IBC: How Much Premium Should You Pay?
Episode 4823rd April 2022 • The Fifth Edition by Infinite Banking Authorized Practitioners • John Montoya, John D. Perrings
00:00:00 00:16:51

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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:

  • Schedule a free, no-obligation consultation to better understand how IBC could work for you.
  • Get access to the online course, Whole Life Insurance Fundamentals, with a 50% discount

Transcripts

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- Episode number 48.

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How much should you fund when implementing

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the Infinite Banking Concept?

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In this episode we're going to get a little quantitative,

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maybe not as quantitative as, you know

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some people would like.

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A lot of people love to look at illustrations, but, you know

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because like everything else we do in IBC

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the name of the game is about principles

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and process not numbers on the page.

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And so in this episode we're gonna talk a little bit

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what does it mean to actually

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"fund an Infinite Banking policy,"

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how to think about premium payments.

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And then we'll talk about some trade offs to consider

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when funding a new policy when you're kind of thinking

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about how much should you do.

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So let's hop in.

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- Hi everybody.

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This is John Montoya.

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- And this is John Perrings.

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- We're authorized Infinite Banking practitioners

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and hosts of The Fifth Edition.

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- Okay, let's talk about funding a policy.

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This is John Perrings here.

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Going solo again today, really missing John Montoya,

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but I'll try to, you know do the best I can here.

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And the reason we're using this topic

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is you know, just like most things we start to get a lot

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of questions from different people

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when we talk to them in consultations.

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And so that becomes, you know typically a subject

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that we'll push out on the podcast.

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So in this one it's how much should you be paying?

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And a lot of people will use terms like

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how much should I fund the policy and...

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So we're just gonna harp on some terminology

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a little bit here and talk about funding.

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You are in a sense funding a policy

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where you're funding your pool of capital

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and that's really what we're doing,

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it's a place to store cash and so we're funding

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our source of capital.

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But it's, a lot of times people use it

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because they're still using investment terminology.

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So, you know, we're not funding a,

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we're not funding an account,

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we're not funding an investment,

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you know, we're not putting money into a fund.

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What we're doing is we're paying a premium.

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And so, and this make, I think it's important

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to differentiate again, I've talked about this in the past,

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we're paying a premium and the reason

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I'm kind of harping on it is because the number one thing

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that creates cash value is the ability to pay a premium.

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And so one of the things to understand

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is when people think about funding something

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they think about taking a large lump sum

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of money and putting that into something like an investment

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and that's not what we're doing here.

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And so I'm kind of just reiterating the fact

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that we're paying a premium.

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Life insurance is very good at building a lot of value

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over a long period of time with very regular

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and predictable premium payments for that policy.

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We're buying life insurance,

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we're not funding an investment.

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So just, you know, again, kind of harping on that just

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to make sure we're all on the same page

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and we know what we're doing here.

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So, how should we start, how should we think

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about premium payments when we're kind of thinking

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about how much we should pay?

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And you know, what we're really doing is capitalizing right?

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Every time we pay premiums, we're capitalizing,

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we're adding to our strategic source of capital

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as Nelson talks about in the book

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"Becoming Your Own Banker."

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So if you still haven't read that,

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which a lot of people will book appointments with us

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not having read, "Becoming Your Own Banker."

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And you know, I'm not trying to shame anyone

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or anything like that, but it's the source material.

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So you can, you know, watch all the YouTube videos you want

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and get a half of an education or get some information

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that's, you know either not complete

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or maybe even inaccurate, or you can just read

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"Becoming Your Own Banker.

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It's a 90 page book.

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Most people I think can do that.

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So that's where you should be starting.

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We are strategically accumulating capital

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and we're using a cash asset, which is life insurance

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that has benefits that no other cash asset has.

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And so we should be thinking about life insurance

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as a place to store cash.

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And therefore it's kind of like,

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well how much cash do you wanna store?

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That's the question in terms of, you know

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the amount of premiums you should be paying.

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So I'll ask this question.

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If you've ever been on a consultation with me

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I've probably asked you this, but if you had a place

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to put money that grew 40 times what it would grow

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if you kept it at a bank, that growth was tax deferred

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but accessible tax free.

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It was liquid, right, has the same liquidity as a bank,

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provided contractual leverage with guarantees

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on the underlying collateral in the form

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of a no questions asked policy loan provision,

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had creditor protection that's different depending

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on what state you're in but in general

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much better creditor protection than anything else,

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allows for strategies to reduce taxes and increase

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the income generated on other assets, right?

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So if you had all those things would you wanna put

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just a little bit of money there or would you wanna put

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as much as you could?

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And so that's sort of the thought exercise of the day.

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The question is really, you know, how much should you pay?

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It's really, how much do you wanna save

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and how much do you wanna save in a place

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that has all of those benefits that I just mentioned.

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So, that being said it's kind of like,

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okay, that's all great.

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So how much should I pay, right?

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So it's like, I get it.

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You know, we wanna have some answers

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and the thing is it's very individual

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and I'm gonna tell you why.

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There are some general guidelines we could use

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and it gets into what I've talked about before

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with scheduled premium and unscheduled premium.

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And by the way, this was in episode 46,

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dealing with large lump sums.

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And, you know IBC policies typically have some flexibility

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regarding the premium amounts built into the design, right?

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So if you think about the premium amount

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that is regularly scheduled to be paid

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on a monthly or a yearly basis, think of that

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as the amount that you would commit to saving.

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And so, you know, you could use different rules of thumb.

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Like some people say, well you should take 20%

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of your income and save that, right?

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So maybe it's 20% of your income.

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You know, maybe it's 10%, maybe it's 30%, right.

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But you know, there are some rules of thumb

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in what you save out there.

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So maybe that could be where you start

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in thinking about this.

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But the other way we wanna think of it is

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because there's this leeway a little bit

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you've got sort of a minimum and a maximum

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that's the flexibility that's built into the premium

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when we're designing policies with infinite banking in mind.

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So what that means is you, so you've got

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your scheduled premium.

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You could go down a little bit if you needed to

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and you could also pay more into it

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if you needed to pay more in premium.

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And this causes some people to try to like game

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the system a little bit, not game it,

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but it's not a nefarious thing.

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It's just, like for example, they'll say, well

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if I could pay this but I could go down to this

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maybe what I'll do is I'll pay this

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even though it might be a little bit above

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my comfort zone because I'll just scale

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down to the minimum if I need to.

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And that's understandable but what happens is

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it may not be sustainable.

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And so what people have to understand is

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especially in the early years,

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if you are using the Paid Up Additions writer

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and you scale down to kind of the base minimum

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of the policy, what you're actually gonna do

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is you're gonna stop paying the PUA portion of that

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and that's going to significantly affect

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your cash value growth, especially in the early years.

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And so that policy may no longer perform

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the way you want to if you end up having to do that.

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So in that case what I'd recommend

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is scaling down the overall premium

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and just pay the scheduled premium

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that's comfortable and sustainable for you.

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I mean, it should be, you know, as much as you can

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but it has to be sustainable, right?

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It has to be something that you would think, okay

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I can do this for 20, 30 years,

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whatever the length of time is.

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The other side of that is sometimes people will say,

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well, I'll just I'll, I actually could pay more

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but I'll just schedule this little bit of money,

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relatively speaking, a smaller amount of money

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as my scheduled premium knowing that I can put more into it

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but now I'm not tied to it.

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And I totally get that.

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I get that.

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But what ends up happening is usually people

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start to you know, when they first start a policy

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they don't yet realize what it can do for them.

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And so I have quite a few clients right now

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that wish they could pay more in premium

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but they're a little bit limited.

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And so what's going to happen with the,

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they're limited to the kind of the modified

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endowment contract limits that are set by the IRS.

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So, they started smaller but now they see

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what they can do with it so they wanna fund more.

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So now they're kind of maxing out their policy

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and it's not really even hitting

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the limit of what they could fund it.

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And so what's gonna happen is they're going

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to end up having to pay up the policy sooner

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than what they had anticipated

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which is not, you know the end of the world.

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But now they're going to if they wanna keep having

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this great place to put cash,

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now they're gonna have to qualify for another policy

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and we just don't know what, we don't know

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what that's gonna look like in the future.

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You know, sometimes we become uninsurable.

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And then now, also now we're going to have a new policy

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that we have to overcome that capitalization period

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all over again.

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So, what I try to recommend is like, let's come up

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with an amount that you can commit to

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for a long period of time and let's make that

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the scheduled premium.

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And then if anything happens and anything happens outside

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of the norm, you need to go down for a little bit of time,

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we can do that.

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And if, and now you also have room to go up

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if you run into some money you have some kind of a windfall.

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So it's really kind of about sustainability

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of the overall process of infinite banking, right?

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So there's no you know, right answer.

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You know, like sometimes people will well,

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what do people normally pay?

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And it's like, well it doesn't really matter

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what other people are paying.

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What matters is what's right for you.

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So another trade off to consider, you know

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we talked about dealing with lump sums again in episode 46.

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Sometimes people will want to, you know

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have that scheduled premium and then maybe put

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an additional lump sum in the beginning of the policy.

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And so some things to consider there are

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how is that going to affect your liquidity, right?

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So thinking in terms of an emergency fund.

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So everyone should have an emergency fund, right?

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If COVID taught us anything, it's that maybe

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it wouldn't be a such a bad idea

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to have a year's worth of income saved

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and liquid so that you can access it

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if things, you know, really go sideways.

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And so the thing we wanna pay attention to

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when we're thinking of amounts of how much premium

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we should pay, is the money you're going to use to pay

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especially those early premiums,

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is that going to affect your emergency fund at all?

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Because remember in the early years of the policy

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we don't have as much cash value

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as what we've paid in premium.

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So I'm gonna say some numbers here with great trepidation

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because I know there's some people out there

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that are really focused on, you know, ratios of base to PUA.

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Don't get hung up on these numbers.

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I'm just gonna do it to make it simple.

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Let's just say there's a 50% base and 50% PUA.

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And man, I know some people are just like being like,

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hey, it's supposed to be 90/10.

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Maybe, maybe not and I'll talk a little bit

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about that here in a second but let's just say it's 50/50.

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And if you pay, let's just say a $20,000 premium.

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Well, in that first year you're only gonna

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have about $10,000 of cash value, right?

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So if that's your emergency fund,

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you just cut your emergency fund in half, right,

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the liquidity of your emergency fund.

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Now over the long term it's gonna be a great move

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because it's going to, you know grow again

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much more than it would grow in a bank.

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But in the short term, if that's your emergency fund,

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that can create some pretty serious liquidity issues

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if you ever had an emergency and needed that money.

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So those are some things to think about.

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The last thing I'll talk about is I guess that

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that whole ratio question, you know.

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There's and just going back to like personalized design

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for your life insurance policy.

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There's no such thing as like a truly personalized thing.

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Like there's only so many things you can do

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with a life insurance policy but there are quite

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a few things you can do, there are a lot of variables

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and every time you pull a lever over here

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for a design option, another lever over there goes

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up, right?

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So everything's a trade off and every are thing

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is a trade off between cost and risk.

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And we're working within the MEC limits,

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there's all kinds of variables that cause us

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to do different things with life insurance policies.

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How much you should pay is greatly dependent on

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everything else you have going on

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in your financial life, right?

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So while the, you know, if you go on YouTube,

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all these people are gonna start talking

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to you about PUA ratios.

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And if you go down that route, congratulations

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you just bought a cookie cutter life insurance policy

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and you're on your way to having a cookie cutter

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financial life.

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The reality is since everything's a trade off

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we have to consider all the other things going on

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in your financial life.

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There's no super secret way to design

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a life insurance policy that's better than others.

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There's no correctly designed life insurance policy.

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The correctly designed life insurance policy

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is what's correct for you.

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And that, when I say that what I mean is

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everything else that you have going on in your life

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is part of the equation and there's no,

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you know, one right way to design a policy.

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So that's why it's important to find an advisor

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who you like and trust.

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And if you're doing this for Infinite Banking,

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you should look at infinitebanking.org

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which is the Nelson Nash Institute's website

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and they list all the authorized IBC practitioners.

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And you can find one that you like and trust

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and you can work with them and just trust them

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to design the way that makes the most sense for you

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and that's really the number one thing

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you should be looking at.

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So I hope this was helpful for everyone.

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Again, if you have any questions

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about how this could, you know, impact you

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in your current situation, feel free

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to go to the fifthedition.com.

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You schedule an appointment right there

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with us for an initial no cost consultation.

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And I also have a online course available

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at thefifthedition.com where you can get a 50% discount

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whole life insurance fundamentals

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and it's really for those of you looking

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at whole life insurance.

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It's really kind of a general whole life insurance course

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but also hits on a lot of the topics

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that we talk about for Infinite Banking.

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So it's a great thing if you're one of those people

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that likes to, you know do all the learning beforehand,

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before talking to someone, this course is exactly for you.

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So thanks again.

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Looking forward to getting back with John Montoya

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on the next episode and we'll see you then.

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