E66: Fundamentals of How to Fund a Banking Policy

Nate: In this episode, we discuss the details on what building a banking policy really looks like, and then we’ll share examples on how other people have funded their policies to help you understand what it could look like for you or what you may be able to use to help grow your system if you’re already started. She’s Holly, and she helps people find financial freedom.

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

Well Nate, I think it’s important that one of the reasons why we’re really talking about this subject is because of what happened in the last few days with yourself and myself. In meeting potential new clients and in working with them, one of the questions I got asked, you got asked the same questions probably about the same time in different meetings, was how do I fund this policy? What do I use to get started? There’s very complex ways, and there’s very simple ways that you can get started. One of the key things I think that you have to think about is do you have savings or is there something your cashflow [inaudible 00:01:19] that you’re doing right now? What are you putting aside on a monthly basis into savings, or do you have extra cash at the end of each month that you could be using this for?

Nate: Yeah. So Holly, you and I both got a note from different people on, man we’ve been listening to your podcast. We’ve done this and this, and we really don’t even know what it looks like to get started. So we both thought, okay well maybe it’s time that we actually got into some of the detail on what people do when they get started with a policy, how they fund it themselves, and examples of that. You know Holly, I was thinking maybe we could start with just the different things that people use. You get into a meeting with Nate or Holly, or whoever it is, and you’re discussing with them wanting to do this, have no idea what it looks like for you, and don’t even know what you’re supposed to be doing to put into it. So, that’s what I’d like to start with here, is explain just some various examples of things that people actually use.

As you already mentioned, the first one we could talk about would be cashflow. That’s low hanging fruit. If you’ve got money every month coming in in income, which we hope you do. If you don’t, we can point you in the right direction, I guess, for that, but if you have income, the first rule is to pay yourself first, which means live on less than you make. Have money left over. We would like to transition that money into a policy. That can come, Holly, from things like if you’ve been funding a 401(k) at a high level, or something like that, and that’s really what you’ve been using to save, but you see that you want to go more into the infinite banking route, well I’ve seen a lot of people start with that to help them actually get the cashflow they need to start. Just redirect where they may be already saving money. That can probably be the easiest one to shoot for, I think of a lot of people.

Holly: Even if it’s not a 401(k). Most people or some people are saving some type of money from their paycheck. Whether it be just for savings for rainy day or this or that. That oftentimes is a great way of whatever they’re putting in there into savings to start moving that actually over into a policy, whether it be the lump sum or whether it be what they’re contributing on a monthly basis.

Nate: You don’t need a lot of money to start. That’s one of the first questions I get. Do I need to put in a ton of money for this thing to even work? No, you can just start really at almost any level. There is too small, there really is, but don’t worry about that. Just get confident in knowing, yeah we can set aside just a monthly amount to put into a policy. We can redirect cashflow to do that. So, that’s pretty easy. The other, what I would call easy one, Holly, is just savings that you already have. Just in a rainy day fund, emergency fund, savings account that’s not doing much. The just in case of money. We can roll that money into a policy very easily, and it works really well. Sometimes in a combination with your cashflow supplementing that. But those are probably the two easiest ones. Just money that you want to move in on a monthly basis or because you’re earning money. It can also be savings that you already have that you want to move into your own bank, instead of somebody else’s bank.

Holly: Yeah, absolutely. Well another example a little bit more complex … Well actually, I don’t even know if it’s complex either, but I get a lot, “Hey I’m getting a refund from my taxes. Can I start a policy with this?” I’m gonna just make a caveat, it’s not a refund. It’s money you already paid. Then they’re giving back to you to use. But that’s one, as well as even retirement programs you have. When I say that you’ve got to be careful with that, right, but some people have retirement programs that’s money that’s just sitting, and they need to do or want to do something with it.

Nate: Exactly right. As you mention, there’s always penalties and taxes and regulations and all this. Of course when you go with a retirement programs, and so it’s a case-by-case basis, but depending on what your goals are, where you’re wanting to head, we have a lot of people who have in the past chosen to do that where they move money. Maybe they’re already retired and are pulling money from these programs. Maybe they’re even building it up and they just don’t want to be a part of the government sanctioned retirement world and they want to move it in, and there’s ways to do that that make sense.

As you already mentioned, those maybe get a little bit more complex than just the simple cashflow thing. In that same vein would be things like a HELOC, a home equity line of credit where you’ve got a house that’s worth a lot more than you owe on your mortgage, it’s got a lot of equity sitting there, not doing much for you whatsoever. Can we tap into that? Does it make sense to? Case-by-case basis here. Maybe a little bit of complexity, but certainly an avenue I’ve seen a lot of people do.

Holly: The other one, I mean we talked about 401(k) and what you were contributing to it. You also can take a loan out of your 401(k). We have had clients do that, to take a loan out to fund the policy and show how that works as well. So, I think as much as its infinite banking, there are also, in some ways, infinite possibilities of what you can use and how you can use it to fund or start a policy. I always say to my clients, it’s like you’ve got to get started somewhere. Just like if you wanted to buy property, you’ve got to get started somewhere. So what’s the most simple way we can start right now working to maybe the more complex?

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Nate: I think it’s a good point that you mentioned. I feel like some people think that infinite banking and building these policies is going to be a rigid experience, when it’s really not. It’s not rigid. You have a ton of flexibility. There is some limitations to how you can build it, but in the reality, most people can get exactly what they want. So, I guess how it looks when you fund it, Holly, if you want to switch gears. The easiest one is, “Hey Nate, I’ve been saving 500 a month. I’ve been setting it aside. I want to do something with it. I’d like to use your policies. I’ve been saving 1000 a month, 2000 a month.” Whatever that number is, and just moving it in. That seems pretty simple. Everyone should be able to understand that, I guess. You’re just saving money, moving it in, and paying a premium instead of putting it into a bank or 401(k) or something like that, if that’s you.

That’s pretty easy, but when we talk about some of the more complex ones, how does it look when people fund it? What are some of the ways that you have to do it whenever you start funding a policy, especially on the more complex issues?

Holly: It’s not just taking this huge lump sum of money and saying, “We’re gonna use all of it in year one to do this.” But actually we have to look at how do we best design it and do we just put a lump sum in, or do we actually spread it out over a couple years, or a few years. If you have, even like where Nate’s talking about, hey I’m putting $500 a month, but maybe you’ve been doing that for a few years. Whether it be two or three years, and you actually got 6000 or 12000 or some amount of money that you want to just put into a policy, but what’s the best way of using that and how do we put it in? It creates more complexity to each situation.

Nate: Right. If we have somebody who comes in and says, “Nate, I’ve already got $100000. I got it in an inheritance. I got it because I sold a property. I got it because I’ve just been saving.” I don’t know what it … “I’ve got it in a retirement program and I’m retiring next year, and it’s gonna be available to me.” I don’t know what it is, but when you come with a lump sum, we’re having different discussions because, as Holly said, there’s gonna be some limitations. That brings us into a conversation that I don’t want to hit on too much detail, but this thing called the MEC, or the modified endowment contract. If you’re learning about infinite banking, it’s a word you’re gonna get used to and hear plenty. Because that’s really the limitations.

Some people just say Nate, “I just want to dump it in. I want to write a check for 100000 and be done.” And I wish we could do that. It would certainly make life easy, but unfortunately the IRS doesn’t like to make your life easy. That’s why there’s this thing that they invented called the modified endowment contract, or the MEC. The issue with this is the IRS says there’s certain ways to build these policies that we are not going to call life insurance, and we’re gonna tax it. Life insurance policies, they don’t tax. They will grow tax-free. But a modified endowment contract does not receive the same favorable tax treatment.

If I was to come in with $100000 and there was no way I was gonna keep funding a policy with a premium of 100. I just have this one lump sum. That’s all the money I got. I don’t have any other money coming in to continue it. What are ways that we build a policy when that’s the case?

Holly: You have to ask, are you saving any other money? Let’s say it’s an inheritance, because I actually had a client like this. She did inherit this much money. It was around 100000. Basically what we did is design a program where she could put that money in, but it was 10 years without her ever having to fund it herself. We took a part of it and put it in, and we did dumps, the maximum we could put into a policy without creating a MEC for her. The other thing we did is, and it gets a little bit into more detail, we took that money so it just didn’t go into a bank where she could spend it, and we tied it to basically, or essentially a savings account within her policy to pay those premiums in the next few years, called an advanced premium fund.

Nate: So, there’s some complexity there. I guess the main point is normally if you’re someone who has a lump sum, and we have plenty of clients who pay 100000 a year and above in premiums. I’m not talking about that. I’m talking about the individuals who just have a lump sum from money that they don’t expect to be there again next year. It came out of the blue from a … windfall money or money that’s in a retirement program or something like that, that they want to move in. We can’t just write one check and be done because we’ll create a MEC. Or, you know what, you could, I guess. You just wouldn’t want to. It’d be dumb, but you could and to have a taxable policy.

So instead what you do, as Holly, you mentioned, is we have to spread your money out. We have to fund it over a period of time, typically four or five years, somewhere in that ballpark where we may move 25 grand a year for four years. Then at that point, we’ll either drastically reduce your premium so that you can fund it at a level that you could actually do just with your cashflow or something like that, or maybe we’ll just completely turn the premium off, Holly, if we have to, or use the policy to pay for itself, or do some things that are more fun at that point.

But all that to say, that’s one of the answers to some questions I think some people would have, is well I’ve got some money, but I don’t have it every year. If I put in 100000, am I gonna be expected to put that in again next year, and so forth? No, but there’s ways to do it. Typically if that’s you, you’re gonna have to just move it in over a period of time, as opposed to just one year. It’s due to those MEC issues that dictate how we can build these policies and how quickly you can fund them and how quickly they can pay for themselves, all those sorts of things is really based on some of the MEC guidelines that the IRS puts down.

Holly: I think Nate, too, with that what you have to understand is when you say you have a lump sum of money, one of those questions even you should be asking yourself, and we ask you is but do you have that lump sum next year and the year after that? You can’t afford $100000 for the next four years or five years. So what can we design that you still can get that money in a policy and it’s still the most beneficial to you and still be able to afford it after the four or five years and it’s not so expensive you couldn’t afford it.

Nate: Right. And there is ways, guys, by the way to have some lump sum go into it that is relative. Let’s say you wanted to start a policy with your cashflow and you can afford 20 grand a year just because you’re saving money and you’re doing that, but you’ve got some money, maybe $10000 sitting aside you want to put in. There are ways to build policies where you can fit a lump sum of money, extra money into it early on in the policy, upfront for the policy, where you can make a one-time dump in. And there’s ways to build a policy to avoid that MEC-ing. Don’t get too caught up in that no lump sums are available. If you have money, there is a way to fit it in. It’s got to be fairly relative to what you’re paying ongoingly.

Like you’re not gonna be able to start a policy where you dump in $100000 in year one and you only want to pay five grand a year from that point on. That’s just not gonna look very good. If we could fit it in, we really can’t. But if it was I’m putting in 20 grand a year and I want to put in an extra 10 the first year, maybe even 15, there are ways we can build it to fit it. All that to say they’re extremely flexible. But if you’re the person who has a lump sum, from these various sources, from some sort of windfall money, the chances are we’re probably gonna move it in over a period of time, a few years typically we can move it in. We may combine it with some of your cashflow, so if you do have money, 20 grand a year you want to put in, but you’ve got 50 grand, well maybe we start a policy where we move that lump sum money in over a period of time, and contribute out of your cashflow to it.

You can really build it however you want to. It’s just simple telling Holly and me what you’ve got that you want to contribute towards it. Most of the time, where there’s a will, there’s a way. But sometimes we’ll have to be limited.

Holly: I think if you hear us saying we’re limited, our concern really is we don’t want it to be a modified endowment contract, or a MEC, and we really want to create the best program possible for you. I had one client say, “You’re pulling back the reigns,” but in pulling back the reigns, it allowed him more freedom as he built his policies to grow and do what he wanted to, but if we’d started out the way he wanted to, he couldn’t have sustained the program.

Nate: The best thing to do is just simple say, “Here’s what I want to do. I know there may be limitations on it, but in a perfect world this is what I want.” And many times, Holly and I can build something that works or that’s very close to what you wanted to do, but always know that when we’re building it out, we’re trying to make it work the way you want it, or we’re gonna tell you why what you want is not a good idea and we’ll give you advice on how to make it work in a better way. So, we’re just trying to help as best we can.

Lastly Holly, if we can switch gears here too. When we’re talking about building policies, I have typically gone and brought people through a learning process, or what I call different phases of growing with infinite banking. So, kind of like a phase one, phase two, phase three style of thinking where phase one is just getting your first policy, and in that, and you already alluded to this in the very beginning, I really want your first policy, your first in to be something simple, not something complex. That would be things like putting cashflow in that you’re already saving and things that are already liquid, like cash, money, savings accounts, things like that. Some of those really low hanging fruit to get your first policy going.

Holly: Yeah, and I think even with this simplicity, let’s say you don’t think you’re saving anything monthly, but you actually are contributing to a 401(k). Sometimes it’s just changing the contribution so that it’s not to the 401(k), it’s now going to a policy. So even with 401(k)s, you have to understand you are saving money. You just don’t see that money or realize it’s there. So, phase one, or even the first foundation I call it, that you want to build is what are you saving and what are you doing and how can we get that money into a policy, not something very complex that we’re jumping two foundations ahead or two phases ahead.

Nate: It’s just easier to get in and get your feet wet and seems to make sense to me to get used to something instead of trying to plan out a really complex strategy just to get your first policy, just to get something going, as we’ve always said. And you’ve heard of say this on the podcast, it’s easier to steer a moving ship than one that’s sitting at the dock. Get something that you can learn and grow from, knowing that you can open many more policies, and most of us do have many more than just one policy. Then we start adding some complexities. Normally we start with things that are low hanging fruit, the cashflow, the savings accounts, the emergency fund, redirecting where you’re saving money. That’s pretty simple. We can manage that pretty easy and get used to infinite banking with a policy like that.

Then a year later, we may start adding complexity opening new ones. Complexity like opening a HELOC and using that, or using a 401(k) loan or retirement programs or some windfall money. At that point, we can start adding in some more of the complexity with assets that you have, that we can either leverage or sell or whatever you want to do. Then we start really focusing on some of those things that may get, you know have a little bit more complexity, but you’d be so much more ready for it, having already had a year under your belt.

Then the last phase, Holly, that I typically take people to, is to start policies, like last podcast with Ray talking about how he uses policies to pay for charitable giving and taxes, especially taxes. I’ve seen people start there, but I find that normally people start with more of the generic simple route, and then we’ll end up adding policies to do things like that, things that we call redirecting money that you’re actually planning on spending. Redirecting money that you pay for taxes, or charitable giving or vacations. All these different things. And money that you’re actually spending, can we move that into your system first, and then pull it out. And starting policies with what we call expense money, or transfer money that we are now going to use to fund policies. That’s the last phase people get to. They’ve got their simple stuff, they’ve got their assets moving in, and now they’ve got some of their expense and transfer money moving into a policy first, so we start doing more and more with the policy on a daily basis.

Holly: I think that’s key that you don’t want to start at the, I’m gonna call it phase three. You’re automatically just using the money you earmarked for expenses and transfers. You were gonna spend that money. Because you want to get a taste of the program. You want to understand really what you’re doing, and we really want you to understand how money works, why you’re doing it, and how you’re using it for before we skip over from simple to this very complex, or not even complex, but okay I was earmarking this money for it, now I’ve used it for that, but now what do I do? And really being able to have a policy you can grow with and learn with, and get to that point of, okay now that this ship is being steered, how do I navigate a trip around the world, per se.

Nate: So, there’s some phases. Don’t overextend yourself. Don’t get too crazy with your first in with infinite banking. Just get something going. It’s a good idea. I promise you that. Stop thinking of all the different ways you can get started. Just do something. Make it simple and grow with it. I’ve got eight policies personally. I didn’t start with eight. I started with one and then I got two, then three, then four, and so forth as time has gone on. My income has changed. My understanding has grown. We always are learning, and we’re learning new ways to implement it and getting more excited about certain things. So, it doesn’t matter how you get started because it’s not gonna look the same five years down the road. Things are gonna be so different that we’re gonna have gone and done a lot more, but we don’t have to start there.Get something going. Build upon it. Add additionally policies doing more and more complex things as you go. You’ve got to walk before you can run. We’d like to see you run, but typically starting off at a sprinting pace can bring concerns, can bring confusion, and it’s just something we try to avoid, at least at the very, very beginning before you’ve ever had a policy, taken a loan from it, paid it back, or done anything with it. Typically we say, let’s go ahead and get something under our feet and then we’ll build on that.

Holly: I think it’s really important what Nate said, learning that right now you’ve got to learn how to walk before you can run, and you’ve got to learn how to run before you can jump, or leap. Very much the same. The phases we’re taking you through, we’ve done it ourselves. I started in the simple phase and did that for many years. I’ll be honest and say the second phase of the complexity in the HELOC, it took me a long time to pull the trigger because I really enjoyed the simple phase of knowing that that was money I could depend on. So, we’re doing that because that’s our experience as well. We want you to have a positive joyful hopeful experience instead of trying to really understand something so complex that you really don’t know what you’re doing.

Nate: Exactly right. So I guess to wrap up this conversation, there’s so many ways to fund it with from cashflow, savings, where you’re saving money, redirecting that. Things like loans from a 401(k) or from a home equity line of credit, retirement programs, a combination of all of those. You can get as complex as you want. Then even from starting policies with money you’re actually spending and rolling that into the banking system. The main thing that limits how we can build these policies is the MEC issues, and we’re the experts on that, so you don’t have to be. So, don’t be too concerned about that. We have your back on this. And to work in phases. Just get something moving, get moving in the right direction. Start making some changes to help us. Let us help you and advise you, and you’ll be where you want to be in no time at all.

Holly: I agree 100%.

Nate: This has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free resources and transcripts, please visit LivingWealth.com/E66.