E9: Infinite Banking Explained and How to Benefit From It
What does a football coach and the University of Michigan have to do with building your wealth? In this episode, Nate and Holly unpack a recent contract negotiation that teaches us the multiple benefits of life insurance. Listen in as the hosts discuss how a life insurance policy has been used to help some of the most influential businesspersons and how it can help you in the same way.
Also, Nate and Holly reveal:
- Why wealthy people buy so much life insurance
- How the middle class can use a policy like the rich
- How life insurance can be more than just a death benefit
- How to step up your charitable giving without falling behind
- Gain access to our Secret Banking Masterclass now FREE to listeners of the podcast here now
- Why Dave Ramsey is wrong
- What is Infinite Banking
- Who was Nelson Nash?
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Podcast Transcript: Creative ways that the wealthy have used their life insurance policies
NATE: Many times we’ve been taught by the ﬁnancial powers that life insurance is a stupid place to put money. But in today’s episode, we’re going to discuss some of the creative ways that the wealthy have used their life insurance policies. And we’re also going to give you some ideas on how you can use a policy in your own life to build your wealth. She’s Holly, and she helps people ﬁnd ﬁnancial freedom.
HOLLY: He’s Nate, and he makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered. Episode 9.
NATE: Alright Holly, let’s go ahead and get started today. The main story that brought around this podcast in particular, the writing of it, was a month or two ago we saw this article on ESPN, and it said something about Jim Harbaugh and him getting this crazy 2 million-dollar-a-year life insurance policy paid for by Michigan. For those who don’t know who Jim Harbaugh is, he’s the head football coach for the Michigan Wolverines, one of the highest-paid coaches out there. And we heard this crazy story about him getting this policy. Holly, tell us a little bit about this story. What happened with Jim?
HOLLY: What happened with Jim was he negotiated with the school to basically increase his contract, he made an amendment to his contract, and the school is increasing to him nine million dollars. For 2016 alone. But what they’ve done is they added 5 million dollars of salary for the next six years . . .
NATE: So $5 million is just his normal salary, right? He normally gets paid $5 million, but you’re saying in 2016, he’s really going to get $9 million from them.
HOLLY: He’s going to get $9 million. And part of that $9 million is that Michigan is going to act like a bank. And they’re going to loan Harbaugh $4 million this year, and they already did it. They did it on June 3rd, so he’s already been given the money to start this life insurance policy. And then each year after, he gets $2 million for the next ﬁve years. Basically, what they did is they gave him the money to buy a life insurance policy. Most of us in the middle class think that’s crazy; who would go and take that money and buy a life insurance policy with it? Now, I’ve heard that Warren Buﬀett once said, “If poor people would do what rich people would do, they wouldn’t be poor anymore.” And basically what he is saying is Harbaugh is using life insurance, this product, diﬀerently than what, Nate, you or I might use it as being in the middle class. So what does he know that we don’t know? He’s using life insurance diﬀerently for something that’s greater than what you or I ever would have thought of. What are some of the beneﬁts of that, Nate?
NATE: If I could go back into it a little bit . . . As Holly was saying, as the middle class has been taught to do things with money, the wealthy people are trying to think outside of the box and do other things. So here we have Jim Harbaugh; he’s getting paid $5 million a year. That seems like a lot of money in just straight salary. And now they went to go redo his contract, and he wants to make some more money. But you and I know, Holly, that we don’t like paying taxes, so he’s probably trying to ﬁgure out a way to avoid that. What they’ve come up with is they’re going to lend him $4 million dollars, as you said, in 2016 and then $2 million for the next ﬁve years. All that money is just going into a life insurance policy, which seems crazy. How is that going to beneﬁt Jim today, was your question, Holly, (which I’ll get into in a second). Essentially, because they’re lending him the money instead of paying him the money, then it’s a loan, so it’s not taxable. If he’s borrowing money, he doesn’t have to pay taxes on the money he borrows. The school is lending him the money; he doesn’t have to pay taxes on it. And the school . . . essentially they make it a win-win for everybody because the school has a lean on the policy that if Jim was to die at any point, when he dies actually—whether it’s tomorrow or thirty years from now—they’re going to get back all the money that they lent to him. And they’ve got it in the provision that he doesn’t have to pay them a dime back until he dies. That’s a pretty remarkable thing. As this premium is going in, it’s building cash values, and it says in the provision that he is allowed to borrow against the cash values. Holly, as you and I both know, that whenever you borrow from a life insurance policy, if it’s set up correctly, you don’t even owe taxes when you take the money out. So he’s essentially totally bypassing the IRS, and he’s able to get this money from Michigan that they’re actually going to recoup 100% of it anyway. So they love this deal. Jim likes this deal because he won’t have to pay taxes on any of the money. His family loves this deal because they’re going to get rich at the death beneﬁt. It sounds to me like it’s a pretty good gig.
HOLLY: And the key there is he doesn’t have to repay that loan until he dies. And that’s when the university recoups its investment. But the rest of the insurance payout goes to whomever Harbaugh chooses to give it to. This is a deal. It guarantees his family an increase of $6 million in 2016 if he were to die. And $3 million each successive year after, so he’s just created a win- win for his family.
NATE: It’s unbelievable. So just to bring us back to what you had asked me, to begin with, why would this make sense? Dave Ramsey and some of the other big players in the world say, “Life insurance is a stupid place to put money.” And then we hear stories like this, like Jim Harbaugh’s, and we say well if life insurance is such a stupid place, does that mean that Jim is a pretty dumb guy, or his agent, or the University of Michigan?
Or is some life insurance agent out there so smart that he’s screwing with the minds of some of the top paid people in the education industry—the president of Michigan, the athletic director, Jim Harbaugh, all the people in those negotiations? Did he sucker all of them? Or maybe they just know something, and they’re thinking diﬀerently than we are. And that’s your question, Holly. How should we be thinking when it comes to these types of things? And that’s why we wanted to do this episode is because the wealthy have been using life insurance, and the middle class has been left out in the cold with mutual funds, ETFs, retirement programs, all the things we’ve been taught to jump into. Harbaugh’s not into that; he’s doing something totally diﬀerent.
HOLLY: I know. And what he really was doing was working with money today. He is willing to look at the university as a way to provide for his family, to help with his taxes, and also to ensure an inheritance. And the university wins as well because they get money back when he dies. So no party here lost. Yes, the university is loaning him the money. But they’re going to get it back one way or another. He’s going to be able to take loans on his policy and use that money, but it’s not considered a form of payment because it was a loan, so it’s not taxable.
NATE: And there could be some listeners, Holly, that we probably jumped ahead of in conclusions that really even understand how life insurance works in the ﬁrst place. When most people hear about life insurance, they mainly [think] about a death beneﬁt or that’s the ﬁrst thing we think of.
Right? That Jim Harbaugh’s doing this as a death beneﬁt play, but you and I know that with what we do at Living Wealth and with this inﬁnite banking concept that we teach that our whole goal is not how to use life insurance to pass money on, but how to use life insurance to build wealth today. And that’s one of the things—Jim Harbaugh is clearly not doing this because he just wants to get a death beneﬁt for his family later. He’s doing this because he wants to get wealthy while he’s alive, too. Life insurance policies, when designed correctly, (and you can focus a life insurance policy to be heavy on a death beneﬁt or cash) and if you do the cash, then he’s going to have a ton of money to work with. It’s going to be growing guaranteed every single year, and he doesn’t have to pay taxes on the growth. That’s why the wealthy buy it so much because it’s tax-free. So when we’re talking about life insurance, you and I are mainly focused (we’re a little bit on the death beneﬁt) but almost solely on what he’s going to be doing with the immense amount of cash values that are going to be building in there, growing by 4% or 5% year in and year out with no risk. That’s what we like to see, and that, of course, is probably why Jim got this thing.
HOLLY: And he got it, too, as a way not only to protect himself but, I believe, the university. But he’s basically allowing the university to give him extra money that he can then use today. And most of us have never thought about that money that we’re putting into a retirement program, 401k, or something like that as we’re saving up or storing wealth for the future. But we all need cash to live today. And he is doing that. That’s what Harbaugh is doing. He’s using the cash today that the university is providing to be able to live and provide additional income and resources to his family. He’s deﬁnitely not stupid. He’s not waiting and saying, “Hey, give me a $9 million salary.” That’s not what he was saying at all.
NATE: Because if he did that then he’d have to—he’s already getting paid $5 million. If he got $9 million, that’s another $2 million in taxes he’d have to pay. On top of what he’s already going to pay.
HOLLY: So what is he doing? They gave him a $2 million loan, and then they’re going to give him another one of $2 million in December this year and every year after, another $2 million. He was so smart even when he gets this money; it’s at the end of the year. He’s getting it in December, but $2 million . . . so he’s increased his income without actually increasing what the university is paying him.
NATE: In other words, on his W-2 tax forms there’s no additional income but there’s a whole bunch of money that’s been transferred to his control. To a certain point.
HOLLY: And he’s able to control that the whole time. The university has allowed him to have that control. Yes, they did an amendment, but what they did was design the policy so that it delivered value both to Jim and the university. And that’s what we as individuals and as middle class need to understand: life insurance does have value that’s not just the death beneﬁt. It is a contract. And because it’s a contract and because of how it can be designed, it can bring value in the form of money to you without increasing your taxes.
NATE: Right. Taxes are the biggest eroder of wealth that we know today. Try to get yourself in a tax-free environment. That’s why the wealthy buy so much life insurance. The middle class, we haven’t been taught to do that. And some people listening may say this is one outlandish case, even though in the article we read [from] the guy who laid the groundwork for the deal, I think the athletic director for Michigan, he says that, “It’s a commonplace form of deferred compensation in the corporate world.” Commonplace form of deferred compensation. That means that these types of transactions, where a company may lend money to an executive so that they don’t have to pay taxes on it and they pay it back, these types of things happen commonplace, he says. So the wealthy are trying to ﬁgure out ways to reduce taxes and buy life insurance, but we’re all being told it’s a stupid place to put money. If this is a commonplace idea to the higher execs in the world, maybe it’s something we ought to look into ourselves.
HOLLY: And, Nate, you mentioned that this is just Jim, just one football coach in the entire U.S.A. who did this, right? But there are other key people in the world who have used their life insurance to do the same thing. One of the big names that most people don’t ever realize is Walt Disney. When he went to start Disneyland, most people thought he was crazy. “This isn’t worth it; we’re not going to loan you money for this.” What did he use? He used his current life insurance policies to be able to fund and start Disneyland.
NATE: And even J.C. Penney, I read an article on him, back in the Great Depression just to keep his stores aﬂoat during that terrible time, borrowed from his life insurance policies to run the business.
HOLLY: To pay his employees. He absolutely did it.
NATE: By the way, Holly, that was almost 100 years ago that people have been using this thing! And yet we think this is some mysterious, mystical tool or some “salesy” snake oil; that’s what we’ve been told it is by the Dave Ramseys of the world. Wealthy people have been using it for over a hundred years; they’ve been doing these types of things.
HOLLY: They realize something. NATE: Yeah, let’s take a hint. Exactly, let’s take a hint, and let’s do that. Nobody had to tell Jim Harbaugh that this was a dumb plan. Even if it’s dumb, and you think, “Why would you do that,” it’s a win-win. He’s now seeing very easily how it was a win. And that interim athletic director, Jim Hackett, he said this is what corporate America . . . this is what they’re doing. Big time corporations. This is commonplace.
NATE: Yeah, commonplace is a very speciﬁc word. It means it happens all the time. We talk about, Holly, that banks and corporations are the biggest buyers of whole life insurance. They buy this stuﬀ like crazy.
HOLLY: And they keep doing it day in and day out. So either they know something—really you should be asking yourself—do they know something that you don’t know or are they just using the products that we have access to diﬀerently? And I would say they’re using those products diﬀerently, and they understand money and how it works. And they’re starting to put together how to have some ﬁnancial education and how to use these products that the wealthy are [using] every day so it is commonplace among the middle class versus just corporate America or the executives are doing it or Bank of America or Wells Fargo are doing it, but I can’t do it.
NATE: That’s what we really want to get to. Some of the ideas we’ve seen that you don’t have to be making $5 million a year and be Jim Harbaugh. I mean, honestly Holly, you and I probably are not going to go some place where anyone’s gong to lend us $2 million for the next ﬁve years to build a policy. I don’t know if that deal is going to be available. But the idea behind it and how to use life insurance and create win-win situations and create value where there used to not be any, I think that’s available to everybody. So I thought we could go into a little bit of discussion on some of the ways we’ve used it or seen it being used, these life insurance policies [and] this inﬁnite banking concept to build wealth. I’ll go ahead and let you start it. I have a couple of ideas in my head, but I’d like to hear what you’re thinking as well.
HOLLY: Before I go into that, we’re going to take a break and hear from our corporate sponsors at Living Wealth, and then we’ll jump back in and talk about how Nate and I use this on a daily basis in our own lives.
HOLLY: So Nate, before we left, you had asked me how I use it, and I’m going to use a really simple example to [explain] how—the very ﬁrst thing we ever did in my life, with me and my husband—we used our life insurance policy. When we ﬁrst started our very ﬁrst life insurance policy, we did it when our ﬁrst child was born in 2006. And we were poor in the sense that we were missionaries. If we had a $1000 a month come in, that was a good month. For us, we really had to sacriﬁce and sit down, but we started putting $300 a month into a life insurance policy. We moved back to the States, and my husband wanted to buy a GPS. I know they’re commonplace now; you can buy them at Costco and diﬀerent places. We didn’t have the $600, that’s what they cost at the time, to buy this GPS. But we knew we could borrow from our life insurance policy, so that’s what we did. We borrowed the money out, asked the life insurance company for a loan, and we bought our ﬁrst GPS. And for us, it was so freeing to know we could buy something that wasn’t a need; it was a want. But we ended up paying ourselves back over the course of the year, and instead of having $600 that we paid back, we paid more than that back; we put in about $750. We actually had $800 we could borrow back out. It was shocking to me that we could have more money than what we actually borrowed out and paid back. So for us, we used it to buy something like a GPS, but how else can you use it? I’m working with my next-door neighbors; they use their life insurance policy to pay for their kid’s private schooling.
NATE: Yep, I have some clients doing that. Kind of as you said, this whole idea of life insurance policy is actually making me money? That sounds crazy. A lot of people when they see that premium or putting money into a life insurance policy via a premium think I’m going to be poorer after I pay this premium or something like that. But you’re saying you were able to build a life insurance policy, [had] cash values, borrowed money, bought a GPS— there’s no rules to that. You didn’t have to tell them what you were going to use the money for, no loan application. You just took the money, bought the GPS, repaid the policy loan back over a time period that you wanted to do, and you actually got more money back than you paid in, and made money on it. That sounds way outlandish! But if it works for a GPS, it can probably work for something bigger.
HOLLY: It can work for a car. Have you used it for a car?
NATE: I just did. I bought my wife and I—we’re expecting our second child—and she’s a mini-van lover, surprisingly. And so she says she wants to get a mini- van. We take her car, trade it in just earlier this year. $22,000 we owed after our trade-in for the car. I borrowed money from my policy to go fund the purchase of the car, and instead of having a car payment to a bank, I’ll have it back to myself. And I’ll pay that back, and over the course—I think I did for 60 months—I’ll repay it total, so I borrowed $22k, I’m going to repay $25k because I’m going to pay myself interest just like I would a bank. Even though I’m going to put $25k back into the policy, I’m actually going to have more like $30k of cash values after that’s all said and done. So I not only got all $25k principal and interest that normally someone would have paid to a bank I’ve got sitting there, I also made $5000 tax-free with no risk simply by doing some creative things with a life insurance policy that normally we haven’t been told to do.
HOLLY: And, Nate, you also have the car. You can trade it in, too. And what most of us don’t realize is that what normally would be a depreciating asset has just become an appreciating asset because he has the car, he’s going to have the money, and he’s going to have $5000 extra. All by using the vehicle of life insurance instead of using the bank.
NATE: It’s an amazing thing when you do it. I even had another thought similar to how the University of Michigan and Jim Harbough are doing it. A lot of listeners are probably like us and we do some charitable giving. Either we go to church or we have causes that we care about. And normally we just give money out of cash. We simply write a check because we earned some money, and we write a check, and we send it to them, and it’s done. One of the things that is so powerful is if we could do just what we’re going to talk about with Jim Harbaugh—they could have just given him the compensation. Just like everyone else. Everyone else gets compensation with a check. Well here’s Jim Harbaugh who’s adding a step to it and actually getting a loan instead of a check. If we would add one more step to our charitable giving, we could actually drastically increase how much we can give and have everyone win. What I mean by that is if you would take the money that you would normally give and you put that into a policy, into a premium, and borrow from your policy, just like Jim Harbaugh is going to do, borrow from your policy to give to the charity, then you still get to give the gift. But over the time frame, however long you’re going to live, there’s going to be this large death beneﬁt that is going to be created that can be sent to the charity. So you can be giving them the cash values while you’re alive, but then also giving them a huge amount of money when you pass away with the death beneﬁt that was created out of thin air. So it’s a win- win, and, in fact, you can even make money. It’s essentially the same thing that Jim Harbaugh is doing, but you can control it and you can create money out of thin air to where instead of getting compensation like Jim Harbaugh and that’s it, getting compensation that’s tax-free that’s going to beneﬁt the university and beneﬁt the family. Killing ﬁve birds with one stone. That’s what we’re trying to help people do.
HOLLY: I’ve done that. Charlie and I have done that. We give quite a bit, but what we did is a larger policy, and we have the charities that will each get something when we die, but we still give the money to the charities. And I was amazed at the concept of understanding and explaining to them that just because upon my death or when I graduate from this earth that my giving doesn’t have to stop. That my giving can still beneﬁt them and their organization and people that I truly believe in what they’re doing and how they’re helping the world and the greater good. So even in death, not only does my family win, but the charities and organizations that I truly believe are beneﬁtting from that, and it didn’t cost me anymore to do it through a life insurance policy. It took more time. That’s all it took. More time and one more step. But to be able to give what you’re giving to them and just put it through a policy so that it’s growing tax-free, and then giving the charity that money as a loan, it actually is easy and simple. It’s just a matter of do we have that extra ten minutes or half an hour or hour of your time to be able to give a lasting legacy to an organization you believe in. And it’s not just charities that you can do this with. You can do it with your child’s college education. You can do it with a wedding that you want to plan for your children. You can help your kids with down payments on a house. You can literally use this life insurance as the tool for what we ﬁnance. And we ﬁnance everything in life. To take that power away from the banks, to be able to control your money, to see you use it how you want to and to be able to give and use it—whether it be for a wedding or a vacation. We did it for a vacation last year; my daughters—we went to Hawaii, and they wanted to ﬂy ﬁrst-class. Did it cost that much more? No, we ran it through a policy just so they could have that experience. And it was phenomenal to see the joy of them being able to be like “We can watch movies!” And me knowing it really didn’t cost my husband and I any more of a sacriﬁce other than the fact of we just used the money of our life insurance policy, and we’ll pay that back. Versus we’ll just go on coach and [not] see that experience.
NATE: It’s just an amazing rift, to sum it all up, of what some of the things you and I have learned to do from this concept. We’re big proponents of life insurance and how you can use it. The rich know things that we don’t know. And as you said before, Warren Buﬀet says, “If the poor would do what the rich do, they wouldn’t be poor any longer.” And if you’re tired of at least feeling poor, then it might be time to start putting your money some place else where you can use it. Life insurance is such a great place. If you’ve been burned by somebody—normally life insurance gets a bad name because somebody got burned or had some kind of misunderstanding, most of the time it’s not based on truth. If you educate yourself, and educate on how life insurance really works, you’ll see what a powerful tool it is, and it makes it easy to understand why wealthy people buy this thing like crazy. If you would like more creative ways to learn how to use it, you can go to Livingwealth.com. We have some ideas there, and also from there, we have a couple of courses there on the website to broaden your horizon of what life insurance can do and start thinking with the wealthy and abundant outside-the-box mindset like these guys. Holly, anything else before we close it down?
HOLLY: We’ll be talking more, possibly in our next episode or in an upcoming episode, [about how] Jim Harbaugh made a lot of money. Nate said we couldn’t ﬁnd $2 million. But there are other ways and other tools that you have and assets that you have that you can use to fund your own life insurance policy. And that’s what we’re going to look at in the future. I don’t make $2 million. Nobody’s going to give me $2 million. But what do you actually have that can be used for life insurance policies and how does that really work? So we’ll talk about that a little more in an upcoming episode.
NATE: I forgot to mention that. So deﬁnitely stay tuned. Probably the next couple of episodes we’ll sit down and talk about how you may not be able to get the leverage to the extent that Harbaugh does, maybe you will. We’ll talk about a way that you can do exactly what Harbaugh did, but we’ll at least talk about what you and I in the middle class the closest thing to it that we can do. That’ll be exciting, too. So stay tuned for that. Anything else, Holly?
HOLLY: That’s it.
NATE: This has been Dollars and Nonsense. If you follow the herd, you will be slaughtered
HOLLY: To get free resources and transcripts for this episode, please visit Livingwealth.com/e9.
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