went through a long and costly process of getting a Bank Charter and winning the deposits of customers (whose money he lends to borrowers).
Every time a person buys a life insurance policy he is starting a business from scratch. There is the inevitable delay in results in getting a business started.
Location 1171: Both methods, D and E, are all dependent on borrowers to make their business successful and the market sets the rate— not Alan Greenspan at the Federal Reserve Bank. In the Life Insurance method the policy owner is earning both interest and dividends. There are no stockholders! The cost of administration in both cases is a "wash."
This is the essence of what The Infinite Banking Concept is all about— recovering the interest that one normally pays to some banking institution and then lending it to others so that the policy owner makes what a banking institution does. It is like building an environment in the airplane world where you have a perpetual "tailwind" instead of a perpetual "headwind." Simple, isn' it? Controlling the environment is much more productive than trying to make the airplane fly 5 miles per hour faster!
Location 1194: So, let's compare the activity and characters in a conventional bank and that of a life insurance contract with a mutual, dividend-paying company. A bank can't operate without "hired help ." Neither can a life insurance company. A bank must lend money or it is not in business. So does a life insurance company. (These two items are a "wash.") The stockholder at the bank earns dividends. So does the life policy owner. The C/D holder at a bank earns interest. So does the life policy owner (guaranteed cash value). The only difference in the two is how earnings are allocated. The life policy owner gets both interest (guaranteed cash value) AND dividends!
Location 1201: That's because, when you buy a life policy, you are literally starting a new business from "scratch." There is a "start-up cost" in creating a new business. It takes a life company about 13 years to amortize the "cost of acquisition" of a new policy.
In order to issue a C/D, a banker has to create a bank. From the start of the idea until it's "break even" point, it will take the average bank about 15 years. Practically no one seems to recognize this fact.
Location 1211: If I were in the life insurance business, I would never suggest that a client do it this way. I would recommend policy loans to buy the cars. There is a simple reason for this procedure. Remember, the earlier one starts a life insurance policy— and the longer it stays in force— the more efficient it gets. When one surrenders Paid-Up Additional Insurance, you are surrendering a small portion of Paid-Up Insurance that has recently been created. Hence, you are killing the growth potential of that much of the policy. If you use policy loans, instead, then you are not terminating this potential. The policy values continue to grow.
To put all of this in perspective, study the Financial Statement of a conventional bank. Deposits to a bank are LIABILITIES— something they owe to their depositors. Loans are an ASSET to the bank— it is their source of income!!!
Location 1228: There are only two hard, fast rules in building and in carrying out this concept:
- Don't be afraid to capitalize the system. The more capital you put into it, the more you get back, tax-free at "passive income" time (some folks refer to this as "retirement income" but, I'm removing the word "retirement" from my vocabulary).
- Don't make policy loans without making provisions for paying them back (stealing from your system— just as in the grocery business—don't steal the peas!!).
Location 1235: Furthermore, this procedure provides a place to put "windfall money" for things that do come along in life, such as inheritances, proceeds from sales of various kinds of property, death benefits from policies on which you are the owner and/ or beneficiary, etc., etc. These possibilities are real in life. I have experienced several of them.
Chapter 13: Expanding the System to Accommodate All Income
Location 2064: Next is the matter of the house mortgage. When enough money is accumulated in cash values in the foregoing policies to pay off the mortgage, then borrow from them and do so, making sure that you pay the policies whatever would have to be paid to a mortgage company to amortize such indebtedness. Of course, you can speed up this ability by adding new life insurance on someone (it doesn't matter who the insured is— all you want to do is own the policy so that you can control the cash values). This repayment of the policies should also include "closing costs" that would be associated with the refinancing of a house mortgage. Remember to play the game—whatever the next-door neighbor would have to do to refinance his house with a new mortgage, you do to yourself at your own banking system. The money will go to your policies being managed by the life insurance company.
Part IV: Equipment Financing
Everyone should be in two businesses— the one in which you make your living and the other should be the banking business that finances whatever you do for a living. Of the two businesses, banking is the most important. Businesses come and go— but banking is eternal. Just think about it for a moment— the richest man in the U.S. today is Jeff Bezos. The business did not exist 30 years ago.
Location 2615: Another improvement can be achieved by "back-dating the policy" for six months. Most all companies allow this. Pay the initial annual premium now, but ask the company for a policy date six months ago. This way it will be only eighteen months before being able to use the policy to cut the finance company out of the pattern. The earlier you are able to do so, the better the results.
Location 2648: At this point, we turn to the matter of ownership of the policy (or policies). The company, a corporation, should not own it. He can improve the wealth building effects of the whole scenario by owning the policy himself, purchase the trucks himself , and lease the trucks to the corporation, making sure that he has charged a lease payment that is as high as possible . He can get that figure from some leasing company that leases similar equipment. By doing it this way he can have an interest deduction for the policy loans used to purchase the equipment (the loans are for business purpose)— he can depreciate the trucks over a reasonable time— and he has a "captive customer" to lease the equipment to that is sure to make the lease payments.
As stated at the outset of a presentation —" This is an exercise in IMAGINATION, REASON, LOGIC AND PROPHECY." None of the figures you are going to see are 'set in concrete.' They will vary with interest rates— and how you treat the system. Your behavior in managing the system is the most important factor in the entire equation." Capitalizing the policy 4 ½ years would probably still produce better results than the original
Part V: Capitalizing Your System and Implementation
Location 4670: Assuming that you are, by now, sufficiently convinced that this is a course of action that you would like to take, the question becomes, "How do I get started?" The most important word that comes to my mind is desire. Without it, you probably can't do it. Remember Parkinson's Law back in Part II— everyone is already spending all financial resources on what he thinks is best. There has got to be some honest introspection at this point and a commitment to "get out of financial prison" must be a burning passion.
Location 4674: This is going to require a change in priorities in life and recognizing that controlling the banking function personally is the most important thing that can be done in your financial world. I strongly recommend that you find a life insurance agent that is thoroughly familiar with The Infinite Banking Concept to act as your coach. In all probability such an agent will be thoroughly familiar with questionnaires that will help you find out just how you are spending money now and show you ways to re-direct that cash flow to build your banking system. Above all, you must be patient. It is going to take years to get started—and it needs to be a lifetime commitment.
Location 4682: Organize (or join one already in existence) a "wealth club" that meets periodically. Here, you have the support of others that are working their way out of darkness. Be sure to include members that already have a good track record in practicing the principles of The Infinite Banking Concept. This is important because you need to surround yourself with others of like-minded understanding. You don't want to become a victim of feeling that you are "the lone ranger." We all need the nourishment of a favorable environment. No one elevates himself much above the environment in which he operates. Above all , get started now. The longer you wait, the more you have penalized yourself. Review the first four parts of this book regularly . If you know what is happening, you will know what to do.
Chapter 14: The Retirement Trap!
Location 4705: A thought had been working in my mind for several years and I finally got around to putting it on paper. It was 1976— the so-called Bi-Centennial Year— and I penned these words on my birthday and put them into my personal file for posterity. "Social Security will fall, as have all socialist programs since time began. Before it falls, they will attempt to prop it up. The source of funds that they will use is the reserves of private pension plans and other government sanctioned schemes."
Location 4728: When government creates a problem (read onerous taxation) and then turns around and creates an exception to the problem they created (read tax-sheltered retirement plans, etc.) aren't you just a little bit suspicious that you are being manipulated?
Location 4762: W. Edward Deming's Idea of Quality And, then, consider the case of W. Edward Deming, the business consultant who taught the Japanese the idea of "quality."He went to Japan in 1950 and changed their world as a result of his teachings. When he came back to America many years later he became the darling of the business world—and rightly so. Deming died at age 93, still lecturing on The Fourteen Points that made him famous. They are as follows:
The Fourteen Points:
- Create constancy of purpose.
- Adopt a new philosophy.
- End the practice of purchasing at lowest prices.
- Institute leadership.
- Eliminate empty slogans.
- Eliminate numerical quotas.
- Institute on-the-job training.
- Drive out fear.
- Break down barriers between departments.
- Take action to accomplish the transformation.
- Improve constantly and forever the process of production and service.
- Cease dependence on mass inspection.
- Remove barriers to pride of workmanship.
- Retrain vigorously.
The Seven Deadly Sins:
- Lack of constancy of purpose.
- Emphasizing short-term profits and immediate dividends.
- Evaluation of performance, merit rating, or annual review.
- Mobility of top management.
- Running a company only on visible figures.
- Excessive medical costs.
- Excessive costs of warranty.
Chapter 16: "But, I Can Get a Higher Rate of Return"
Location 4822: When first exposed to the rationale of The Infinite Banking Concept a person will almost always think—and often voice the thought, "but I can get a higher rate of return by investing in _________________." Unfortunately, that person has not understood the message! We are not addressing the yield of an investment— we are discussing how you finance anything that you buy. It is always better to finance it through your banking system than out of your pocket.
Chapter 17: An Even Distribution of Age Classes
There are a number of significant advantages to this plan:
- It covers multiple generations— promotes long range planning.
- Underwriting problems are minimized.
- Tax-free build-up of cash values over a long period of time.
- Outlay is very small compared with the ultimate yield.
- Generation paying the premiums can most easily afford them.
- When death benefit occurs, the system becomes self-sustaining.
- Precludes any need for Social Security.
- Passive income is assured.
- Estate planning is greatly simplified.
- Wealth "mentality" is transferred to succeeding generations over a long period of time to produce consistent understanding. They are learning a process—not buying a product.
- Promotes the understanding of what stewardship is all about. Money won't buy happiness— but poor stewardship of money will steal happiness.
Chapter 18: A Different Look at the Monetary Value of a College Degree
Location 5697: Some thirty-six years ago, when I was just getting established in the Life Insurance business we were, of course, all thoroughly indoctrinated with "needs"selling. One of those "needs"was funding for college education for the client's children. It was all assumed that the children would go to college. If there was any question as to the value in monetary terms of doing so, we were taught to point out "how much more the average college educated child would earn over a lifetime of work compared with the average child who did not get the college degree."
Location 5702: First of all, I have the distinct feeling that the college degree is extremely over-rated in its value. Witness the number of people you know who have a degree and, thus, feel that they are educated but other than the degree there is very little evidence of the fact.
Location 5712: Dr. Herbert Rotfeld's commentary on higher education is a pretty strong statement about the condition of "higher education"in America. And people are paying ever-increasing college costs to get a degree that is becoming less valuable. One of these days the consumers are going to wise up to the fact they have been conned and the "house of cards"is going to come crashing down. When the perceived value of anything has no real basis, a return to reality is inevitable.
Location 5716: A lot of the idea that everybody needs a college education has its roots in the period just after WWII with the advent of the GI Bill. Here came the huge number of "students" to get their degrees, when the major reason for this event was the fear of government powers that "all these servicemen returning to civilian life are going to wreck the economy. We have to do something with them." Since that time Parkinson's Law has taken effect—a luxury once enjoyed , becomes a necessity. And so, now the cry is that "everybody deserves a college education!" Please notice that the cost of doing so has risen much faster than inflation in the rest of the economy.
Location 5761: First, I assumed that the usual cost of the college degree is $20,000 per year for four years. From what information I can gather that seems to be the case. So I used this same figure to put into a high-premium policy, in this case $6,500 to a base Life Paid-Up at 65 policy plus $13,500 into a Paid-Up Additions Rider on an 18 year old male. This premium total of $20,000 was used to pay four annual premiums of $20,000 each. After the four years dividends were used to pay the base premium for the duration of the policy— the classical "premium offset" illustration— and so there was no further outlay. Next, I assumed the Insured retired at age 70 (I no longer let people get away with the assumption of age 65 for retirement. It is just not going to work in the future) and surrendered dividend credits from that point on. Based on the current dividend scale of this company the cash values at age 70 were illustrated to be $2,457,303. Withdrawing dividend credits alone of $145,000 per year for retirement purposes could be sustained indefinitely. And assuming the Insured lived until age 85 means that he had withdrawn an income total of $2,175,000. If he died at that time the projected death benefit is $3,279,018.
Chapter 20: Points to Consider
- There are only two sources of income—people at work and money at work. In the typical American family, through the first half of the Twentieth Century, the father worked outside the home and the mother managed the home, nurturing the family and instilling spiritual values as the children matured. Now it is widely accepted that "a family can't make it without both spouses working outside the home. It takes two incomes just to make ends meet. "Could it be a fact that this modern family has no money at work?
- If you knew, at passive income time, that you would be getting back everything that you paid into a system—tax free—would you object to putting more money in it?
- When you get paid for your work, you put all of it into "someone else's bank"and then write checks from the account to buy the things of life. So, "someone else's bank"gets all of your money. If you owned a banking system, wouldn't you want to run all of your business through your bank? If this is so, then life insurance premiums paid each year should ultimately equal annual income. This can' be done immediately. It will take the average person about twenty years to reach this level. If this message is taught to succeeding generations, then a perpetual banking system can be achieved.
- When government creates a problem (onerous taxation) and then turns around and grants you an exception to the problem they created (any tax qualified plan) aren't you just a little bit suspicious that you are being manipulated? Tax-qualified retirement plans were all created under the guise of "giving you a break."First, there were pension plans for corporate employees, and then came HR-10 plans for partners and sole proprietors, and finally, IRA's for individuals. Now everyone "had an exception" to the IRS Code. If the government really wanted to "give you a break" —all they had to do is cut out the taxes! Do you really think they want to do that?
- Wealth has got to reside somewhere. Where would you prefer to have it reside?
Real Estate? Then take a look around and see what happens when one needs liquidity. Real estate is very much a "frozen asset." The Stock Market? Then, try reading from my Recommended Reading for Those Interested in the Stock Market in this book. Until you have done so, are you qualified to make an intelligent decision about such action? Or, free contract with other free persons (Life Insurance)? From this base of financial operation you can do any of the other things in life that you desire.
- You finance everything you buy. You either pay interest to someone else or you give up interest you could have earned elsewhere. There are no exceptions.
- Your need for finance, during your lifetime, exceeds your need for life insurance protection. If you solve for your need for finance through life insurance cash values, you will end up with so much life insurance; you can't get it past the underwriters. You will have to insure every person in which you have an insurable interest.