E167: Know the Best Perspective for Premiums that will Determine your Success in IBC
In this episode, Nate discusses the proper perspective for premiums while practicing the infinite banking concept. This is the most important understanding that will determine your success while practicing IBC.
Topics Discussed:
Episode Resources:
- Gain access to our Beginner’s Course now FREE to listeners of the podcast here now
- What is Infinite Banking
- Who was Nelson Nash?
- CREDIT: Episode art background photo by Amy Hirschi
Podcast transcript for episode 167: Best Perspective for Premiums
Nate: In this episode, I discussed the proper perspective for premiums while practicing the making concept. This is the most important understanding that will determine your success while practicing IBC. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.
All right everyone, welcome back to the show. It’s once again great to be here. This is Nate and I’m going to dive into probably one of the most important things that you can learn and believe in while you practice IBC. So this is an episode that I think it can be extremely helpful for almost everybody. There may be a select few of you that truly have a proper understanding of premiums while practicing IBC. But what I find with almost everyone is that there’s still some wonkiness that occurs when dealing with premiums, especially while you’re practicing IBC. Here’s what kind of sets the stage for this. I believe that your relationship to premiums is the most important thing that will determine your success while doing IBC. Your relationship with premiums is the most important deciding factor for whether or not IBC will be a success to you or not or really just how successful it can be. It will determine the actual quality of IBC’s impact on your life.
It can also be said that loans and loan repayments fit in the same window. So I would say that your relationship with premiums, loans and loan repayments will determine your success. If you have a faulty perspective on policy premium, policy loans or policy loan repay, one of the three legs of the stool, your IBC system will be weird. You’ll have concerns, you’ll have questions. You won’t really accomplish what I think you may set out to accomplish. Your entire IBC experience will be one or lost based on having the proper perspective on these things because how you think really determines almost everything you do in life. So how you think will be a huge determiner on your success in IBC and in almost anything by the way and almost anything that you do.
A lot of people when they’re introduced to IBC, they have detailed questions about premiums. They have detailed questions about loans and they have detailed questions about loan repayments. But as you probably have heard in many different settings, if you get the big picture, the details don’t matter very much. If you don’t get the big picture, the details don’t matter at all. That’s actually one of Nate sayings. It’s a rendition of the typical saying that you may have heard is if you get the big picture, the details don’t matter. If you don’t get the big picture, the details don’t matter. I don’t really subscribe to that. So I believe the details do have some sort of importance obviously. So I like to say it and I believe it’s very true. If you get the big picture, the details don’t matter very much. If you don’t get the big picture. The details do not matter at all and I believe this is the case with premiums, especially with loans and with loan repayments.
There is no sense in getting into the details of any of them until the big picture is understood. Most people think that they understand the big picture, especially when in regards to IBC and how premiums are going to operate. They think they do, but they do not. Because of some sort of mental hangups. So they think they do, but they don’t and it handicaps them. It handicaps them for sure. What I’m about to say is the proper perspective for premiums when practicing IBC. Premiums must be seen as a capital contribution to a bank that you are starting. Premiums must be seen as capital contributions to a banking enterprise that you’re starting. This is the proper perspective. Premiums must be seen as a capital contribution to a banking enterprise that you’re starting.
It has to be seen as capital contributions to a business, a banking business that you are going to operate. This is the proper perspective. Now you can get started with IBC without having the proper perspective, but this is the proper perspective. So anytime you pay a premium to a policy, you are capitalizing a banking enterprise. You are sending money to a business that you operate. This is the perspective that Nelson tried to get. That’s why he said in his book, “everyone should be in two businesses”. They should be in whatever business that they operate from, your operating business and they should also be in the banking business that finances the operation and I think that flavors everything he did. So you should see your premiums as capitalizing a banking business. From that perspective we can then get into the details of what premiums look like.
We can then get into the details of how much should go to base premium and how much should go to paid up additions rider. We can then get into the details on whether or not you want term insurance blended to the policy or not. We can then get into the details of how much of the premium will be available in year one for cash value. But if you don’t see the premiums in the proper perspective that they are how you capitalize your bank, then you will be off base regardless of the details. This is given lip service by clients but they have no faith in it. So this is what I’m trying to stamp out.
Premiums are the only way to capitalize the bank. Premiums are the only way to put capital into a policy and what I find interesting whenever we discuss banking just in general banks, of course if you were going to open up a regular bank, by the way, not in a policy bank with air quotes, but a regular bank, you would have to raise capital, capital would have to be deposited.
Even Nelson Nash talked about this. I love this book because it hits everything briefly. Some people probably wish he was more thorough, but it hits everything briefly. If you’re going to open a regular bank, capital has to be raised first before it can even accept deposits and make loans. The owners, the stockholders of the bank are the ones that are going to contribute a large amount of capital to the bank in hopes that the bank will become a profitable enterprise and that they will receive a solid return on investment. That is a basic banking enterprise. Banks always raise enough capital to make loans other people. Remember that is their intention is to use the money and I think the same thing is true for all of us. IBC essentially presents that we should all be raising enough capital inside of our policies, inside of our policy banks to where we have a real intention to make policy loans.
And this by the way, I’m going to keep referring to this. If you have not listened to the four stages of IBC commitment podcast, I really think you should listen to that. We also have a webinar that’s been recorded that you can view on our website, livingwealth.com. Go to the wealth creation resources and webinar tabs and you’ll see the four stage of IBC webinar. I’m going to refer back to this a lot, this idea that whenever you are starting IBC I think it’s important to have some intention. It’s easiest to get started without much intention what we would call the saver stage, but I think it’s actually more important if you’re going to practice IBC to capitalize policies with the intention to make policy loans and to understand how they’re going to apply in your life.
I think that’s very important. Now, you can start out at a small level, in which case that’s not going to happen just to get your feet wet. But at some point if you really want to practice IBC, that has to take place. You have to have enough capital, which means you have to have paid enough premiums to capitalize a bank that’s large enough to do the things you want to do. So a lot of times we’ll talk to clients who really love the idea of IBC. They love it. They love the theory, they love the philosophy, they love everything about it. But then you find out there is something that is stopping them from being properly capitalized in their policies. There’s like a wall called the fear of premium, which we would call the fear of capitalizing a policy. It comes in many flavors and many different shapes and sizes and because of that wall they never contribute enough capital to make big impacts on their financial success.
I think this is perfectly fine. I think everyone should do what they’re comfortable with, obviously. I’m not even here to try to convince you to be uncomfortable with the system. I’m not here to do any of that. I’m just merely saying that they love the idea and they want to be practicing at a high level, but they can’t bring themselves to, oftentimes because of some sort of incorrect understanding of premiums. It’s the biggest concern that they have. And it could also take place by the way, that’s the most common. It can also have an issue with loans and loan repayments. Their relationship with either of those can be out of whack and they can see the theory of IBC. They can fall in love with it. They can be extremely compelled by IBC and think it’s amazing. And yet because of some misguided concerns, they can be missing out on really practicing the way that they have in their vision to be able to practice it.
Now I also want to say I think some fears are valid. In other words, I don’t want to discount your feelings or your thoughts or experience because some of them are very valid. I’m not talking to the people who don’t even want to be full IBC practitioners, who just want to kind of add it in. And you may be listening to podcasting, you’re just not ready for that, nor do you even really believe in it that much. But you do love the policies. You do love the liquidity, the guaranteed growth, the tax-free nature of policies. You like to be able to use them and store some money up and you’re having fun with it and I’m so thankful and you’re just not ready to commit to higher levels of IBC practitioner. That’s perfectly fine, have fun. I’m not even trying to be disparaging it at all in this. I’m really not.
I’m just merely saying the main audience I’m seeing here is the people who have some concerns that are keeping them from doing what they actually want to be doing. That’s the main group of people I’m talking to. The people who threw some possibly misguided concerns are being forced to have a subdued IBC system, a handicapped one because of a misunderstanding of premiums, policy loans and policy loan re payments. Very common. So you’ll hear us hit on this all the time because no matter how many podcast episodes I do, no matter how much time I spend with people, it constantly comes up and so I want to make sure that everyone understands the proper perspective for premiums in IBC, premiums must be seen as a capital contribution to a bank that you own and must be seen as a capital contribution to a banking enterprise.
It must be seen as capitalizing a business and just like a bank, the capital you’re putting in, it should be large enough to where you end up using it, where you end up needing to use it, where you end up liking to use it. This is kind of the IBC mentality. I think most people get that. So your relationship with all of this is going to determine your success. Premiums are the only way to capitalize the bank. So here we go. Oftentimes premiums are seen more or at least they are felt more as a liability. Lip service can often be given about premiums being a deposit to a bank. I actually don’t even really like that term that much anymore. As much as I like premiums as capital contributions to a bank you own. I think that is the proper perspective.
Lip service may be given to that. Yeah, I understand I’m building capital in my bank so that I can use it. I understand that it kind of works as a deposit, they give lip service to it, but in their heart of hearts, premiums are still seen as liability. They are afraid of a negative consequence occurring if they committed to a premium that one year they couldn’t pay or something like that. I don’t even like the term paying premiums. This is what I would say. They end up contributing less capital to a policy than they otherwise would like to because there is a fear of premium. That’s actually a phrase in IBC. I don’t even really like the idea of paying premiums. It’s verbiage. Words matter, right? Word associations matter. Paying premiums doesn’t sound very good and it comes with connotations, but that’s why you have to have the proper perspective.
You have to have the proper perspective for premiums being paid in IBC. Premiums should be seen as a capital contribution. So what happens whenever someone wants to achieve big things with IBC and wants to do better with it and make more money as a bank owner, they want to be a better banker, but they can’t really commit to capitalizing more because of the word premium. I can’t pay the premium. I really feel there is some reality to this and I’m going to get to it by the way, but the proper perspective is that premiums are capital contributions to a banking enterprise that you own. The more capital you contribute, the more loans you can take from the bank, the more things you can accomplish with it and the more capital that’s in the bank, the more profitable the bank will be.
These are realities we can’t get around. So oftentimes, yeah, we have to see in the banking business as an enterprise that we are funding and the capital we’re contributing is going to produce a higher ability for our bank to be profitable and make loans. But oftentimes the premium gets in the way. In reality, what exists is a fear of negative consequences if premiums have been overextended. This does not mean that I believe that there is no such thing as having premiums that have been overextended. I certainly do. You could start foolishly, you could make mistakes, but what I would like to know or like to be known is that it’s far rarer than anyone could ever imagine and I want to talk about why. So why do I think that most fears of capitalizing policies through premiums are based on incorrect ideas? First off, the reason why I think the fear is overplayed in most people’s hearts and minds is because of a lack of confidence or understanding.
I don’t think it’s fully understood by most people how flexible your annual premium that you end up contributing, your annual capital contribution to your banking system. So what I’m trying to bring up here is that most people would know by now if you’re listening to the podcast that when you’re starting an IBC policy, you want that policy to produce the highest amount of cash value as possible and the lowest amount of death benefit as possible. Those two phrases have to be put together. In other words, if you want the highest cash value, you actually have to have the lowest death benefit and vice versa. If you want the highest death benefit, oftentimes you’ll have lower cash value. So this is where if you want to go back and listen to some other episodes, we talk about the MEClimit, we talk about the modified endowment contract or the MEC,which kind of is the IRS’s rules about how much cash value really can be stuffed in compared to the death benefit.
I don’t have time to go in here, but I just want everyone to understand that in this world you will end up having a huge amount of flexibility by how IBC policies have to be built and here’s how it works. Inside of your policy, you will have what’s called a base premium and you will have what’s called a paid up additions rider premium and the majority of your premium is going to go to this this thing called a paid up additions rider or PUA rider, which many of you will hear and that kind of acts as a cash value accelerator, you could say. In other words, the PUA rider is really just a fancy term for the piece of the policy that you’re using to stuff the policy with cash value much quicker than just a base premium would do.
By the way, there’s some misconceptions about this too. The base premium is not an expense either. The base premium produces cash value too. It just is slower at doing so than the paid of additions rider. So you want a huge proportion of your premium to go to paid of additions rider premium and you want a smaller amount going to base premium. That’s how every policy is designed. And so I wanted to express something I’ve said many times to clients too. With this scenario, you will end up having essentially a window of premium paying ability created. So every policy will have a base premium at the bottom of the window. So let’s say someone’s going to start a policy and they want to contribute capital at a clip of a hundred thousand dollars a year of premium. You can contribute as much or as little capital as you want to your policy and you can schedule it with huge variations, but we’re just going to use a hypothetical scenario
Someone who wants to contribute a hundred thousand dollars a year in capital to a policy premium, it’s very possible that the base premium may be somewhere 20,000 to 40,000. Somewhere at the floor there’s going to be a base premium, let’s just say $30,000, let’s say. The client wants to contribute a hundred thousand dollars of capital towards their banking enterprise and they want to do it every year. What they will essentially have though is a base premium, let’s say of 30,000 and a MEC limit that might be slightly higher than the a hundred depending on how it’s built. Maybe we’ll set the MEC limit to be let’s say 110,000. If you’re watching me, you can see I have my hands lifted up. I have a top of a window which is called the MEC limit of the policy, and that will be the highest amount you could contribute to that policy by design.
It’s called the MEC limit, and if you wanted to contribute a hundred thousand, that’s your desire. We would probably set the MEC limit just a little bit over a hundred thousand to make the most cash rich policy that we can. So let’s say the MEC limit is 110,000. That’s the max capital contribution you can make towards the policy in any given year. However, the bottom of the window is what’s called the base premium and the base premium is only $30,000. So what you have created is a window where the base premium is at the bottom of the window of 30 grand and the MEC limit is at the top of the window, 110,000, and you get to decide how much of that window you want to contribute towards every year. The paid up addition rider premium is what fills up the window and it is flexible. It is not required. You can pay all of it, you can pay none of it.
Now some insurance companies are more strict on how flexible the PUA rider can be, but nonetheless, in every company, the PUA rider is never required. So there may be some differences in insurance companies of how flexible the contributions can be. Let’s say in this little example, he wants to pay a hundred thousand. The MEC limit’s just a shade above it. Let’s say it’s 110 and the base premiums, let’s say 30. So and most people misinterpret or misguide as they think if they say they want to do a hundred thousand dollars policy, they may think to themselves, oh man, but what happens if I don’t have a hundred thousand in any given year? No matter what I tell them, they think there’s going to be some sort of huge negative consequence.
They think there’s going to be some sort of huge negative consequence that occurs. That’s not true though. In every policy that’s built for IBC, there is a MEC limit. There is a base premium. So there’s a top of a window, there’s a bottom of a window, and there’s a flexible PUA rider that fills up the window. We absolutely hope and everyone should want to be able to max out the window every year that they can continue to contribute the maximum amount of capital towards the policy they have. That’d be ideal. That’s the best. But there is no negative consequence. There is no negative consequence to filling in less of the window space. So this is why I think sometimes the fear is a little bit overplayed and that they actually want to contribute lots of amounts of capital, but they’re afraid to say it because they know that what happens if I can’t contribute all of it one year?
Once again, no worries. You have a huge variation in what you can actually contribute. So I have a very large window of premium paying ability. Some years I will max the whole thing out because I have a great year and I’ll dump every dollar that can be squeezed into premiums will get paid. However, I could just as well have a lesser year. I could just as well have a lower income year. That’s the nature of being in business and that’s the nature of how aggressively I’ve established my IBC system. So I could also just as easily end up not contributing the max of amount of premium to the policies. I could very easily not do that as well and there’s no negative consequences for doing it. So I think that oftentimes lip service is given but not believed toward the premium flexibility with PUA rider.
Essentially what I’m bringing up in this is that what keeps people is a fear of overextending and a fear of negative consequence for paying premiums when in reality is usually an overplayed fear. In other words, they always keep their premiums really low because in other words, they’re paying contributing capital and they’re setting their system up to be able to contribute capital, assuming a worst case scenario is going to take place. Let’s say in our little scenario, instead of having a guy who would like to be contributing a hundred thousand of capital but is very concerned about being able to hit that every single year, let’s say, in other words, instead of saying that’s actually what he wants to contribute, he doesn’t want a policy like that because what happens if I don’t hit a hundred. So he says, let’s just do 50. I’m pretty sure I can hit 50.
Let’s just do 50. So then the policy would have like a $15,000 window and a $50,000 MEC limit and he would like to be living life being able to contribute a hundred thousand capital. But because of fear, it keeps it subdued. Given he actually could have started a hundred thousand and just contributed 50 to it in a given year and there would’ve been no negative consequence to it. So I have more to say on this likely, but I want to move on to the next point.
So a lot of times there’s a misguided fear based on an incorrect idea of how strict premiums can be and the idea of negative consequences and in all stems from premiums being seen as payments, as debts, as obligations, as opposed to planned capital contributions that can fit anywhere inside of a window that you’ve created. Now, there is wisdom in creating a window that makes sense for every person.
So there is no reason for a guy who can only save 20 grand a year and that’s his max premium, to have a window of 150,000 of premium paying ability. There’s no reason for him to buy a policy that has a MEC limit of 500 grand of premium capital contributions. If he can only put in 20 and there’s reasons why that wouldn’t make sense, it’s because the window is established by the death benefit. So the window should match the person so that you certainly don’t want just to be stupid with this. I’m just merely saying oftentimes people’s windows are way smaller than they probably could be, not because of me saying it, but just because they would actually like to be able to contribute more capital to their bank as they get going, but they have a much smaller capital contribution established through the premiums because of a few.
The next thing I wanted to say is that even further than that, once a policy is established, the payment ability, the contribution you make is even further more flexible than most people realize. Because once your bank, your policy has capital accumulated in its cash value, which is the first day you pay the premium, that cash value itself can be used to fund its own premium, which we’ve talked about before. If you want a very analytical played out understanding of how policies can fund themselves without you contributing any money, I would encourage you once again to go to our website livingwealth.com. We just have a free webinar that’s been recorded there. You don’t even have to give us your name and email, just go watch the webinar. We’ve recorded a webinar. It’s on our wealth creation resources tab. Under the webinar section it says something like policy pays for itself. That’s the term, we’ll probably link to it in the show notes here.
So I would recommend you view that webinar and do it twice, view it twice. All I’m saying is on top of the fact that you’ve established a window of premium paying ability that you can contribute towards anywhere in the window. On top of that, there’s another mechanism that you could choose to contribute nothing in a year and not even have a truly negative consequence. And there’s many ways to contribute nothing. A lot of times people think that premiums must be low enough to make sure that the top of the window ability does not cause financial burden. So why does this not make sense? Premiums are capital contributions to a bank that you own, to a banking enterprise that you’re starting. You don’t have to contribute the max contribution every year toward the bank in order to have a profitable bank.
Of course, the more capital you contribute, the more cash value and debt benefits are generated, the higher the dividends will be and the higher the interest is being earned and the more profitable the bank will be and the more loans you can take from it. So obviously more capital is best. Premiums are not payments, they’re not obligation or that should not be the perspective going into it. Premiums are capital contributions to a banking enterprise that you owe. This is what they are. The more premiums you contribute, the more capital you contribute to policies, the more you can use them and the more profitable they will be. What we love about it is that in this world you are guaranteed to be profitable through the policies. There’s a guaranteed contract and insurance companies that will show you that you will be profitable. So unlike establishing another bank where the bank might fail, you might lose every dollar of capital that you contribute.
It might be lost in that enterprise. We actually know that as we stick with this, we’re going to be profitable. There’s no question of whether or not you’ll have contributed money and the cash value is going to be zero, five years down the road because the enterprise didn’t work. No, the enterprise is going to work. It’s guaranteed to work by the insurance companies who’ve been around for 160, 170 years. So that’s what we love about it. So we’re capitalizing policies through premium payments. A lot of times there’s fears that keep people from actually having the proper perspective. We don’t have the right perspective, but I will say as we are kind of wrapping this up, it is possible to overextend yourself and damage yourself with premium levels. It is possible to overly extend yourself and damage yourself with policy premium levels. I’m not trying to say you should not be conscious of things like that certainly, but it’s far more difficult than most imagines.
It’s far more difficult than most people will as far as to actually create that type of scenario. So, that type of scenario where you have over-extended yourself typically occurs when drastic financial changes occur very early on in your IBC journey. In other words, your business files for banker, it used to be making a ton of money. Somehow all income is gone and you just started your policy six months ago or 18 months ago maybe so even, and you’ve only paid one or two premiums and now there’s a huge drastic negative consequence where all income is gone and your hopes for the future are destroyed.
That would certainly present a scenario in which you have overextend yourself, but I am not exaggerating what I’m saying that’s the very rare circumstance for overextending yourself per se and damaging it. The other type of kind of overextension occurs mainly more so with mismanagement of money, mismanagement of the policies, and this is probably the most common one where someone starts with IBC, pays premiums, borrows all the money out, does things with the money without ever intending to repay it and without even using the money to buy appreciating assets.
So they’ve got almost all their money borrowed out of policies all the time, and they don’t even have much to show for. They just bought depreciating assets and spent money on various little things and they never repaid the policies and they never wanted to. If you were going to buy an appreciating asset with a policy like an investment, it’s true you don’t exactly need to repay the loans by any sort of strict measurable schedule because now you have the policy and the investments that you made through it, and so things are going to work out well, but the reverse is not true. In other words, if you buy depreciating assets or expenses and use that and max out policy loans every year just to pay for things that there is no corresponding asset and you don’t ever repay those loans are the ones you would want to repay, you would want to recapitalize the policy through loan repayments, especially for depreciating items or expenses, and the worst case is when you have mismanaged the system and your income goes dramatically down.
This is actually the most common situation where people end up being impacted by their premium levels and so forth, is whenever they have borrowed all the money out, they’ve blown it or they mismanaged it. They haven’t done what they’re supposed to do to practice IBC, and they don’t have any investments to show for it and their income goes down. These are the situations in which case we at Living Wealth have seen problems, but it’s so rare. It’s so rare for these things to have happened. You have to be conscious of it. The window premium should be available, but your understanding of the flexibility of premiums with PUA riders and the ability to offset premiums with loans, surrenders or reduced paid up, go watch the webinar folks. But these have to be known at the outset to alleviate invalid concerns about policy premium levels so that you can see premiums in their proper perspective, which is a capital contribution to a banking enterprise.
I see all of my premiums as I’m just, I am excited to pay them. I can’t wait for more capital to be contributed to my bank, and that’s not just because I sell this. Truly it is not. It is because that’s what every practitioner of IBC should see it as an exciting event where more capital can go into my system. Oftentimes, they’re not seen that way due to what I would call misguided fears. So we would want to kind of alleviate some of the invalid concerns so that you can see premiums in their proper perspective and then operate accordingly. That’s what we would like to have happen for everyone. Sometimes, some of my clients are so gung ho that I have to talk them back like they want to commit to such to levels of premium that I don’t think they should yet, and so we’ve had to walk some back, and so there is a truth that you don’t want to be stupid with this, but it’s actually far more flexible than most people imagine, and that typically inhibits them from unlocking the real power of IBC to its fullest.
If you get the big picture as it applies to premiums, if you get the big picture, the details won’t matter as much, but if you don’t get this big picture, this perspective is the big picture. If you don’t get this picture, the details don’t matter at all as you’re playing on IBC, so I want this to be said, so I were happy to discuss the details of premiums. How much should go to base? How much should go to PUA? Should we add term insurance to the policy to boost the death benefit so we can have a higher MEC level? How much is going be available in cash value right away? How much is going to be available in cash value next year? All of these little details, I would say they’re important. They’re great. I’m just merely saying it is a worthless conversation to talk about those details.
If you see premiums as payments anyway, let’s build out a strategy that makes sense for you. Let’s understand why we’re doing it. Let’s understand the proper perspective for premiums, and then let’s start nailing down some of the details for how it would apply to you, and I think that is the best way to move forward. I’ve had fun with this and I certainly enjoy everyone being here. If this is enjoyable to you, as we’ve mentioned many times, the best way to get the word out for this podcast is to like or review it, to rate it. That’s the best way to get this out there. We would so appreciate that. With that being said, this is Dollars and Nonsense. If you follow the herd, you will be slaughtered.
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