E116: Answers to the 4 Most Common Advanced Questions About Infinite Banking

Nate: In this episode, we discuss the most common advanced questions we receive from our existing clients and others that already have experience with infinite banking. She’s Holly and she helps people find financial freedom.

Holly: He’s Nate, he makes sense out of money. This is Dollars & Nonsense: If you follow the herd, you will be slaughtered.

Nate: All right, welcome back to this episode, we’re actually picking up where we left off in our last podcast, where we discussed part one of common questions which were more… The common questions we receive from people who are just fairly new, maybe they recently got a policy or they’re newer to the IBC, infinite banking world, hopefully those answers and those questions are related to you. This podcast, we’re going to try to delve a bit deeper and answer some questions that we get that are more advanced. And when I say advanced Holly, what I’m meaning is there’re questions that come up a little later on in the process than like an early investigation, I guess I would say.

Holly: Well, and there are questions that come up once you have this policy. So you have to have a policy in order to really understand or be able to start asking these questions.

Nate: Right, and very typically that’s when it comes up. So the first set of questions were I guess you could say questions that many people want to know before they get started. These maybe you like to know before you get started, it never hurts to know, but it is true that these are more commonly asked by people who’ve already gotten a policy and are trying to figure out well, now what?

So let’s go ahead and dive in Holly, question number one that we felt both of us, very, very common. We have clients who they get their policy, they’re super excited to begin their infinite banking journey. And then they’re trying to figure out, “Well, what do I use my policy to do?” And before we get into the question, that’s actually a very common thing, by the way Holly I’ve gotten asked from people who’ve started elsewhere. Like someone who starts at IBC with a policy from some guy, “Well, I got my policy, what am I supposed to do with this thing?” And the guy says, “Well, whatever you want, you can use it for anything.”

Holly: Yes.

Nate: “Oh, well that narrows it down, sweet, I’m glad I talked to you, that really helps me decide what I can do.” In other words, it is true you can use it for everything, but sometimes I feel like most clients want a little bit more direction than that, I guess is my opinion. Where they’re more thinking, “Oh, I understand there’s no limits to what I can use my policy to do, but what are the things that people do that most people use policies for?” I guess that’s where we can start. “What do most people use their policies to do? What ideas Nate and Holly can you give me that I can start using my policy to do?”

Holly: Well, and I would say the most common things that people do really in using their policies is either getting rid of debt or financing other investments using their policies. Those are the two top of the bucket list, if you want to say what they use their policy for, but if they have no debt or they don’t really want to finance other investments, what are other things they can do really outside of those two main things, and-

Nate: Yeah, I’ll call those low hanging fruit. The low hanging fruit items are… Well, a lot of us, if we come into this becoming your own banker concept, and we’re sitting here with credit card debt, and student loans, and car loans, and other things that we don’t want to have anymore. Obviously and historically that’s been the lowest hanging fruit, let’s get rid of third-party debt or at least the third-party debt that we don’t want anymore.

Whereas others would say, “I don’t have any debt,” but they’re interested in maybe buying real estate or assets that produce a rate of return that they’re interested in investing in. As you were saying, those were by far the two most common low hanging fruit, but you might say, “Well, what if I don’t have any debt?” Really, maybe you have a mortgage, but you’re just not interested in paying it off. “I don’t have any debt I’m going after, and I don’t have any assets or investments I want to buy at least right now. What can a person like me do with their system?”

Holly: One of them is, if you do any type of charitable giving, how can you actually use a policy to do your charitable giving? And Nate and I have talked about even by being able to use a policy, oftentimes you’re able to increase your charitable giving. But that’s one very easy way, and it’s not a low hanging fruit, but if you do any type of charitable giving, being able to use your policy for that charitable giving purpose.

Nate: Yeah, so definitely, we’ve seen a lot of people doing charitable giving, we see a lot of people especially if you are not a W-2 earner, if you’re self-employed or earn from 1099 income or you own a business, and you’re actually having to write big checks out of your pocket to Uncle Sam. We would like to try to get that money into your own banking system first, and then use your policies to finance your taxes as well.

Just like in charitable giving, I personally give a lot, I know a lot of our clients do as well to their church or other charities. And I like to have that money hit my policies first if I can and then pull it out of the policy as well. So charitable giving is very common, income tax very common, property taxes, very common. But I guess if you’re listening to this and you’re starting to realize, all we’re trying to say is what do most people use the policies for? Well, we’re trying to use our policies for as many things as we can-

Holly: Yes.

Nate: … as long as it makes sense, the rule of thumb applies and the rule of thumb is anytime I can put money into my policy first, and then use it to go pay for something it’s better for me than if I just pay cash for that same item. So I wanted to go into my policy first, so that would be the case as we said, with charitable giving, that’d be the case with property taxes, income taxes on things, but it could be as simple as a vacation. A family vacation that cost money. Most of us just pay cash for that, or we use the credit card and then pay the credit card off with cash. What if we can move that money into a policy first and then use the policy to fund the vacation? And so we can actually make more money doing it that way, than just paying cash for everything we buy.

The idea here is let’s try to capture as many transactions as we can using policy money, but that means you’re going to have to start moving money that you just used to spend, it’s got to go into policies first too. You can’t just leave that on the sidelines and use policy to fund everything, and just have this big gigantic balance building up in your checking account, because you never spend any checking account money, you just spend policy money.

So you have like no money in your policy because you spend it all and you have this big balance in your checking account because you never spend that, that doesn’t make any sense either. You want to get the checking account money into the policy and then use the policy as much as you can.

Holly: Where you said vacations, you also have to think if you are a business owner or individual that owns your own business, you want to be using your policy money for your business, for overhead expenses, things like that. So it literally is just about anything, you can use a policy loan for, we want you if possible to put the money in there first, and then make that payment per se. But you don’t want it where you have a huge loan balance and you’ve got all this cash just sitting in your checking account doing nothing for you.

Nate: Yeah, so there’s a fine line. And I don’t know if we’re going to answer this as crystal clear on the podcast as I’d like, especially when we have so many other questions to get to. But there’s certainly a fine line whenever you’re figuring out what to use policies for just taking a policy loan, you’re not really getting anywhere, right? So you want to make sure that all your transactions are purposeful.

So whenever we hear, “What do I use my policies for?” The answer is kind of everything, we will give you guidance on specific ways to structure your financial position, where it starts to make more and more sense to use policy loans. As Holly and I both have mentioned, if I use my policy to give to charitable giving, then all my checking account money that I used to give, I got to do something with that now, and that needs to find its way back into the system.

Holly: Yes.

Nate: And the same thing goes for property, the same thing goes for vacation. The goal is to get more and more of your banking money into your banking system and less than the other banks. It’s hard to practice IBC if you just have a small little policy on the side, and you have all the rest of your business going through bank’s hands. So continue to push the limit, I guess.

And we might have to stop there on that one and hit question number two, which aligns with this as well. This is a huge question most people ask, which is, “Well Nate, if it works for cars, and vacations, and weddings, and all these different things, well, why don’t I just use my policy to finance everything? Should I just run everything through it right now?” We chose to do this to ourselves, Holly, by the way-

Holly: I know we do.

Nate: … by getting advanced questions. But it’s not going to be easy to answer it in a little quick podcast, but it’s a very common question. How can we shine some light on this whole policy, finance, everything? When does it make sense? When does it not make sense? How can we help people understand how to operate most efficiently?

Holly: I think you have to start with the goal in mind, Nate. When you answer this question, the answer, yes, you can finance everything. Should you finance everything? It depends. But really the goal is not to just have policy loans, okay? The goal is to not just have policy loans, the goal really is to take over items in your financial budget as time goes on, but you have to be able to have the policies, and the money going into your policy in order to be able to take those loans out and take over set items in your budget as time goes on, it doesn’t happen instantly.

I’d say there are very few of us that are financing every single thing, do I finance the pack of gum I bought?probably not, right? But we limit ourselves Nate in this, some of us only think we only finance big ticket items versus, well, why would I finance a small ticket item?

And I’m going to say the goal is even in your life to teach yourself a discipline of getting that money into the policy and then taking out and buying what you needed or wanted. And I used the example of my daughter, I’ve said before, but she financed through her policy at $150 surfboard. But the goal, most people wouldn’t say, “Why would you finance $150 for an eight or nine-year-old?” $150 is a lot of money, right?

So to teach her the importance of, she put the money into the policy, now take it out and use it and pay it back. It’s teaching her how to actually take over items in your budget. She’s paid that loan off, she has the money growing in there, plus she has the board and if she wanted to, she could buy a more expensive board the next time. But the goal is actually in your mind [inaudible 00:11:22] is to be able to take over items and stuff that we are just sending dollars, we’re sending away from us to send back towards us I guess.

Nate: That’s the issue when you get to advanced questions, it’s because everybody’s financial position is different and there is not a one size fits all infinite banking strategy that everybody can implement. I think it’s very common for someone to get into infinite banking and realize, man, I love this concept, I want to use policies, finance, everything, I want to screw the banks, I want to get rid of the bank, let’s just run everything through policies. That’s kind of naturological conclusion that people end up bringing forward. The reason that it’s difficult Holly, is because there’s really no way to do it with just one policy.

Holly: Yes.

Nate: So you start with your first policy, but here’s what doesn’t make sense. Let’s say you have household expenses of $10,000 a month and you’ve got a policy that has $10,000 of cash value in it. It doesn’t really make sense to take out a policy loan of 10,000 and then make a policy loan repayment of 10,000. Why does it not make sense? Because it does absolutely nothing for your policy.

Holly: Exactly.

Nate: Remember, a policy loan is pledging your policy cash value as collateral and the insurance company sends you a loan, no impact on your policy. Then whenever you repay the loan, no impact on your policy. Some people will say, “Well, what if I paid back with interest?” Well yeah, you could, but you don’t technically have to take a loan out to send extra money to the policy, I think some people may be confused with that.

Holly: It’s true.

Nate: They think that, “Okay, the only way for me to send this extra money…” Like in other words, “I take out 10 grand, I’m going to put back 10,500. I’m going to pay it back with some interest this month. And that $500 can boost my policy.” But yeah, my answer would be, “Well sure, send 500 bucks extra, as long as it doesn’t hit your MEC limit, which would apply for the interest as well.”

I don’t think we have time to go into what extra interest means right now and everything like that, but all that to say, just taking a policy loan or repaying a policy loan is not helping you. This is what Ray says they would do early on in the 2,000, when they first learned about this concept and all they had was Nelson’s book and they didn’t really know what they were doing. But they were taking loans out like crazy and they’d get to the end of the year, and they said, “Man, we’ve took out 50 loans from this policy and repaid It all, moved all this money in and out and we’re right where we were supposed to be at the end of the year anyway, as far as our cash value goes.”

So what was the point of doing all that? And it was in that moment that we realized the policy loan itself is a tool, but it’s the premium that you pay that changes the future. So the goal is maybe not so much just to churn money in out of policies, but it’s to continually expand your premium. That’s why we said that the money needs to go into premium first before it gets borrowed out. If all you do is just borrow, repay, borrow, repay, borrow, repay, and never increase your premium, you’re just going to be churning money in and out with no end game.

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Nate: Question three that we get very often, you got somebody who starts their own policy and they’re saying, “Well, how much premium should I really be paying? What makes sense for me? I have my policy right now, it feels pretty good, but how do I know how much premium I really should be paying?” And then in that same vein, they’ll ask, “Well, when do I know when to start more policies?”

Holly: And I think in the past Nate, the belief and mindset was, the premium you should be paying is how much money you’re saving. And I think that’s really the wrong question to be asking, it’s really… Like Nate said, if you have $10,000 of expenses a month coming in and out, you probably should have a premium of more than $10,000, especially if you’re going to want to take over everything.

The reality is you want as much premium as you believe you can afford, and that you’re able to pay, because if you’re not putting a significant amount of money into your premium, you are leaving a lot of money on the table in your regular banking checking account that you don’t own and you’re allowing everybody else to use your money and gain the interest off that money.

Nate: To fully practice [inaudible 00:16:53] banking, it’s really hard to be successful at IBC if your premium is a very low percentage of your income. Because all that goes to show is that you have way too much business going on with other banks through their checking and savings. There’s a ton of money flowing through your hands that will never have the opportunity to make you a dollar, but it will have the opportunity to make other banks a dollar.

So it’s very hard to practice IBC, keeping your premium a very small percentage. It’s okay for it to start there, you don’t have to start huge, but you’re going to have to get over what I feel might be a poor mentality or some sort of fear of the unknown. I think this is why you brought that up Holly at the beginning which is, it used to be choose a premium amount that you’re pretty sure you can continue to hit out of your income, because we felt like if I buy a policy and what if one year I can’t fund the whole thing?

So I got to make sure that I only fund a premium or build policies out than I am like 99% sure I’m going to be able to pay the full premium that I can put in every single year. And so we bring this fear with us, and Holly, you and I were talking about some things before the podcast that we have these clients who are sitting on tons of money, saving tons of money, but they refuse to open new policies due to some sort of mental wall or mental block, or fear. And that almost every single time that you delve through it, it’s based on a misconception or a wrong idea of what would happen if they were to run into some unexpected financial calamity in the future while having policies.

I’ll finish with this, in my own life, that’s the way I started, I said, “Okay, how much money am I pretty sure I’m going to be saving?” Okay, I build my premium around that. I started to make more money. What do I do with that more money? I start more policies. But at the beginning I continually left the policy premium to be what was a pretty conservative figure for me at the beginning of my time. But as time goes on, you really need to start seeing the flexibility of the policies, and the biggest issue comes when we only see the premium as a payment that we have to make.

The payment mentality for your premium is something that hits everybody almost, and if you can’t get over it, you’re going to suck at IBC. Because if you feel that your premium is just a payment you have to make, then you are going to always absolutely pay less premium. And it was not until you fully buy into your premium as a deposit, and you realize, “Well, I’ve never made too many deposits,” that you start to expanding the [inaudible 00:19:46]. All this to say, Holly right now, “Nate, how much premium should I pay?” As much as you possibly can stomach, and probably more because what we’ll do is we can just move money from one policy to another.

In other words, I have $120,000 a year in premium, and I can only actually save, let’s say I have a really down year and I only say $50,000 or something like that, but I’ve got all this other premium. Am I even stressed out? No, the 120 was not a payment I had to make, it’s not a liability. By the way, right now my premiums are, let’s say 120, my cash value increases right now across all the policy or more like 150. I’m sitting here, I’m just moving money from one to the next, I’ll take a $20,000 policy loan from one policy to pay a premium on another policy, that policy premium I just paid will produce, let’s say $25,000 of cash value.

Are you telling me that it’s hard for me to move 20,000 from my first policy to get 25,000 created in the next policy? And then what would happen if I couldn’t pay the next policy premium? Let’s say it was 20,000. Well, I just moved 20 from my first to my second, I’ve got 25 now in my second. I can take 20 from that and pay the next premium, I get 25 from there.

I know I’ve been talking for a while, I’m just simply saying, as time goes on you have to realize that the more premium you get, the more money you’re going to have, and that policies are profitable and premiums, first off, they’re flexible, the amount that you put in can be way less than your schedule. And as you’re building these up, you’re going to have so much cash value, you can just move money around and create profit like the banks do. So there needs to come a time when we’re not afraid of the premium. So how much premium should I pay? As much as you can and continue to expand. When do I start more policies? Yesterday, you probably [crosstalk 00:21:39] have enough.

Holly: I think we get to a place where we think we have enough policies, unless you can’t start another policy because you’re maxed out on your insurability. The reality is you need to be starting policies way before you think you need to be starting it. Until you change your mentality, and this was one of the key points Nate said was, premium is a deposit, we have never made too many deposits into our own bank account. We’ve made plenty of deposits into everybody else’s bank account, but we’ve never made too many into our own. As soon as you shift that premium, it’s a premium deposit into your account, the premium isn’t a payment anymore, it literally is a deposit that’s growing and working for you that you have access to and you can use.

Nate: Right, so most people like Holly and I, we have all these clients or I should say, some clients are doing great, some clients are more like, “Well, I’m just not sure I’m going to leave all this cash sitting outside because I don’t know if I can really fund a new policy on this.” Most of it is based on fear and the fears are typically based on misconceptions. Anything else Holly before we go to last question?

Holly: Nope, I think we can move on to the last question, which is a good one because many of us don’t ask it, or when we ask it it’s after the fact. It’s really, how do I deduct my policy loan interests? And the second part is, should I start a finance company?

Nate: Some people have heard, and we’ve mentioned in this podcast many different times as well about using policies, and there is certain occasions where your policy loan interest will be deductible. So I guess we can start there. The question that we get quite often for people who are using policies is, “Well, Nate, I’ve heard that I can deduct policy loan interest for certain things, what qualifies that? How do I know when I can deduct policy loan interest and what do I need to do?”

Here’s the rule of thumb when it comes to deducting interest paid to your policy off your tax return. Essentially, it’s based on whatever the loan that you took was used for. And this is the same way it works really in the grand scheme of things. If you were to borrow money from a bank to buy a personal car, the interest that you pay on that car loan is not a deduction to you.

Holly: Nope.

Nate: However, if you borrowed money from a bank to let’s say finance a rental property, now that interest is a deduction and the same style applies with policy. So essentially whenever you borrow money from a policy to make an investment or to finance anything in your business, the interest you pay back to the policy is a deduction. Just like it would have been a deduction If you had borrowed money from any entity to do those types of transactions.

So essentially any investment you want to make, it doesn’t matter if it’s a policy loan or any sort of loan. If you borrow money to make an investment, the interest paid on that loan is a deduction. The same thing goes anytime a business borrows money to finance any of its operations, the loan interest is an expense.

So all that to say, how do I deduct policy loan interest? Well, it’s going to be 100% based on what it was used for, and if you happen to use a policy loan to make an investment or to utilize in your business, then the loan interest payback to the policy is a deduction to you just like it would’ve been if you borrowed it from anywhere else.

Holly: And I think that the rule of thumb Nate is, if you had borrowed it from a traditional bank or someone else and it wasn’t deductible, then it’s not deductible for you with your policy loan.

Nate: Right. That was an easier way to put it.

Holly: But there’s no gray area. Can I say I used it for this? Nate, you legitimately have to be a good banker, right? And you have to be an honest banker. And so if you couldn’t deduct it personally for your regular taxes, if you borrowed it from a bank or someone, then you can’t deduct it from a policy loan either. And I think people get that really, really confused, “Well, why can’t I deduct it? I paid interest.” Well, it goes back to you don’t get a deduction when you pay your car note to the bank, so you don’t get to deduct it that way either.

And I know some people don’t like that answer, but the reality is this is a business, it is a bank, right? So you have to think like a banker. So the bankers wouldn’t let you deduct it, so you’re the banker you don’t get to deduct it.

Nate: And essentially there’s nothing magic about policy loan interest. Policy loan interest by itself is not deductible. However, if you use it for certain things, it is a deduction because it would be the case no matter what. And so, as Holly said, the rule of thumb is, if it’s not deductible when you use another person’s bank to finance it, then it’s not deductible if you use the policy.

But if it is deductible, if you would use else’s bank, then it’s also deductible if you use the policy. That’s the easiest way to put it, and typically that’s found in your business for business purpose, as well as other investments you want to make. Then any interest that’s tied on loans to achieve those results is deductible, even if it’s from a policy loan. So that’s awesome news that you can actually borrow money for certain things and get a tax deduction for paying the interest of the policy. However, the policy itself will continue to grow tax-free on the full amount.

So you get a deduction on one side, but then tax-free growth on the other. So we certainly love it, it’s an awesome thing, especially when you’re buying assets or financing in the business. The last question we get asked is from people who are really gone deep into IBC, and they want to know, “Nate, how do I know if I should start a finance company?” As you said, Holly. So how do I deduct policy loan interest? And maybe should I open a finance company to handle these loans? And once again no black and white answer there.

Essentially, if we have an individual who is not in business, then actually it may start to make more and more sense to start a finance company because there may be not only some policy loan interests that you can write off for certain transactions, but there’s also the ability for that business to maybe pay for things that it needs, that you consensually expense inside the business that normally would not be an expense to you If you just remained a W-2 employee on your tax return and don’t have any business corporate documents.

So it’s certainly in that regard, but I guess the simple answer Holly is there’s one guarantee like, yeah start a finance company. And that is if you want to pay off and completely take over your primary mortgage on your home, and you want to maintain your mortgage interest deduction for your primary home, then you ought to start a finance company that will file a real mortgage on your home, just like a bank would. And so you can pay the finance company back the interest and write it off. That’s a kind of a shoe-in like yes, if you want to take over a mortgage, then absolutely it’s time to start a finance company. And then there can be other reasons that are more situation specific where it might make sense to open a finance company.

Holly: But I think the key is if you are taking over that primary residence and you still want to be able to deduct your mortgage interest, you do have to have a finance company yourself that is going to file that deed in that mortgage. So that’s one of the no-brainers Nate is when you definitely yes, you should start one, but just because you’re doing all these loans doesn’t necessarily mean you should start a finance company. I think it’s very much based on individuals and what they’re using that loan money for and how they’re using it, and what’s in the best interest of the individual. So as much as we’ve had some questions where we’re like it depends, there’s no black and white answer to any of the questions we have really thrown out there to you other than it is a case by case situation.

Nate: One thing we found pretty common too is if we’re working with a business owner who may already own a certain style of corporation, and let’s say they own an S corporation, there’s actually some benefits that you can get with a C corporation that you can’t get with an S corporation. So sometimes we will start finance companies as a C corporation, and they’ll use the C-corp to finance various things that are going on inside their S-corp that runs their day-to-day business, I would assume.

But then allows people to unlock some medical expense reimbursement programs or college tuition deals or some things that you can’t actually do with an S-Corp, and then vice versa, if they happen to run a C-Corp, which is becoming less and less rare as just a small business, typically don’t originate that way. But if they were to have C-Corp already, then there’s things that an S-Corp can take advantage of that a C-Corp can’t that it might make sense to own one and to utilize as a finance company.

Once again, case by case, you certainly don’t need to open one, if you don’t make very many policy loan transactions, I guess that’s the easy answer. If you’re not doing a ton with the policy loans, or if you don’t have any big ticket items to do just low volume policy loans, probably don’t need a finance company, but the bigger and bigger your loans are, the more it might open up a window of opportunity to start a finance company. That was the four questions we really had to hit, and we have gone over our normal time. Any last things to say before we close it down, Holly?

Holly: No, I think we’re good.

Nate: All right, well, this has been Dollars & Nonsense: If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/e116

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