The Infinite Banking Concept Unraveled
By Christopher Levarek
“Take a pail of water to the seaside and heat it to 210 degrees Fahrenheit and all you have is very hot water. But if you heat it up to 212 degrees Fahrenheit you have live steam with unbelievable power!”
- Nelson Nash
As an investor I am always exploring concepts of investing and methods of diversifying investments throughout a portfolio. One such concept which is not new but is most often misunderstood and even unheard of is what is called IBC or the “Infinite Banking Concept”.
This concept or methodology gained notoriety from R. Nelson Nash but closely parallels normal banking concepts by traditional banks with one major difference, it allows the investor to become the bank.
Imagine being able to realize the full advantages of a bank. Save capital, earn interest, loan capital, earn interest, loan other’s capital, earn interest and compound earnings at an ever increasing rate. This is the idea behind IBC and one which we will dive into today.
What is IBC?
The Infinite Banking Concept as explained by R. Nelson Nash in “Becoming Your Own Banker” is a method whereby an earner or investor can put money into a pool of funds which earns interest or receive dividends and to which they are able to access when needed.
Deposits are made continuously, dividends are earned on the capital and loans can be taken upon the capital which earns interest adding to the pool of funds.
Additionally, any investments made with the loans on the capital feed back into the pool if so desired and can 10x the cash growth.
Thus the capital grows continuously versus simply at a fixed savings interest rate with a traditional savings account for example. This is all done with what is called whole life insurance policy.
What is Whole Life Insurance?
Whole Life Insurance is an insurance policy similar to the more commonly known Term Life Insurance polices which provides a death benefit to the policy owner’s chosen beneficiaries. The main difference is that term life insurance is set for a specific term, ie. 20 years for example; after which a new policy must be created.
Whole Life Insurance can cover an individual at the same premium or payment for “life” without needing adjustment or renewing of the policy. There are varying kinds of policies even in Whole Life. However, this the idea, pay a consistent premium into a pool of funds with a life insurance policy company which provides a death benefit to the owner or owner’s beneficiaries and other benefits.
How Does it Work?
The idea behind IBC is being able to create a pool of savings which one can use when needed however one which also takes advantage of the benefits of compound growth from interest, dividends and investments.
With Whole Life Insurance policies, owners are basically paying a premium monthly or deposit of capital into a shared pool from multiple other owners, essentially one large bank of savings. The cash value of each policy grows year over year with the deposits, dividends and interest on loans.
Dividends based on the cash value of the policy are distributed at timely increments (quarterly for example) which then supplement the cash value. As the value grows, the dividends continue to grow until at some point the dividends can even pay the premiums monthly without owner contribution.
Loans can be taken against the cash value of the policy to invest, purchase a car, business equipment or even a house! When a loan is taken, the interest from the loan goes back into the cash value of the policy and increases the cash value. Thus, instead of paying car or home or business interest to a bank, one is essentially growing their own wealth by taking the loan.
The Death Benefit continues to grow as well for a policy holder and ensures that their beneficiaries are provided for. If someone owning a policy within the shared pool of funds passes away, the death benefit is paid however a specific owner’s cash value does not decrease. It is a shared pool for that reason, contributions are moved as needed to fulfill needs of the pool of funds. Similar to how a bank loans other people’s capital to others however your value in your savings does not go down.
The insurance company follows mathematical formulas dictating what premiums should be, chances of death benefits needing fulfilled and coordinates the availability of the funds appropriately similar to a traditional bank.
In Final
The Infinite Banking Concept is one which begs further investigation. There are numerous ways to structure the policy and many more ways in which it can be utilized. It definitely is a long term strategy to which the benefits are realized over years versus in months.
We invite readers to look in to Nash’s book linked above as well as checkout Patrick Donahue’s “Heads I Win, Tails You Lose” which can be a more modern read on the subject. Or checkout this great video by David Befort, an experienced educator and practitioner of this concept, “The Infinite Banking Concept Explained”. As always, Invest Smart!