What is the Infinite Banking Concept?
I present a brief introduction to what is known as “The Infinite Banking Concept,” or the “IBC” for short, from a slightly autobiographical perspective. It should help anyone who has yet to hear about the IBC.
Thanks to Kaye Lynn Peterson for her helpful comments.
Escape from Academia
I first learned about the IBC in 2016 through R. Nelson Nash’s best-selling book Becoming Your Own Banker: Unlocking the Infinite Banking Concept. That should sound bizarre, because it isn’t often that a book on personal finance has such a profound experience on its reader. But this was no ordinary book.
Nash’s book appeared on my radar by way of my discomfort with my career path in academia. I was completing my Masters degree in Economics in northern California and couldn’t think of anything better to do than Google the intellectual people I respected in order to see what else they might be doing.
I knew from his books, YouTube lectures, and articles that Professor Robert Murphy (at Texas Tech University — as of this writing) was a rigorous thinker. He wasn’t and isn’t the type of individual to become casually involved in a professional enterprise, so it surprised me to learn that he was a co-founder of something called The Nelson Nash Institute (NNI).
That Bob was involved at such a high level was reason enough for me to read what appeared to be the foundational text of the Institute. After all, Becoming Your Own Banker (terrifically abbreviated BYOB) is only 92 pages long. I read it in a night in my small room above a restaurant I worked in on weekends in Alameda, CA. As many who read BYOB report: “it clicked.”
I graduated with my Masters and moved on to doctoral study. One year into my study in a PhD program in Applied Economics at Texas Tech, I decided to make the leap from academic-in-training to a provider of the financial contracts that Nelson discusses in his book. I explain more of my background on that decision here.
A Rigorous, Worthy Idea
I’ve presented this brief autobiographical perspective to emphasize the gravity of the situation. I didn’t leave a fully-funded PhD program and a potential (likely) academic career for a “get rich quick” scheme. I saw the opportunity to make a greater difference in finance as an entrepreneur promoting the IBC.
Though I can’t convey all of the elements of the IBC in a relatively short article (you should read the book for that), I’ll present what I consider are the financial fundamentals of this concept so that you’re equipped to do further research.
The IBC is a strategy for managing cash-flow. Everyone has cash-flow, even those who don’t work (income and expenses are both cash-flows). The IBC is particularly for those with positive cash-flow, that is, people who are making more than they’re spending. It answers the question, “what do I do with the money I make that I don’t need to spend right away?” You might also say it addresses the question: “what’s the best way to save?”
Modern conventional wisdom suggests that you have two options: accumulate cash in your private possession or bank account, or invest. The IBC is a third option. It’s for people who want to do more than keep cash at home or in the bank, to complement their investing, and (importantly) to address their need for financing — i.e. credit, loans, capital — purchases throughout life.
It works like this. You purchase a particular kind of life insurance that’s designed in a specific way. It’s called dividend-paying whole life insurance. The specific design has to do with the relative levels of the two types of premium you can pay towards this type of life insurance.
These premium levels are set so that the policy owner builds what is called cash surrender value (or just cash value) much faster than he would with a policy without any special design. This cash value is effectively equity similar to that you might build in a house.
This cash value (equity) can be used as collateral to take out loans from the insurance company. These loans are called policy loans. The power of IBC is in the dynamics between the cash value and policy loans.
Policy loans are an extremely unique type of debt. There are no lengthy applications, additional collateral assignments, or restrictions on the use of the borrowed funds. The use of policy loans does not impact the continual growth of the cash value. In fact, the cash value is guaranteed to grow every year until the death of the insured. Furthermore, all of the cash value growth is tax-deferred (so there is no tax on the “build-up”) and policy loans against that cash value are tax-free (let that sink in for a minute).
There is no magic here. You should repay the loans you take out and when you do, you will pay interest to the insurance company. And if you don’t repay the loans then that interest will compound. If you (or whoever the insured party is) pass away before repaying the loans, then the balance of the loan is deducted from the death benefit before it is sent to the beneficiary. Interest payments on policy loans received by the company contribute to the company’s overall financial performance, which policy owners (who are also company owners) participate in through the receipt of annual dividends.
Say that again?
Let’s review. The IBC is a strategy to optimally manage savings though one or more dividend-paying whole life insurance policies. These policies are custom-built so that they build up equity (cash value) early in the life of the policy — like within days. This equity grows guaranteed and can be leveraged through policy loans that have extremely favorable — incomparably favorable, in fact — conditions for the policy owner. Because we are talking about life insurance, the equity growth and the policy loans are uniquely tax-favored compared to other financial instruments.
What these technical dynamics mean is that the IBC is the best way to build capital — an idea I expand on in this article.
The numerous, robust features of whole life policies in general and especially those that are designed to build high cash value (as you do with the IBC) are so good that Congress, encouraged by special lobbying interests from within the financial industry, had to try and diminish their strength. This resulted in regulations in the 1980s that complicate the construction of IBC policies. However, the power of the Concept and of whole life insurance as I’ve explained above persists. It’s that good.
As you read more about the IBC (hopefully in Nelson’s book) and discuss it with your friends and family, you may come across a couple questions. I’ve dealt with some high-level criticisms of the IBC in this post, but there are a couple ground-level items to cover.
First, the IBC is not about investing. Whole life insurance is not an investment, nor does it replace investment. The only reason IBC works the way it does is because it’s implemented with whole life insurance.
Second, the IBC is not a tax-dodge scheme. Premiums are paid on a post-tax basis. However, the increase in cash value over time is not taxable. This means that the cash value growth compounds. Compounded growth is also known as exponential growth. It requires positive, consecutive increases across the entire time period examined. Remember, this growth — modest at first though it may be — is guaranteed so long as the policy owner continues to make premium payments, which makes whole life insurance the only financial asset that comes with such a positive growth guarantee.
Third, it will be no secret to an informed financial agent that some version of “banking on life insurance” is possible. When choosing someone to answer your questions about the IBC or how to use whole life insurance in this manner, consider that you wouldn’t go to a dentist to repair a broken collar bone, even though dentists and orthopedic surgeons are both doctors. Check out the NNI’s Practitioner Finder for a group of financial people that have been specifically trained to provide these policies. My own NNI profile is here. Thanks to the internet, it doesn’t really matter where you are in the country, so if you have questions and want to work with me specifically, you can just email me at firstname.lastname@example.org.