In this episode, Nate discusses the optimal way to set up your infinite banking system so that you can get the most profit out of becoming your own banker.
Topics Discussed:
- What should you be doing to get the most out of IBC
- The most powerful breakthroughs of IBC
- Why IBC is meant to optimize your entire financial life
- Determine what should be flowing through IBC policies
- Understanding facts about the premium levels that you start
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 Austin Distel
Podcast transcript for episode 173: Make a Significant Impact with IBC
Nate: In this episode I discussed the optimal way to set up your infinite banking system so that you can get the most profit out of becoming your own banker. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered. I love, by the way, as we start this off, I love optimizing things in life. I think my wife would attest to this. She probably gets irritated at me. I love optimization. I hate being inefficient. I hate wasting time. I hate wasting money. It’s just in my wiring. I love to be an optimizing person, an efficient person. And so I have given a ton of thought over the past five years especially to how can we optimize our infinite banking system to get the most out of it? And obviously it’s a question that a ton of my clients have, they have the same question of course. And so not only in my own life I’ve been trying to figure out how do I optimize in my own life IBC, but then how can the vast majority of people who are doing this, how can they optimize their own systems?
And people ask me this type of thing all the time. Clients of mine, they’ll ask, what should I be doing to get the most out of IBC? A couple of things on that front. First off, I think some people make the mistake or they get off base whenever they ask this question because really what they’re asking is, what should I be taking policy loans out to do? As if that’s going to help optimize the system. So in other words, they get a little off the beaten path and they think that the way to optimize IBC in their life is to use policy loans. Nate can help me figure out what I should be taking policy loans out to do and he can help me optimize that. Really quick in this front, I do believe that your use of the policy and you taking policy loans while you’re practicing the becoming your own banker system is going to be very important in how you end up optimizing the situation.
But after five years of focusing on this in my own life, I really think that there’s things that have to come around before that. It all culminated recently in the webinar that I shot called the The Four Stages of IBC Commitment. You can go to our website livingwealth.com, you can go to the wealth creation resources page, click on the webinars, the recorded webinars tab. It should be the first one up there. I think it’s one of the most powerful breakthroughs of IBC understanding in a long time and I think it will answer a lot of your questions. We also did a podcast episode 160. So some of this is still on these threads because this is what matters to me and I feel like it matters to most people. How do we optimize this and what does infinite making want to be in your life and in my life optimally?
And so with all of that being said, it has less to do with what you decide to take policy loans to pay for. It has less to do with that and more to do with how you set up the system in your life overall, which has more to do with how much premium you are contributing to policies and has less to do with how many loans you take. One thing that you will have found out in The Four Stages webinar though, the more premium you contribute to policy, the higher level of premiums you contribute based on your capacity, the more often you will end up using the policies. This is a fundamental truth. So to optimize IBC, it is not based on what you use policy loans to do. It’s based on how much of the overall banking function is traveling through policies and then being deployed versus how much of your financial life is not involving policies at all.
And the way to involve money is actually through the capitalization of policies, through the premium mechanism. Here’s a point I’m trying to make in this and then I’m going to dive into some details. But the point I’m trying to make into this is that IBC is optimized when it’s optimized for your entire financial picture. So I think what some people do is they’ll buy a policy, they’ll be putting some money into it and they say, Nate, how do I optimize that policy? They think that it’s possible they could be taking out policy loans from that one policy and start making a difference in their life. So they think they ought be using this policy to get the most out of it. I do believe that the people who use policies are getting the most out of IBC, but the problem is whenever they don’t fully believe, understand, comprehend the idea that IBC is meant to optimize your entire financial life in every area, it is not meant to optimize one policy.
So what ends up happening is people who will put, they have a pretty low level of premium compared to their capacity and they’ll think that all they have to do is take loans and make loan repayments and that will optimize their IBC system. That’s actually incorrect. What they ought to do is start putting more money into the capitalization, the premium of the policies, and then use the corresponding increases of cash value to finance things in life. And that is how you’ll optimize the system. So where does this leave us? What is the optimal way to set up the becoming your own banker strategy? What does it want to be in our lives? And I firmly believe after all of this time that really what it wants to be, what the system thrives under is when every dollar of your free cash flow is contributed to premiums, to capitalize policies. Every dollar of your free cash flow is contributed to premium.
Now I think that that begs some questions and I’m going to spend the rest of this podcast diving into what this means and all the caveats to it and exceptions to it. But essentially this is what it wants to be. And if you remember The Four Stages webinar I did that would put you squarely in what we call stage three, the entrepreneurial stage of IBC. It wants for you to operate it like a business. That’s what it wants, IBC wants that of us, of the people who truly practice and adopt infinite banking. It wants to be run as a banking business and it can’t be done unless you get to every dollar of free cash flow going into premium first before it is deployed. So this begs a few questions.
First off, I feel like we need to define what free cash flow is. So whenever I say free cash flow, the question is what do I mean? And what I am referring to when I say the word free cash flow, I’m referring to the money that is left over after everything is paid for in your life. So what I refer to as free cash flow is the… You’re going to live your life, you’re going to have your lifestyle expenses, you’re going to go on vacations, you’re going to pay huge amounts of your income to taxes, you’re going to give to charity, you’re going to tithe to your church. You have all of these things taking place and then you’ll have money that’s left over. Because hopefully you’re living on less than you make, make more than you spend in all of these areas and you have money left over to operate with. Now by the way, you can actually possibly optimize your system even further by contributing higher amounts of money than your free cash flow.
And that puts you into what we call stage four, the lifestyle stage. But with that being said, I don’t think that’s for everybody though. So I’m saying what should everybody doing IBC tried to get to. And I think it’s the stage three, this idea that every dollar of free cash flow is going to premium. I’m going to give some examples of my own life here in just a minute. What IBC wants to be is every dollar that’s left over after those basic everyday, just everything that you’re doing in life is paid for should go into policy premium to capitalize your bank. And then from that vantage point, money should be going out of the policies to produce additional value, whether that’s helping you operate in your business, financing things in business, whether that’s making investments in various other places, whether that’s any sort of larger ticket item like a house remodel, cars, more luxurious vacations and things that are one-off larger expenses.
Everything like that should be financed from policies, not because the financing is optimizing the system, but because that’s where all your money is already is in the bank, inside the policy per se. And from that vantage point, we are forced to, we’re required to, we love to finance things through the policy. So that is what I think IBC wants to be. But this begs a whole bunch of additional questions of how this is going to work out in reality. And I’m here to solve the problem for all of us if I can, using my self as the Guinea pig, but just having lived a lot of life. So a first question that we get all the time is like, well, what about my volatile income? What about the fact, Nate, everything looks great on paper if everything stays exactly the same and according to the plan, but my income, a client would say, is volatile.
I run my own business, or I get random amounts of bonuses. I’m not sure what my income is. And so I’m going to hit this at this point, but just know something really quick that the person hosting this podcast, Nate Scott, also has an extraordinarily volatile income. So I would like to say that I believe practically everyone’s income is technically volatile in some sense. And so we have to take that into consideration when we are trying to build out a system that you can fund every dollar of free cash flow into policies. So we are going to take this into account. Your income is volatile. So my income is extremely volatile. Who knows who’s going to be on the other end of a call, who’s going to want to do business with me? Hopefully everyone listening to this show wants to do business with me.
I would love to be your coach or someone on our team for sure. We’d love to be involved in your life. We think we will do a great job. But that being said, who knows who all’s going to show up. We never know for sure. So my income can range dramatically. For the past few years it’s probably anywhere from 500,000 up to a million dollars of income could be a wide range of what my net income after all of our business expenses and so forth, what we end up netting and what I end up netting personally, which may be a big number to some listening and maybe a small number to others. Who knows? I’m not here to say anything on that regard, but I thought I’d be transparent to say I also have a volatile income, which means that if I want to have every dollar of free cash flow going to premiums, I have to take that under that idea into account.
And what I think a lot of people get worried about is overextending themselves. So in other words, they’re concerned that, well, if I start a policy because I want to get everything out of IBC that I can and optimally set myself up up, so I’m going to set it to my free cash flow. The question is what number am I going to choose? Am I going to base my system on in my situation an assumption that I only make $500,000 a year or am I going to base my assumption on having 750 and meeting somewhere in the middle, or am I going to base my assumption I’m having a million dollars of income? What am I going to base my assumptions on when I’m designing this system that I want to be able to pay every dollar of free cash flow into? What am I going to base this on?
This is certainly a person by person discussion, but I thought I’d give a few conceptual thoughts into this scenario of how I’ve lived my life in a way that I think allows me to, whether I have a lower end year or a higher end year, I can be very flexible in that window, the very large window of my income to be able to contribute every dollar of free cash flow that I receive towards policies. And so how this works is you have to understand a few facts about the premium levels that you start.
First off, every policy that you start essentially has a window of premium paying ability where you will have at the every policy or added all together throughout your system of policies, you’ll end up creating a window where there’s a going to be a max allowed contribution that is referred to as the MEC limit of the policy. So every policy that is in existence has what’s called a MEC limit at the very top of the window. You really can’t contribute more than your MEC limit or you shouldn’t want to contribute more than your MEC limit because that would turn the policy into a modified endowment contract and it would turn into a taxable entity. Of course, you don’t want to mess around with that. You’d rather have the tax-free nature of life insurance. So you have a MEC limit at the very top of the window. Way below that is what’s called your base premium. That’s at the very bottom of the window. And so what fills up this gap from the top to the bottom is something called your paid up additions rider. Your PUA rider and the PUA rider is a flexible piece of the policy with every company it is never required.
So you have a MEC limit at the top, a base premium at the bottom, and you can fill up the window by making paid up addition rider contributions. Those contributions are flexible, meaning they’re never required at any company. Though it is true, some companies allow for a more flexible PUA rider than others. This is not really the time to go into that per se, but just note that you essentially have created a system where your base premium is at the bottom, your MEC limit is at the top. And the goal would be working with companies or at least having a large flexibility of PUA rider premiums to fill up the gap. What gets people off base though is that let’s just say they came to me and they told me, Nate, I make 500 grand. My free cash flow flow’s 150, but some years I might make 400. Some years I might make 600. What should I do?
A lot of that is based on a concern of overextending their premium. And the idea though is that when you create a policy, by the way, when you create a policy, especially with us, I can’t vouch for what everyone else does in the IBC community. But when you buy one through Living Wealth, if you were to say, I want to start a 150,000 or 100, 0000 or a 50,000 or a $10,000 policy, whatever it is, that is actually what we set to be your MEC limit of the policy by default. So in other words, that’s the top of the window. The reason we do it that way is because we want, based on your assumptions that brought you to say, I want to contribute X amount per year. What brought you to make those assumptions?
We want to build the policy that based on those assumptions, you would be able to essentially max out the window every year or at least get close to it. But the reality is you do not have to max out the window. So for my life, let’s just say my free cash flow is $150,000 on a lower year and is $300,000 on a higher year. Essentially what I’m saying is I could create a situation where I have a window where the MEC limit across all my policies is $300,000, where the base premiums might be $80,000 or something like that. And so I’d have this window here of 80, 100,000, something like that at the bottom, let’s just say 80,000 and 300,000 at the top. And you can even possibly go lower depending on how much term insurance you blended in all sorts of things that once again, I’m not going to go in into this podcast. But the reality is I could create a situation where the base premium levels are so low that even if I had a down year, it wouldn’t impact me. I’d still be able to fund them all. And if I had a great year, I’d be able to max out the premium levels of $300,000, let’s say in this little hypothetical scenario. So I can create in my life, even with a volatile income just by nature, there is a whole bunch of flexibility in every policy design.
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Nate: Let me keep going on this feature. What if I had a down year? What if I had what I would call down year and I can only put in 150? I’m actually left with a couple of choices, aren’t I? I could do a couple of things here. I could choose to just put in what my free cash flow is for that year and just make a contribution of 150. I could put in the $80,000 base premium and add in $70,000 of paid up addition rider premium and I could just be done at that point. But do you know what else I could do? I could choose to ask the insurance company for a policy loan if I wanted to in this year, in this down year so I could take out $150,000 in a policy loan if I wanted to. So they’d write me a check for $150,000 based on the fact that… I’m making some assumptions here.
Obviously I’m assuming that I had cash value in policy, which I do. So this is what I would do in real life and I could choose to then go ahead and write a $300,000 check now. So I could ask them, say to the insurance company, I want $150,000 policy loan. They write me a check and then it hits my bank account, and then I write back a $300,000 check. And so I put my $80,000 base premium and I max out the PUA riders all the way up to the MEC limit, and the policy is maxed out at $300,000 of premium paid for this year. What this does is, of course now I would’ve paid 150 no matter what, but I added an extra 150 that I borrowed from the insurance company. So now I have a $150,000 loan balance on the policy, but I also have a corresponding $150,000 approximately of paid up addition rider cash value.
But what this has done for me is now it creates even more future premium or contribution flexibility because then a couple years could go down the road and I could have not only 300,000, but I could have a huge windfall. Maybe an investment I made produced a windfall or maybe my income was out of sorts way higher than even I would normally expect at all. And now let’s say I had 400,000 or let’s just use for ease of understanding. Let’s say I had $450,000 of free cash flow in some future year, a couple years down the road from having a great year in business and some windfall money from investments proceeds that that were produced. So now guess what I can do? I can not only max out the $300,000 MEC limit that I have across all my policies, but I could also write a check for 150,000 to repay the policy loan I took a couple years ago to max out for a year that was a down year.
There is so much that you can do to max things out or to allow for random dump ins available into the future. We call that having a strategic loan balance, all sorts of things. So that’s how I’ve set myself up and I’m having a lot of fun with it, by the way. So I have set myself up, what I believe to have enough premium with some loan balances and so forth to where I could have a great year and I could fund up to my MEC limit just out of my free cash flow, or I could have a down year and just contribute less, or I can have a down year and borrow some money from my policies to max out in that year. Which would then allow me to carry what we call a strategic loan balance into the future that I could dump back in and fill up that whole anytime I want.
That’s a more complex discussion. I should really do a podcast solely on that to answer everyone’s questions on that. I know it might sound complex, it’s very simple. I just simply go to work. I earn money and I put a whole bunch of it into policies. It produces cash value. That cash value is growing tax-free, uninterrupted for forever with no risk, and I leverage the ever accumulating pool of capital that is my cash value. I leverage it to take advantage of opportunities and to pay for the larger ticket items of my life. And this has honestly simplified my life. If you wanted to have the most profit as a banker, you should do it this way. Is it for everybody? Probably not. Is it for a lot of us? Yes, it is. It’s very great. As we’ve talked about in the past, IBC is the most compelling when it’s built this way and then is added into the lives of people to where it can be super useful.
And those are the active investors, small business owners, entrepreneurs, and just entrepreneurial thinkers in life. They would love this type of setup because it’s like adding a banking business to what they’re doing. This brings up a couple points though. What should technically be taken away from or added to free cash flow? So what should be taken away? Because I can hear some people listening to this who might still be confused at that. And what I wanted to say is, in my own life and other entrepreneurs, small business owners, active investors, those types of people, they can be turned off by just conventional retirement program style methodology. And so IBC once again, is very compelling to them because they already didn’t like doing retirement programs and things of that nature to begin with. But I wanted to say a couple of things on that front.
So you can define what free cash flow means to you, and then use that to determine what should be flowing through IBC policies and how to set up your premium. And so to kind of give an example of what I mean when I say you can define it for yourself, IBC does not require you to make a choice between funding retirement programs or funding policies. In other words, you can work at your company, you can enjoy having some exposure to the stock market. You can have a 401K match that they’re offering, and you can look at all of that and say, I would like to continue contributing to the 401k to receive at least the employer match. So that by the way means we would take that out of your free cash flow number. So even though it’s not being spent on the things that we would normally use in our formula to determine free cash flow, that’s a choice you can make.
You can just say simply, I’m going to continue to put money into the 401k, and then we can say, okay, IBC, just add that or take that away from free cash flow just add that in. So in other words, IBC is going to be whatever’s left after you make your 401K contributions, but once you get to that level, it is true that we will likely have a philosophical difference on how you should set up the future. That’s the real reality. So while we don’t mind of course, people putting money in those situations, nor is IBC requiring you to change those. There happens to be a truth here, that for people who are loving and enjoying and desiring to continue to make retirement program mutual fund-based contributions and max those out in life, they just oftentimes are not a very good fit for IBC, which is most compelling for people on the other end of the spectrum.
It’s most compelling for entrepreneurs, small business owners who don’t really love locking capital up in passive long-term appreciation based investments and hoping that it all works out in the end. Some people also are a bit confused, well, if every dollar of free cash flow is going to policy premiums and how am I ever going to repay policy loans? Once again, this goes back to how you’re defining the term free cash flow. If I borrow money from my policy to purchase a vehicle, my payments back to myself, back to my policy for the car loan, I have added into my budget the reality that I’m going to drive cars and I’m going to have to pay for them somehow. I’m either use my policies to do it or I’m going to use a bank to do it. Whatever.
Money has to be set aside in everyone’s budget for vehicles. So of course that money is in the budget, that’s not part of free cash flow. You can decide for yourself what counts as free cash flow and what doesn’t. So all that to say with all of this as we wrap up to optimize IBC, it is not about taking policy loans for different things. That’s not how you optimize it. You optimize it by contributing as much capital as possible to the system, and that then requires you to use the system more often because that happens to be where all the capital for operating your life is really located. We actually have resources on the website beyond The Four Stages webinar that talk about some of these very things. So I’ve set myself up this way.
I’m having a lot of fun. I’ve been doing this for 10 years. A lot of my biggest policies are newer because my income has gone up on normal trajectory where I wasn’t making much to start with. There can be different off years, but it’s trending upwards over time, of course. So that means I’ve been opening larger and larger policies as time has gone on. But some of them are becoming very profitable. All of them except for the brand new ones, of course. And all I’m doing is just sitting here, living life, working, paying premiums. It’s producing tons of cash value. By now it’s growing by way more than I’m contributing, and I’m just using that accumulated cash value to do the things of life. It has actually simplified my life. It’s very profitable. The only reason it gets confusing for people is when there’s some misconceptions and misunderstandings about flexibility and about how to classify policy transactions that throws people off base. I will be doing a show on how to properly classify policy transactions. That will be coming down the pike as well. But with all that being said, I hope this has been enjoyable. I hope that this has shed some light on how you should be optimizing and some of the flexibility that may help you achieve ultimate optimization. This has been Dollars in Nonsense. If you follow the herd, you will be slaughtered.
Announcer: One last thing before you go start your journey towards financial security and wealth today, visit livingwealth.com/beatinflation. You’ll gain instant free access to the beginner’s course Ray, Nate, and Holly made just for you. Again, that’s livingwealth.com/beatinflation.
