Notes:

1. The policy owner’s behavior is more critical than the behavior of the insurance company.
2. If you can’t afford to pay back a conventional loan, then you probably can’t afford to take a policy loan.
3. It’s not about interest rates, or rates of return!
4. It’s about controlling the banking function.

Infinite Banking Concepts® 2012

Todd provided this article for inclusion in Nelson Nash’s new book Building Your Warehouse of Wealth, due this summer.
Insurance companies have put numerous pages on the front of Equity Indexed Universal Life (EIUL) illustrations that describe the issues below, but most people (by design) will not take the time to read and understand what these pages are saying.  I would encourage you to read those pages thoroughly before depending on an EIUL policy to increase your assets or protect your family.  Similarly, Universal Life (UL) and its cousin Variable Universal Life (VUL) have some of the same problems so I’ve spelled out the issues below and placed an * next to the ones that are specific only to EIUL.  As stated earlier, all Universal Life policies are a side fund (money market for regular UL, mutual fund-like separate accounts for VUL, and index fund-like accounts for EIUL) plus annually renewable, or one year increasing premium term insurance for the death benefit..
#10  Internal costs are not guaranteed
#9    Mortality charges are not guaranteed
#8    Market drops cause double pain
#7    Late premiums kill any guarantees
#6    Dividends from the index don’t get credited*
#5    Participation ratios are often less than 100%*
#4    Returns are usually capped at various interest rates*
#3    Guarantees are not calculated annually*
#2    All of the above can be changed by the company
#1    The risk is shifted back to the insured
Now, let’s look at each of these individually and tell the whole truth about the matter.

10.  Internal administration fees charged against cash value on any type of Universal Life policy and shown on illustrations are run under current expense levels but those can change at the discretion of the company.  Since the insurance company uses this money to run its operations, as prices of office supplies and real estate go up, they may choose to adjust these internal costs after you have bought the policy.

9. Mortality changes, what the insurance company charges for the death benefit are removed from the cash value or paid by premiums.  In UL, these pay for annually increasing term insurance costs.  This is true for any type of UL, no matter what the side fund is invested in.  The cost for this one year term insurance can be changed at any time.

8. Market drops affect the side fund negatively no matter what the side fund is invested in.  Since the death benefit is comprised of the One Year (or annually increasing) Term Insurance plus the side fund, any market drop causes double pain.  Markets can drop regardless of whether they are supported by stocks or money markets.  When the side fund is reduced by a drop in the market or current interest rates, it now has less value so more Term Insurance must be bought to make up the difference which further reduces the side fund.  Consequently you have double pain; less cash value and higher costs.

7. Any late premiums remove any guarantees in the policy.  In most UL policies, even if the premium is finally paid, once it is late, the insurance company is off the hook for supporting any guaranteed premiums, cash value amounts or death benefits.  In many cases, the insured may not even know that a premium was late and that the guarantees have been forfeited.  Thinking about the time frame of a 50 year policy paid monthly (600 payments) ask yourself what the likelihood is of a mistake being made by the premium payer, their bank, the post office, the insurance company clerks or anyone else along the way?

6.*  Equity Indexed Universal Life policies provide the policy holder no credit for any dividends from the stocks making up the index.  The side fund of an EIUL isn’t actually invested in the index; instead the index is used to determine the gross crediting rate for the side fund.  If money were actually invested in the index, the investor would get both the change in Net Asset Value (whether up or down) AND the dividend income.  However, in the case of EIUL, only the change in value of the index is the determining factor and the dividend is left out of the calculation entirely.

5.*  Participation ratios are often less than 100%.  As mentioned directly above, the side fund is not invested directly in the index and many insurance companies only credit a certain percentage of the increase in the market.  Known as the participation ratio, this is often reported at 80% or less meaning you are getting only 80% of the increase in the market.

4.*  Capping returns in order to keep high returns in the market from crediting too much to the side fund is a strategy many insurance companies use.  The maximum return they’ll give credit for may be at a certain percentage rate even though the index may have generated a higher percentage rate.

3.*  Guaranteed minimum returns are not always calculated annually.  Most EIUL policies have a guaranteed minimum return so that if the index drops below this rate, the insurance company will still credit at the guaranteed minimum rate.  However, with some policies this guarantee is not applied annually but instead over an “indexing period” which could be 5-10 years.  So you could have negative years in the index (below the guaranteed minimum rate) which would be applied to the side fund.  This would cause a further reduction of value in excess of the guaranteed minimum rate in one particular year and as long as the overall average rate for the entire indexing period is not less than the guaranteed minimum rate, this would still count as meeting the minimum.

For example, if the minimum guaranteed rate is 2% inside a 5 year indexing period, you could have crediting rates of +13, -10, +10, -8 and +9% which would validate the promised guarantee because it would average more than 2% per year over the 5 years.  The implication is that you cannot have a negative return, but as shown in the example below, you can have a negative return as long the guarantee is not calculated annually.

You’ll notice another example below of the same interest rates, but with $100,000 of existing value instead of $10,000 per year of cash flow into the account.

2.  At the discretion of the company any of the above factors can be changed at any time for the benefit of the company even after the policy has started.  This is really one of the scariest aspects of all types of UL.  There is no way to calculate what the outcome might be.  Even if you analyzed the policy under the current structure and found it to be a viable tool, future changes could cause future problems.

1. Where as typically the point of all insurance purchased is to shift the risk from the insured to the company, all types of UL shift the risk backwards or from the insurance company to the insured.

With a mutual life insurance company, a whole life policy gives you a share of the entire profits of the company via dividends.  The carrot being sold with EIUL is that it might exceed the return of a whole life policy.  Yet this begs the question: How could the insurance company pay out more than the profits of the company and still be in business?
It has been explained to me that the insurance company buys options in the market to cover the risk of potentially having to credit any portion of high market returns in the index that exceeded their general portfolio rate to policy holder cash values.  If this was a sound investment strategy, why wouldn’t the insurance company use this strategy on their overall portfolio?  I think the insurance company knows that the stock market is going to under perform their portfolio rate over time.  This could reduce EIUL profits and increase the profits of the company, which then get distributed as dividends to whole life policy owners.
As a whole life policy owner,  I should be pleased that EIUL could contribute additional profits to the company which might increase dividends to Whole Life, my concern is that EIUL policies are going to create a detrimental effect on the life insurance industry as a whole.  I believe this may be the next major blight on the industry since under funded Universal Life (UL) so heavily promoted in the 1980’s.  The unfortunate outcome is that any negative media affects the entire industry because the media doesn’t differentiate between the new faulty products and the old tried and true whole life products that have been around for close to 200 years. As we know, the biggest danger with negative press is that is causes panic and the people will think the entire life insurance industry is bad and many perfectly structured whole life policies could get cancelled to the detriment of the policy holder and their family, just like what happened in the 1980’s.
Remember #2 above, since the insurance company has the ability to change #10- 3, they can always keep the Universal Life policies from outperforming their portfolio.  Why would I want to take the safe portion of my assets and the protection of my family and expose it to risk?  Doesn’t that defeat the whole purpose of insurance?  In my mind, I buy insurance and shift the risk to the insurance company, because they are experts at mitigating that risk and storing the cash to support it.

If you are seriously considering purchasing an EIUL product, please make sure you read and understand all the risks you and your family are assuming.  Because of the complexity and numerous moving parts for this product, many of the people selling it that I’ve spoken with don’t even understand it themselves.  For me, I prefer a number of simple, guaranteed, tried and true whole life policies.  These protect my Human Life Value and store my cash in the most efficient manner I know.

 The problem is that inflation and credit expansion always precipitates business maladjustments and malinvestments that must be later liquidated. The inevitable bust is always disastrous to the economy. For society at large, the end results are massive unemployment, recessions, and a possible collapse of the monetary system. Only now, with the current financial crises are individuals finally starting to assess how this all happens. What has surfaced as the primary cause no one would have believed during the heyday of easy credit and fast money. But slowly, over the course of recent years, the general public has finally become aware that somehow the Federal Reserve was directly responsible. And, of course, they are right.  After all, the Fed controls all of our money! The Federal Reserve, though created by the government, is nonetheless owned by private individuals and in important ways operates independently from the wishes of the government. As Austrian economist, Murray Rothbard, stated:

“The Federal Reserve, virtually in total control of the nation’s monetary system, is accountable to nobody—and this strange situation, if acknowledged at all, is invariably trumpeted as a virtue.” ¹

This startling realization, the fact that our money is not fully in our control can be immensely depressing once all of its moral and economic ramifications are fully understood. How in the world do you take away the printing press from government and the Federal Reserve once they have had full use of it all these many years? In fact, just exactly how would one go about changing such a monstrous problem?

How Privatized Banking Really Works

To answer these specific questions Robert and I wrote How Privatized Banking Really Works. It is a unique book in that it both diagnoses our nation’s economic problems, but then offers a realistic solution. Our quandary has very specific causes: fiat money and the practice of fractional reserve banking, coupled with government interventions that perpetuate them. All this we explained without the use of intimidating jargon that too often defies comprehension. The book’s overarching theme is that households do have the ability to secede from this chaotic financial system and ultimately force the upper echelons of government to make necessary monetary policy changes. In that respect, this is a book that answers the question of what one person can actually do that will make a difference in an economic environment that has gone terribly awry.

What we made clear was that the solution requires a movement that will ultimately change public opinion. However, the very first step to getting the ball rolling requires the implementation of the Infinite Banking Concept (IBC). To do this successfully one must fully grasp its meaning and see how it actually helps the individual financially. Once fully understood, this concept provides the basis for a formula with powerful turn-around dynamics. The result is a private economic enterprise that provides all of the financing capabilities to acquire cars, children’s education, retirement income and even house purchases. In an economic environment such as what we have today who would not want to know about such a concept? However, making the case for IBC is easier said than done. Today’s investing public is extremely cynical and skeptical, but there is yet another issue that can sometimes prove insurmountable— the closed mind. Many people have difficulty seeing past their preconceived ideas. Nevertheless, if we are to have any hopes of returning to sound money and returning money and banking to the competitive private sector, out of the hands of politicians and bailed-out big bankers, the public must be made to understand this very important piece of the financial solution. Here is where the financial professional who understands Austrian economics must step forward to do his part in properly explaining IBC.

One of the most compelling ways financial professionals explain the IBC concept is to compare it to one’s own private bank as Nelson Nash has done in his national best selling book, Become Your Own Banker. This is important because IBC is all about the banking business. But another way that is often used to explain IBC is to compare it to the perfect investment. Here the client is asked to list all of the attributes of the ideal investment. This exercise alone will do an incredible job of opening up the mind to the infinite possibilities if such a product existed. Although the lists may vary from client to client, the following qualities are the ones most often cited:

1. A consistent high rate of return
2. Liquidity
3. Guaranteed
4. Safe
5. Tax Free
6. No market volatility
7. Creditor Protected
8. Inflation Proof
9. Control
10. Transferable
11. Easy to manage
12. No fees or penalties
13. Reputable
14. Private

Try this exercise yourself and you will see that these are probably the top qualities you would select. In fact, a product that would contain all of these features would be too good to be true. But, when it is confirmed that all of these features are found in Whole Life, the client is stunned. It can’t be! Yet it’s true. If you can think of other qualities not listed here, the chances are pretty high that whole life has them. Furthermore, this is not an even an investment, it’s life insurance!

 Just imagine having an infrastructure with all these qualities and having full control of the asset. This is the power of IBC. The most popular investment vehicles are strong on some criteria but very weak on others. For example, gold is an excellent inflation hedge, but it does not provide a flow of income, its appreciation can be taxed as a capital gain, and the government has confiscated gold in the past. Real estate too can be quite volatile.  Stock market investments, though promising a high rate of return, also come with the risk of massive short-term losses.

The standard case for whole life insurance is that it is remarkably reliable on several of the above criteria. Even its weak points are not as bad as the critics think. In reality there is no such thing as a perfect investment, but the case for middle-to upper-income families including whole life, as part of their conservative financial plan, is quite compelling. When we supplement the standard case with Nelson’s Nash’s insights, and in particular the relationship of insurance and fractional reserve banking (as I will explain later in this article), the case for practicing IBC becomes stronger still.

In our experience, most people reject IBC out of hand because they have one or two “devastating” objections to the use of a whole life policy. The following example may help in defusing these common objections.

 Making Money

 Richard Russell has published the Dow Theory Letters since 1958. He gained wide recognition as a stock market analyst and writer for Barron’s from the late 50s through the 90s. He has also written for Time, Newsweek, Money Magazine, the New York Times and the Wall Street Journal. Recently he republished an article that he declares has been his most popular piece in 40 years of writing. It was titled Rich Man, Poor Man. In this article, Russell unveils the secret to making money.

Before telling us the secret, Russell makes an astute analysis that is worth repeating. He says that making money involves much more than predicting what the stock and bond markets will do or what fund will double over the next few years.

“For the majority of investors, making money requires a plan, self discipline and desire. I say ‘for the majority of people’ because if you are Stephen Spielberg or Bill Gates you don’t have to know about the Dow or the markets or about yields or price/earnings ratios. You’re a phenomenon in your own field, and you are going to make big money as a by-product of your talent and ability. But this kind of genius is rare.”^2.

Since we are not all geniuses, the rest of us need to rely on what Russell calls the “royal road to riches” which he defines as the power of compounding. To compound successfully you need time because compounding only works through time. But he says that the compounding process has two catches. The first is that it requires sacrifice, as Russell puts it, “you can’t spend it and still save it.” Second, compounding is b-o-r-i-n-g.  But Russell makes it a point to assure us that it is slow and boring only for the first seven or eight years and then it becomes downright fascinating! The money starts to pour in.

To emphasize the power of compounding Russell shows an extraordinary study of two investors. Investor (B) opens an IRA account at age 19. For seven consecutive periods he puts in $2,000 in his IRA at an average of 10% return (7% interest plus growth). After seven years this individual makes NO FURTHER CONTRIBUTIONS—he’s finished.

Investor (A) opens up an IRA at age 26 (this is the age when Investor (B) was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he is 65 (at the same theoretical 10% rate).

Now study the incredible results.      Investor A has 893,704.       Investor B has 930,641.

Investor B, who has made his contributions earlier and who only made seven contributions in total, ends up with MORE money than Investor A! But Investor A, who made a total of 40 contributions, only LATER in time, winds up with less money. How can that be? The difference in the two, Russell tells us, is that B had several more early years of compounding than A, and those seven early years were worth more than all of A’s 33 additional contributions.

Amazing! This is indeed the power of compounding. Richard Russell has certainly gotten our attention and made us realize how important it is to save money and to start as soon as possible. However, a closer examination of this example brings out several problems that are worth noting.

First of all, we should keep in mind that Richard Russell wrote this article years ago and his use of a 10% return would certainly be considered an above average rate of return today. But there is also the unmistakable consistency in the growth of this fund, a fact that would never happen in the real world. Russell even admonishes his readers that one of the cardinal rules to compounding success is to NEVER LOSE MONEY and most financial products do lose money. Even diversified mutual funds took a brutal beating in the 2000s. Depending on the composition of their funds, many households were lucky if they broke even during the entire decade. It is all well and good to tell someone, “Buy and hold,” but many breadwinners with 401(k)s and other comparable plans had to delay their retirement after the bloodbath in 2008. As of this writing and because Bernanke has halted QE, we are presently in store for another stock market crash.

Second, there is the factor of inflation that is not calculated into this equation. Inflation, although not visible, is real. Whether you use 3%, 5% or whatever factor you choose for inflation, the accumulated numbers will certainly change once its applied. But what is really missing is TAX.  Russell has this money inside of an IRA.  This means that the tax due on this pile of money is calculated at income tax rates, which can be as high as 35%! If you do the math the pile of money gets drastically small. The fascinating results we first observed with investor’s A&B suddenly diminish.

It is worth the time to stand back and look at this example from both the positive and negative sides of this equation if for no other reason than to realize just how difficult it is for Americans to pile up money over a long period of time and get to keep any of it at the end. The volatility of the bond and stock market, which keeps us from earning a consistent rate of return, is prompted by outside forces, which we know to be artificial bubbles in the economy, caused by monetary policy. The indirect and hidden tax of inflation and the direct tax we have to pay on the accumulation all serve to reminds us of the iron grip government has on our money.

Then there is the problem of control. Do we actually have control over the money we try and save? Individual Retirement Accounts (IRA), the 401(k), the 403(b), and other tax-qualified government sponsored plans for the most part have their underlying assets invested in the stock market through mutual funds. As we have already mentioned, this is not exactly a safe place for our life’s savings. Furthermore, these allocated funds are virtually untouchable till age 59½ unless one is willing to incur a 10% penalty, plus pay the federal income tax, which has only been deferred. After age 70 you must pay the tax. But more importantly, without the ability to tap into your pool of savings in case of emergencies or for large-scale purchases, Americans have very little recourse but to suffer great hardship or be forced to borrow and go into debt.

Astonishingly, the power of compounding that Richard Russell describes in his example can still be achieved if your money is stored inside a whole life policy. The rates of return in a whole life policy are guaranteed never to go below the rates quoted at the time a policy is underwritten. Consequently, a floor is immediately established that assures you of the consistency required to make compounding successful. If interest rates go up then the cash values in your policy will also appreciate.

In case the insured becomes disabled the “Waiver of Premium” rider (not available to those over age 55) guarantees the payment of all premiums at no out of pocket cost to the insured. Just another way the compounding process can be protected.

If the dividends, which are paid annually, are reinvested back into the purchase of additional life insurance, two important things happen. First, the increasing death benefit becomes the hedge against inflation. Second, the accumulating cash values are not subject to tax. Later on, if the policyholder elects to withdraw the dividend payments as income, these too are tax-free up to the point the dollars taken out are above the ones initially put in.

In case of untimely death the entire compounding process self completes immediately by the death benefit and the proceeds are passed on to the beneficiaries income tax-free.

By having one’s money inside a “private” contractual arrangement with an Insurance company instead of a tax qualified government plan such as an IRA, 401(K), or other similar vehicles, there is real control over your money without the typical restrictions and penalties. You have access to the cash values inside your policy whenever you need them through policy loans. Additionally, all of the other desired investment qualities already mentioned are present. Most importantly, you can spend it and still save it, so long as you replace it. If done properly, using a whole life policy as a financing enterprise makes complete sense.

Whole Life Policy Loans Are Not Inflationary

Nelson Nash has discovered that a traditional financial product—dividend-paying whole life insurance—can be used to immediately implement a form of privatized banking, one household at a time. But equally important, when major purchases are financed through whole life policy loans, the money supply is not expanded and there is no contribution to the boom-bust cycle.

Unlike a commercial bank, the insurance company can’t simply increase the numbers on its ledger, showing how much money the customer has “on deposit.” No, the insurance company itself must first raise the funds (from incoming premium payments, income earned on its assets, or through selling some of its assets) before transferring them to the policyholder as a loan. Percy Greaves, in his introduction to a book by Ludwig von Mises, drives home the central point.

“The cash surrender values of life insurance policies are not funds that depositors and policyholders can obtain and spend without reducing the cash of others. These funds are in large part invested and thus not held in a monetary form. That part which is in banks or in cash is, of course, included in the quantity of money which is either in or out of banks and should not be counted a second time. Under present laws, such institutions cannot extend credit beyond sums received. If they need to raise more cash than they have on hand to meet customer withdrawals, they must sell some of their investments and reduce the bank accounts or cash holdings of those who buy them. Accordingly, they (the insurance companies) are in no position to expand credit or increase the nation’s quantity of money as can commercial and central banks, all of which operate on a fractional reserve basis and can lend more money than is entrusted to them.” ³

 So we see that not only does IBC make sense on an individual level, but it also limits the ability of commercial banks to expand and contract the total amount of money in the economy. With each new household that embraces the IBC philosophy, another portion of the nation’s financial resources will be transferred out of the volatile commercial banking sector and into the conservative, solid insurance sector. As more people embrace IBC, the amplitude of the boom-bust cycle itself will be dampened. The social benefits of muting inflationary credit expansion are achieved.

Conclusion

 Unfortunately, there are powerful forces at work to disrupt our market economy. The student of history knows all too well that the rich and powerful turn to government for special privileges and handouts, and sabotage the peaceful operations of the market. This government interference leads to the financial crises that seem to inexplicably plague our country.

The beauty of Nelson Nash’s Infinite Banking Concept—and the crux of this article—is that IBC is effective both individually and collectively. Financial professionals should devote their efforts to showing households that they can provide themselves with a much more secure future. By accumulating their savings in whole life policies to finance their major purchases, families and individuals can contribute to the soundness of the dollar and dampen the boom-bust cycle.

The proponents of IBC and the scholars in the Austrian tradition can learn from each other, and in doing so can make their messages more attractive to their respective audiences. Financial professionals trying to show others the benefits of IBC can add a new point in its favor: its widespread practice would preserve the currency and strengthen the economy! These efforts can build the 10%. The movement we seek can actually happen. Public opinion can change. Monetary policy can be re-written.

Bibliography

1. Murray Rothbard, The Case Against The Fed (Auburn, AL: The Ludwig Von Mises Institute, 1994), p.3. Available at http://mises.org/books/fed.pdf.

2. Richard Russell, Article: Rich Man, Poor Man Available at
http://www.lewrockwell.com/orig12/russell-r4.1.1.html, February 2, 2011

3. Percy Graves, quoted in Huerta de Soto, footnote 106, p. 592.

Click to Download this PDF scanned from Fortune Magazine, September 1983.

By R. Nelson Nash

History seems to prove that mankind refuses to learn as much as it can from extremely valuable experiences. I can think of no better place to prove my point than looking at the Bible. Mankind has an eternal problem – we want to be God (in the pagan sense of the word). To witness the ultimate manifestation of this malady, watch what we try to do with our government. Let’s begin by going back several thousand years in the book of Genesis…

Click here to download this 23 page PDF

Instead of looking to the mainstream for answers to this crisis, why not look to those who saw it coming?

For those new to Austrian economics, this reader will offer an introduction to this unique school of thought. It is unlike any other school of economics you have likely come across. Instead of focusing on unrealistic mathematical models, the writers here build their thinking on human action and observations of how the economy actually runs.
What’s important is not necessarily the specific political opposition to this bailout, but rather educating people about the dangers of nationalization, central banking, and government regulation. Only when people recognize the dangers of the government’s “socialism for the rich” will we be able to get back on the road to prosperity. Unfortunately, a correction is necessary. There is no such thing as a free house. The more the government intervenes, the longer and more painful it will be. But this crisis gives the country a chance to rethink its previous assumptions about the economy and the government’s role in it. Hopefully, this reader will be a first step for many into an exciting, growing branch of economic thought.

The Bailout

• Stop the Bailout, Lew Rockwell, September 11, 2008.
• The Government is Not Promoting Stability, Bob Murphy, September 22, 2008.
• Day of Reckoning, Pat Buchanan, September 27, 2008.
• Economic Depressions: Their Cause and Cure, Murray Rothbard.
• Notes on the Fannie Mae/Freddie Mac Bailout, Bob Higgs, July 17, 2008.
• Get Out of the Way, Anthony Gregory, July 18, 2008.
• The Mises Institute’s Bailout Reader

The Bubble

• The Impending End of the Housing Bubble, Bill Bonner, September 19, 2006.
• Is the Housing Bubble Popping?, Mark Thornton, August 8, 2005.
• Pop Goes the Bubble, Gary North, August 23, 2003.
• The Land-Price Bubble, Doug French, June 10, 2003.

The Banks

• Anatomy of the Bank Run, Murray Rothbard.
• More Bank Failures, Doug French, August 25, 2008.
• Run for Your Money, Max Raskin, September 28, 2007.

The Fed

• War and Inflation, Lew Rockwell, June 9, 2008.
• The Fed’s Failure, Michael Rozeff, September 17, 2008.
• Why Not Abolish the Fed, Jacob Hornberger, February 5, 2008.
• A Run on the State, Bill Huff, September 27, 2008.

Short Selling

• Don’t Sell Short Selling Short, Gary Galles, April 7, 2007.

Ron Paul and Austrian Economics

• The Austrian School and the Meltdown, Ron Paul, September 26, 2008.
• The Creation of the Second Great Depression, Ron Paul, September 25, 2008.
• Ron Paul Against the Bailout, Ron Paul, September 25, 2008.

We Told You So

• Fannie and Freddie, Ron Paul, September 10, 2003.
• ‘Bull’ Market?, Mark Thornton, February 9, 2004.
• We Told You So, Mark Thornton, March 24, 2007.
• Falling Oil Prices: Told You So, Dom Armentano, September 10, 2008.

Podcasts

• Ron Paul on the Panic of ’08, September 18, 2008.
• Lew Rockwell on the Michael Reagan Show, September 26, 2008.
• Robert Higgs on War and the Economy, September 25, 2008.
• Steve Berger on Financial Markets, July 31, 2008.
• Robert Higgs on the “Crisis,” September 24, 2008.
• Joe Salerno on the Broke Banks, July 23, 2008.

Books

• America’s Great Depression, by Murray Rothbard
• The Causes of the Economic Crisis, by Ludwig von Mises
• The Politically Incorrect Guide to Capitalism, by Robert Murphy
• Economics in One Lesson, by Henry Hazlitt
• Prices and Production, by F.A. Hayek
• The Mystery of Banking, by Murray Rothbard
• The Case Against the Fed, by Murray Rothbard
• How Capitalism Saved America, by Thomas DiLorenzo

Copyright © 2008 LewRockwell.com

R. Nelson Nash discovered the formula to building wealth using the sound principles of an industry that has been deemed the foundation of the United States economy: Banking. He is the creator of the Infinite Banking Concept and renowned author of Becoming Your Own Banker. This concept uses dividend paying whole life insurance policies to create a personal bank.

1. Whole life insurance has been around for over 200 years. Yet, we still see strong hesitation to purchase this type of product. What do you feel are the biggest misconceptions of whole life insurance?.

The general public in America knows practically nothing about dividend-paying whole life insurance. It is all a matter of getting interested people educated about this wonderful idea.

2. In your book, you say that one’s infinite bank can take up to 7 years to capitalize. What do you suggest for individuals who are retiring today?

I suggest they attend one of my 10-hour seminars and get fully informed about what is possible. Please note that the “capitalization phase” in the equipment financing section of my book is only four years. Furthermore, I demonstrate that the policy can be used much earlier than that.

3. There are a lot of financial pundits out there that suggest buying term life insurance and investing the difference. What do you tell people when you hear this strategy?

I suggest they study the sixteen books that I recommend for people who are interested in the stock market. When they finish them, they are now qualified to talk about “Investments.”

4. There are numerous advantages to your Infinite Banking Concept such as the recapturing interest paid to other financial institutions, a growing death benefit, and the ability to leave behind a legacy. What, if any, are the disadvantages or drawbacks of this concept?

The disadvantages or drawbacks would be in not participating in the process!

5. Recently, we have seen many commercial banks shut down or acquired due to questionable financial decisions. This is causing a lot of people to be wary of where they keep their money. Can you speak to the stability of life insurance companies?

What is the most disastrous thing that has happened in the financial world in the last 100 years? Answer: The Great Depression. During that time life insurance companies were stronger than any other thing.

6. We enjoy the ability to access our cash value on a tax-free basis. Yet, I often see comments from naysayers like, “When the government finds out, they’ll change the tax laws.” Although tax laws are uncertain, are you confident that these tax advantages will stay in place for whole life insurance long term?

Life insurance is not a creature of the IRS Code (which has been around only since 1913). Life insurance has been around for about 200 years. Pension plans, IRA’s, HR-10 plans, 401-k plans, etc. are all a function of the IRS code. They are all “exceptions to the IRS code.” Please notice what is now happening to all those sort of plans. Yet, my life insurance policies continue to grow. (Please study the attachments.)

7. What would you say is most important in making one’s infinite bank successful and why?

Read my book. Do what it says. It is built on firm principles that have stood the test of time.

8. In your seminars and in your book, you show examples of financing cars and equipment. Are there any “out of the box” things you have done, or have seen people do, in utilizing an infinite bank?

It is limited only to one’s imagination. Again, attend one of my seminars and you will see any number of examples.

9. I’ve read your book and experienced your teaching in a live setting, so I can appreciate your humor. I think it would be entertaining to our readers if we play “word association”. I give a word, and you give your immediate response.

• Term insurance – Nonsense!
• 401k – Absurd!
• Social Security – Criminal idea!
• IRS – Equally criminal!

10. Today, a lot of people are fearful of the current economy. I believe a lot of it has to do with the media. Do you have any last words of advice you would like to give to our readers?

• Subscribe to Daily Reckoning (no cost) and read Bill Bonner every day.
• Read items on www.lewrockwell.com every day.
• Also, www.mises.org and www.fee.org.
• Read the 16 books for those interested in the stock market.

Using The Infinite Banking Concept to finance purchases without lending from banks

You probably don’t sit around calculating how much interest you pay to banks and other lenders each year, but chances are you have financed large purchases, such as homes, education, cars and major appliances.

The interest paid on these items can add up to hundreds of thousands of dollars, perhaps more, in the course of a lifetime. People often have to decide how much money to allocate for their retirement and how much to paying down current debt.

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Jeanette set up an amortization table to repay the loan over five years at 10% interest. In making the “car payments” she is even accelerating
her own high interest schedule. This means she is going to repay the loan “before she runs out of the amortization schedule.”

If she doesn’t finish the schedule — then she is “stealing from her banking system.” This means — sometime in the next five years — she needs to see a life insurance agent and buy another policy to accommodate that extra money she is paying on her car. The earlier she makes that move, the better, because the earlier you start a policy and the longer it stays in force, the more efficient it gets.

When she completes the schedule, she will have proved to me that she fully understands the essentials of “being your own banker.” She will have “graduated from the Nash School of Finance” Summa cum Laude! At that point I will give to her the policy that I bought on her when she was age
2. My wife will have to join me in the gift and we will have to spread it over more than two years because of the IRS gifting limitations.

(Note: at this point she will have at least three policies.)

When she buys the next car, she simply repeats the process. When she is 40 years old, we can assume that buying a house is a high priority in her financial life. All she has to do to pay cash for it is call her life agent and say, “Get me a policy loan of $350,000 on my policies.” The agent needs to deliver the checks — along with an amortization table for 30 years at 10% interest. (The more interest she pays her banking system, the better, because she will get back all her cost basis at retirement time, tax-free!).

The agent also needs to tell her, “Jeanette, your next door neighbor bought his house last month — and he had to pay $12,000 in closing costs. You didn’t have to do that! To play ‘honest banker’ with yourself, you need to pay $12,000 back to your policies now to emulate what everyone else has to do in such transactions.”

This all means that she is going to pay off that “house loan” before she finishes the 30 year schedule. And this means she must buy another policy to accommodate that extra cash flow. And, remember, the earlier she does it, the better the whole system performs.

NOW — when she gets to be 70 years old, she can stop all premium payments and begin to withdraw dividend income in the neighborhood of $150,000 for the rest of her life. This won’t diminish the death benefit of about $3,000,000 regardless of how much longer she lives.

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