A question we are often asked by new clients, just starting their IBC journey is "how much should I fund a policy?" Or "How much does it cost?"
Whole life insurance, for the purposes of implementing the Infinite Banking Concept®, is about capitalizing (aka, storing cash).
So the real question should be: "How much do you want to save?"
When looked at in this way, we start to see that whole life insurance premiums are not a cost at all.
Questions? Head over to TheFifthEdition.com where you can:
- Episode number 48.
Speaker:How much should you fund when implementing
Speaker:the Infinite Banking Concept?
Speaker:In this episode we're going to get a little quantitative,
Speaker:maybe not as quantitative as, you know
Speaker:some people would like.
Speaker:A lot of people love to look at illustrations, but, you know
Speaker:because like everything else we do in IBC
Speaker:the name of the game is about principles
Speaker:and process not numbers on the page.
Speaker:And so in this episode we're gonna talk a little bit
Speaker:what does it mean to actually
Speaker:"fund an Infinite Banking policy,"
Speaker:how to think about premium payments.
Speaker:And then we'll talk about some trade offs to consider
Speaker:when funding a new policy when you're kind of thinking
Speaker:about how much should you do.
Speaker:So let's hop in.
Speaker:- Hi everybody.
Speaker:This is John Montoya.
Speaker:- And this is John Perrings.
Speaker:- We're authorized Infinite Banking practitioners
Speaker:and hosts of The Fifth Edition.
Speaker:- Okay, let's talk about funding a policy.
Speaker:This is John Perrings here.
Speaker:Going solo again today, really missing John Montoya,
Speaker:but I'll try to, you know do the best I can here.
Speaker:And the reason we're using this topic
Speaker:is you know, just like most things we start to get a lot
Speaker:of questions from different people
Speaker:when we talk to them in consultations.
Speaker:And so that becomes, you know typically a subject
Speaker:that we'll push out on the podcast.
Speaker:So in this one it's how much should you be paying?
Speaker:And a lot of people will use terms like
Speaker:how much should I fund the policy and...
Speaker:So we're just gonna harp on some terminology
Speaker:a little bit here and talk about funding.
Speaker:You are in a sense funding a policy
Speaker:where you're funding your pool of capital
Speaker:and that's really what we're doing,
Speaker:it's a place to store cash and so we're funding
Speaker:our source of capital.
Speaker:But it's, a lot of times people use it
Speaker:because they're still using investment terminology.
Speaker:So, you know, we're not funding a,
Speaker:we're not funding an account,
Speaker:we're not funding an investment,
Speaker:you know, we're not putting money into a fund.
Speaker:What we're doing is we're paying a premium.
Speaker:And so, and this make, I think it's important
Speaker:to differentiate again, I've talked about this in the past,
Speaker:we're paying a premium and the reason
Speaker:I'm kind of harping on it is because the number one thing
Speaker:that creates cash value is the ability to pay a premium.
Speaker:And so one of the things to understand
Speaker:is when people think about funding something
Speaker:they think about taking a large lump sum
Speaker:of money and putting that into something like an investment
Speaker:and that's not what we're doing here.
Speaker:And so I'm kind of just reiterating the fact
Speaker:that we're paying a premium.
Speaker:Life insurance is very good at building a lot of value
Speaker:over a long period of time with very regular
Speaker:and predictable premium payments for that policy.
Speaker:We're buying life insurance,
Speaker:we're not funding an investment.
Speaker:So just, you know, again, kind of harping on that just
Speaker:to make sure we're all on the same page
Speaker:and we know what we're doing here.
Speaker:So, how should we start, how should we think
Speaker:about premium payments when we're kind of thinking
Speaker:about how much we should pay?
Speaker:And you know, what we're really doing is capitalizing right?
Speaker:Every time we pay premiums, we're capitalizing,
Speaker:we're adding to our strategic source of capital
Speaker:as Nelson talks about in the book
Speaker:"Becoming Your Own Banker."
Speaker:So if you still haven't read that,
Speaker:which a lot of people will book appointments with us
Speaker:not having read, "Becoming Your Own Banker."
Speaker:And you know, I'm not trying to shame anyone
Speaker:or anything like that, but it's the source material.
Speaker:So you can, you know, watch all the YouTube videos you want
Speaker:and get a half of an education or get some information
Speaker:that's, you know either not complete
Speaker:or maybe even inaccurate, or you can just read
Speaker:"Becoming Your Own Banker.
Speaker:It's a 90 page book.
Speaker:Most people I think can do that.
Speaker:So that's where you should be starting.
Speaker:We are strategically accumulating capital
Speaker:and we're using a cash asset, which is life insurance
Speaker:that has benefits that no other cash asset has.
Speaker:And so we should be thinking about life insurance
Speaker:as a place to store cash.
Speaker:And therefore it's kind of like,
Speaker:well how much cash do you wanna store?
Speaker:That's the question in terms of, you know
Speaker:the amount of premiums you should be paying.
Speaker:So I'll ask this question.
Speaker:If you've ever been on a consultation with me
Speaker:I've probably asked you this, but if you had a place
Speaker:to put money that grew 40 times what it would grow
Speaker:if you kept it at a bank, that growth was tax deferred
Speaker:but accessible tax free.
Speaker:It was liquid, right, has the same liquidity as a bank,
Speaker:provided contractual leverage with guarantees
Speaker:on the underlying collateral in the form
Speaker:of a no questions asked policy loan provision,
Speaker:had creditor protection that's different depending
Speaker:on what state you're in but in general
Speaker:much better creditor protection than anything else,
Speaker:allows for strategies to reduce taxes and increase
Speaker:the income generated on other assets, right?
Speaker:So if you had all those things would you wanna put
Speaker:just a little bit of money there or would you wanna put
Speaker:as much as you could?
Speaker:And so that's sort of the thought exercise of the day.
Speaker:The question is really, you know, how much should you pay?
Speaker:It's really, how much do you wanna save
Speaker:and how much do you wanna save in a place
Speaker:that has all of those benefits that I just mentioned.
Speaker:So, that being said it's kind of like,
Speaker:okay, that's all great.
Speaker:So how much should I pay, right?
Speaker:So it's like, I get it.
Speaker:You know, we wanna have some answers
Speaker:and the thing is it's very individual
Speaker:and I'm gonna tell you why.
Speaker:There are some general guidelines we could use
Speaker:and it gets into what I've talked about before
Speaker:with scheduled premium and unscheduled premium.
Speaker:And by the way, this was in episode 46,
Speaker:dealing with large lump sums.
Speaker:And, you know IBC policies typically have some flexibility
Speaker:regarding the premium amounts built into the design, right?
Speaker:So if you think about the premium amount
Speaker:that is regularly scheduled to be paid
Speaker:on a monthly or a yearly basis, think of that
Speaker:as the amount that you would commit to saving.
Speaker:And so, you know, you could use different rules of thumb.
Speaker:Like some people say, well you should take 20%
Speaker:of your income and save that, right?
Speaker:So maybe it's 20% of your income.
Speaker:You know, maybe it's 10%, maybe it's 30%, right.
Speaker:But you know, there are some rules of thumb
Speaker:in what you save out there.
Speaker:So maybe that could be where you start
Speaker:in thinking about this.
Speaker:But the other way we wanna think of it is
Speaker:because there's this leeway a little bit
Speaker:you've got sort of a minimum and a maximum
Speaker:that's the flexibility that's built into the premium
Speaker:when we're designing policies with infinite banking in mind.
Speaker:So what that means is you, so you've got
Speaker:your scheduled premium.
Speaker:You could go down a little bit if you needed to
Speaker:and you could also pay more into it
Speaker:if you needed to pay more in premium.
Speaker:And this causes some people to try to like game
Speaker:the system a little bit, not game it,
Speaker:but it's not a nefarious thing.
Speaker:It's just, like for example, they'll say, well
Speaker:if I could pay this but I could go down to this
Speaker:maybe what I'll do is I'll pay this
Speaker:even though it might be a little bit above
Speaker:my comfort zone because I'll just scale
Speaker:down to the minimum if I need to.
Speaker:And that's understandable but what happens is
Speaker:it may not be sustainable.
Speaker:And so what people have to understand is
Speaker:especially in the early years,
Speaker:if you are using the Paid Up Additions writer
Speaker:and you scale down to kind of the base minimum
Speaker:of the policy, what you're actually gonna do
Speaker:is you're gonna stop paying the PUA portion of that
Speaker:and that's going to significantly affect
Speaker:your cash value growth, especially in the early years.
Speaker:And so that policy may no longer perform
Speaker:the way you want to if you end up having to do that.
Speaker:So in that case what I'd recommend
Speaker:is scaling down the overall premium
Speaker:and just pay the scheduled premium
Speaker:that's comfortable and sustainable for you.
Speaker:I mean, it should be, you know, as much as you can
Speaker:but it has to be sustainable, right?
Speaker:It has to be something that you would think, okay
Speaker:I can do this for 20, 30 years,
Speaker:whatever the length of time is.
Speaker:The other side of that is sometimes people will say,
Speaker:well, I'll just I'll, I actually could pay more
Speaker:but I'll just schedule this little bit of money,
Speaker:relatively speaking, a smaller amount of money
Speaker:as my scheduled premium knowing that I can put more into it
Speaker:but now I'm not tied to it.
Speaker:And I totally get that.
Speaker:I get that.
Speaker:But what ends up happening is usually people
Speaker:start to you know, when they first start a policy
Speaker:they don't yet realize what it can do for them.
Speaker:And so I have quite a few clients right now
Speaker:that wish they could pay more in premium
Speaker:but they're a little bit limited.
Speaker:And so what's going to happen with the,
Speaker:they're limited to the kind of the modified
Speaker:endowment contract limits that are set by the IRS.
Speaker:So, they started smaller but now they see
Speaker:what they can do with it so they wanna fund more.
Speaker:So now they're kind of maxing out their policy
Speaker:and it's not really even hitting
Speaker:the limit of what they could fund it.
Speaker:And so what's gonna happen is they're going
Speaker:to end up having to pay up the policy sooner
Speaker:than what they had anticipated
Speaker:which is not, you know the end of the world.
Speaker:But now they're going to if they wanna keep having
Speaker:this great place to put cash,
Speaker:now they're gonna have to qualify for another policy
Speaker:and we just don't know what, we don't know
Speaker:what that's gonna look like in the future.
Speaker:You know, sometimes we become uninsurable.
Speaker:And then now, also now we're going to have a new policy
Speaker:that we have to overcome that capitalization period
Speaker:all over again.
Speaker:So, what I try to recommend is like, let's come up
Speaker:with an amount that you can commit to
Speaker:for a long period of time and let's make that
Speaker:the scheduled premium.
Speaker:And then if anything happens and anything happens outside
Speaker:of the norm, you need to go down for a little bit of time,
Speaker:we can do that.
Speaker:And if, and now you also have room to go up
Speaker:if you run into some money you have some kind of a windfall.
Speaker:So it's really kind of about sustainability
Speaker:of the overall process of infinite banking, right?
Speaker:So there's no you know, right answer.
Speaker:You know, like sometimes people will well,
Speaker:what do people normally pay?
Speaker:And it's like, well it doesn't really matter
Speaker:what other people are paying.
Speaker:What matters is what's right for you.
Speaker:So another trade off to consider, you know
Speaker:we talked about dealing with lump sums again in episode 46.
Speaker:Sometimes people will want to, you know
Speaker:have that scheduled premium and then maybe put
Speaker:an additional lump sum in the beginning of the policy.
Speaker:And so some things to consider there are
Speaker:how is that going to affect your liquidity, right?
Speaker:So thinking in terms of an emergency fund.
Speaker:So everyone should have an emergency fund, right?
Speaker:If COVID taught us anything, it's that maybe
Speaker:it wouldn't be a such a bad idea
Speaker:to have a year's worth of income saved
Speaker:and liquid so that you can access it
Speaker:if things, you know, really go sideways.
Speaker:And so the thing we wanna pay attention to
Speaker:when we're thinking of amounts of how much premium
Speaker:we should pay, is the money you're going to use to pay
Speaker:especially those early premiums,
Speaker:is that going to affect your emergency fund at all?
Speaker:Because remember in the early years of the policy
Speaker:we don't have as much cash value
Speaker:as what we've paid in premium.
Speaker:So I'm gonna say some numbers here with great trepidation
Speaker:because I know there's some people out there
Speaker:that are really focused on, you know, ratios of base to PUA.
Speaker:Don't get hung up on these numbers.
Speaker:I'm just gonna do it to make it simple.
Speaker:Let's just say there's a 50% base and 50% PUA.
Speaker:And man, I know some people are just like being like,
Speaker:hey, it's supposed to be 90/10.
Speaker:Maybe, maybe not and I'll talk a little bit
Speaker:about that here in a second but let's just say it's 50/50.
Speaker:And if you pay, let's just say a $20,000 premium.
Speaker:Well, in that first year you're only gonna
Speaker:have about $10,000 of cash value, right?
Speaker:So if that's your emergency fund,
Speaker:you just cut your emergency fund in half, right,
Speaker:the liquidity of your emergency fund.
Speaker:Now over the long term it's gonna be a great move
Speaker:because it's going to, you know grow again
Speaker:much more than it would grow in a bank.
Speaker:But in the short term, if that's your emergency fund,
Speaker:that can create some pretty serious liquidity issues
Speaker:if you ever had an emergency and needed that money.
Speaker:So those are some things to think about.
Speaker:The last thing I'll talk about is I guess that
Speaker:that whole ratio question, you know.
Speaker:There's and just going back to like personalized design
Speaker:for your life insurance policy.
Speaker:There's no such thing as like a truly personalized thing.
Speaker:Like there's only so many things you can do
Speaker:with a life insurance policy but there are quite
Speaker:a few things you can do, there are a lot of variables
Speaker:and every time you pull a lever over here
Speaker:for a design option, another lever over there goes
Speaker:up, right?
Speaker:So everything's a trade off and every are thing
Speaker:is a trade off between cost and risk.
Speaker:And we're working within the MEC limits,
Speaker:there's all kinds of variables that cause us
Speaker:to do different things with life insurance policies.
Speaker:How much you should pay is greatly dependent on
Speaker:everything else you have going on
Speaker:in your financial life, right?
Speaker:So while the, you know, if you go on YouTube,
Speaker:all these people are gonna start talking
Speaker:to you about PUA ratios.
Speaker:And if you go down that route, congratulations
Speaker:you just bought a cookie cutter life insurance policy
Speaker:and you're on your way to having a cookie cutter
Speaker:financial life.
Speaker:The reality is since everything's a trade off
Speaker:we have to consider all the other things going on
Speaker:in your financial life.
Speaker:There's no super secret way to design
Speaker:a life insurance policy that's better than others.
Speaker:There's no correctly designed life insurance policy.
Speaker:The correctly designed life insurance policy
Speaker:is what's correct for you.
Speaker:And that, when I say that what I mean is
Speaker:everything else that you have going on in your life
Speaker:is part of the equation and there's no,
Speaker:you know, one right way to design a policy.
Speaker:So that's why it's important to find an advisor
Speaker:who you like and trust.
Speaker:And if you're doing this for Infinite Banking,
Speaker:you should look at infinitebanking.org
Speaker:which is the Nelson Nash Institute's website
Speaker:and they list all the authorized IBC practitioners.
Speaker:And you can find one that you like and trust
Speaker:and you can work with them and just trust them
Speaker:to design the way that makes the most sense for you
Speaker:and that's really the number one thing
Speaker:you should be looking at.
Speaker:So I hope this was helpful for everyone.
Speaker:Again, if you have any questions
Speaker:about how this could, you know, impact you
Speaker:in your current situation, feel free
Speaker:to go to the fifthedition.com.
Speaker:You schedule an appointment right there
Speaker:with us for an initial no cost consultation.
Speaker:And I also have a online course available
Speaker:at thefifthedition.com where you can get a 50% discount
Speaker:whole life insurance fundamentals
Speaker:and it's really for those of you looking
Speaker:at whole life insurance.
Speaker:It's really kind of a general whole life insurance course
Speaker:but also hits on a lot of the topics
Speaker:that we talk about for Infinite Banking.
Speaker:So it's a great thing if you're one of those people
Speaker:that likes to, you know do all the learning beforehand,
Speaker:before talking to someone, this course is exactly for you.
Speaker:So thanks again.
Speaker:Looking forward to getting back with John Montoya
Speaker:on the next episode and we'll see you then.