In this episode, Nate Scott answers the five most frequently asked questions about infinite banking. He talks about the importance of choosing the right insurance company, how policies continue to grow even when borrowed against, the difference between direct recognition and non-direct recognition, the pros and cons of different policy designs, and the whether or not you should run all finances through a policy. Nate emphasizes the need for individualized approaches and recommends starting with a solid foundation before considering more complex strategies.
Key Takeaways:
- To practice infinite banking, choose a mutual life insurance company that offers dividend-paying whole life policies.
- Policies continue to grow even when borrowed against because the insurance company lends money against the policy’s cash value, which still earns interest and dividends.
- Direct recognition and non-direct recognition refer to how insurance companies apply dividends to policies with loans.
- The design of a policy, including the base premium and paid-up additions, depends on individual circumstances and goals.
- Running all finances through a policy is not recommended for most people. It is important to start with a solid foundation, understand cash flow, and gradually incorporate policies into financial strategies.
- Individual circumstances and goals play a significant role in determining the best approach to infinite banking.
Episode Resources:
Gain FREE access to our Infinite Banking Course here
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LIVING WEALTH PODCAST
DOLLARS AND NONSENSE: EPISODE 232 TRANSCRIPTION
Nate Scott [00:00]:
In this episode, I answer five of the most frequently asked questions that people ask when investigating the infinite banking concept. I’m Nate. I make sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.
All right, guys, welcome back to the show dollars and nonsense. Welcome to Living World channel. So great to have you here.
Nate Scott [00:25]:
We’re going to dive in today to discuss five of the most common questions that I get when people are investigating infinite banking. And there’s a lot more than five. And I’m going to do a whole series of FAQs.
But on that front, if you’re watching this, if you would, please, and even if you’re just email me or write a comment on the YouTube channel if there are questions that you have about infant banking that you would like to have answered, because we’re going to continue doing some of these FAQ series and would love to hear directly from the viewers, not just me kind of compiling the most common questions.
So go ahead and write a comment on the YouTube page. Shoot me an email at nate@livingwealth.com with your questions, and we’ll add those into our FAQ series.
So here are the five questions we’re going to answer today, though. The first one is, how do I decide what company to work with? This is more like insurance company wise, of course.
Nate Scott [01:16]:
Maybe we’ll also tie in like agency, like insurance agent, like Living Wealth. Do I work with you or do I work with somebody else? But this is mostly going to be what insurance company should I work with? That’s question number one.
The second one is, how does it really work that my policy still grows even when I borrow from it? What exactly is going on behind the scenes there, and why does it seem magical? So we’re going to dive into that question.
The third one we’ll talk about is the difference between direct recognition and non direct recognition. This is definitely a down the rabbit hole question that people have. So that’s not for, like, a newbie. They would never have even heard of those terms. But for someone who’s kind of been investigating and researching, I’m sure at some point this idea of companies that use non direct recognition versus direct recognition will come up, and I want to answer that.
Nate Scott [02:01]:
The fourth question is, how do I want to design the policy? Do I want it kind of a bigger base premium or a tiny base premium? And how do I decide between the pros and cons of each? Because there’s really two big camps that are forming between the tiny base premium people and the more traditional base premium people. And how do you decide which one you want to fit in?
And then the fifth one we’ll talk about is, can I run everything through my policy? Very common question, of course, for those that are really excited once they hear it, but they hear the message they started comfortable with and they’re like, hey, does this work for everything that I do? Can I run everything through the policy? How does that work? So we’ll answer that one, too.
So let’s go ahead and dive into those five questions. The first one that we’ll deep dive into is, does it matter what company I work with? How do I know what insurance companies to use to do infinite banking? So to answer this, I’m not going to spend a whole bunch of time on each question. I’m just going to hit the highlights.
First off, if you’re asking the question, does it matter what company I work with? The answer is kind of yes, kind of no. Okay, so there’s some basics that everyone here would probably already know.
Nate Scott [03:04]:
Number one, it’s got to be a mutual life insurance company. A mutual insurance company means that you own the company. And we really are not interested in practicing the infinite banking concept. We’re not interested in using universal life policies. So it’s got to be a mutual life insurance company that offers a dividend paying whole life policy. Which all of them do. All mutual companies do. But how do I know what company to work with? Well, first off, yeah, it’s got to be mutual. We don’t want to work with a stock held company.
Nate Scott [03:30]:
We want to own the company that we’re practicing infinite banking with. That’s a big part of the process. We want to be able to receive dividends from the profits of those companies. And so we have to work with a mutual company. But as far as which mutual company do I work with? Does it really matter? Yeah, that one is way more difficult to answer with any sort of objective advice.
So here’s the way I see it, and maybe you’ll see it the same way, but the way that I see it is that all of these mutual life insurance companies, well, here’s the way to frame it. There are people practicing infinite banking happily at all of the mutual life insurance companies, whether it’s Northwestern Mutual, New York Life, Penn Mutual, Guardian, Security Mutual Life in New York, One America, Emeritus, Lafayette Life. You go down the list.
Nate Scott [04:19]:
And just as a good perspective to have, there are clients and there are advisors that work with every single one of these insurance companies. There is a ton of IBC business happening, Infinite Banking business happening at all of them. And everyone seems to be enjoying it for the most part. I guess not. I shouldn’t say everyone, but yeah, for the most part, it doesn’t really matter which company you work with to practice the concept. And part of that is that infinite banking is a process, not a product. You can do this process with any dividend and paying whole life policies.
Nate Scott [04:54]:
That being said, yes, it does kind of matter because I believe that there are some companies that offer more flexible style policies that mesh better with IBC than some of the companies that are more know. Every company’s policies may be able to work well, but each one of them are going to have their own kinks and benefits.
So a company like MassMutual, maybe, or some companies like MassMutual would be a highlight of this. That people I hear in IBC community kind of rail against that. They don’t have a true flexible, paid-up additions rider. That’s not the end of the world. But it’s a bit, you know, could you do it with them? Yeah, sure. Is it going to be a bit more painful at times because you don’t have a flexible paid-up additions rider? Yeah, it probably will.
Nate Scott [05:40]:
So what I’m saying is there’s a time and place for all of them. You can be happy with all of them. The other truth is that at the end of the day, when we sell these policies, when we are looking at these policies as an insurance agent, the reason why it’s very difficult to determine what company is the best company to use is because all policies and the illustrations we have are only based on what’s happening right now.
Like every policy illustration that we see, there’s going to be dividends going into the policy and we can project the cash values and the death benefits over time. But those are not even what the insurance company thinks the end result is going to be, by the way. Those are not some sort of random historical amount like, this is what a policy looks like historically.
That’s not even them projecting what they think the policy is going to do. All the insurance companies are allowed to do by regulation is show you what the policy would look like at their current dividend payments today and assume that that never changes for the rest of the life of the policy.
Nate Scott [06:44]:
So of course, if dividends go up, then the policy would perform better than what was illustrated. If dividends go down, then the policy would perform worse than illustrated. But no matter what, they’re not even trying to tell you whether they think it’s not like they’re projecting what they think is going to happen. They’re just projecting what’s happening right now, their current dividend scale.
So with that being said, it can get a little wonky. Whenever you’re trying to, like, if you’re just running illustrations for every company, if you’re, like, in my seat and you’re running illustrations for every company, you’re trying to figure out which one’s going to have the biggest number on the page down the road, and you’re like, that’s the best policy. That’s not true. That’s not reality.
Nate Scott [07:21]:
In other words, just because the company has a bigger dividend scale today, and the policies are producing more in future cash values based on what’s happening today, that does not mean that’s going to happen down the road. I like to talk about this. If I was to go back ten years ago and run life insurance policies for all of the ten best mutual life insurance companies that you could practice IBC with, and I could create a hierarchy of, well, this company is number one. They produce the most cash value, this one’s number two, this one’s number three, and so forth, you could build this hierarchical list of who’s producing the best results.
And that was ten years ago, 2014. Now, in 2024, I could do the same exact exercise. And the list is going to look different. It is going to look different because there’s companies that we write with that used to have awesome policies that have kind of become more lower tier, plain vanilla style policies that we don’t even write them anymore because they’re not really that competitive right now.
Nate Scott [08:16]:
And so what I’m saying is, you can’t put all your chips into this one company as just being the best. In fact, that entire exercise is a bit of a waste of time. So does it matter what company you work with? Kind of. No. You can be happy, like so many people are with all these different companies, all these different mutual life insurance companies, but deep down, every advisor like myself, has their favorites and thinks that, of course we choose to do business with people we think is going to be the best.
But it’s not like we’re willing to sign our name to a dotted line, say, yes, this one’s going to produce the best results over time. We’re all looking at the same information. So what I would say is there are some companies, and I’m not going to name names here that I personally, or here’s how I do it whenever I’m working with clients, by the way, I’ll just say it like that.
Nate Scott [09:01]:
I don’t want to sell a policy to a client with a company that I wouldn’t personally want to write my own policies with at the time. So what I was trying to bring up is, ten years ago, we were working with a certain company far more than we are today, because back then, they really did have very good looking policies.
There’s been a couple of iterations of policies since then to where right now I wouldn’t be that interested in buying a policy from them. So we kind of stopped writing very much for them and went on to the companies that I actually want to buy my own policies from. So that’s how I do it, and that’s what I hope clients can understand. So does it matter what company you work with? Kind of not. That’s not the biggest deal. How you use the system is always going to be a bigger deal than which company you use.
Nate Scott [09:46]:
However, I do feel like there are some companies that are kind of slagging behind for no reason that I can’t figure out. So I don’t personally write policies for them, and I don’t really know if I would recommend you write policies with them, but if you did, I’m sure you’d be happy. That’s what I’m trying to say. I’ve got policy with five different policies with five different insurance companies right now, and I love them all dearly. I’m happy with all of them. Some of them are doing better than others, but who knows what the future holds? So I think that don’t make it such a big deal what company you work with, or even which company is having the biggest numbers on a page, because those are just projections that we can’t know objectively which one’s actually going to be better. So just get started and be happy. That’s my final recommendation on that.
Nate Scott [10:32]:
So the first one doesn’t matter what company you work with. Not really. There’s got to be a mutual company. But at the end of the day, it doesn’t matter. The biggest deciding factor of your success with infinite banking is always going to be how you use it yourself. Let’s move on.
Number two, how can my policy still grow even whenever I am borrowing against it? This is, of course, the secret sauce.
Nate Scott [10:53]:
This is, of course, the magic. This is, of course, what gets all the hype on YouTube. And this is the most misunderstood part. And I’m not going to go into a huge amount of detail because I’ve done podcasts just on this, and I’m just going to answer this question really quick, but think of it this way.
The insurance company is guaranteeing you, you’re paying premiums and they’re guaranteeing you cash value to be built up in this policy. And on top of the guaranteed growth of the policy, you’re also earning a share of the profit through the form of dividends. So there’s this big pool of capital accumulating inside of this insurance contract, most of it guaranteed to happen from the very beginning.
Nate Scott [11:33]:
And the insurance company has to put this big pool of money that’s accumulating. They have to put it to work to earn interest in order to be a profitable company. Of course, it’s not rocket science. You can’t just pay a premium and the insurance company accepts your premium and just lets it sit in a vault somewhere in just green money cash and have it grow. It’s got to be working.
So the insurance companies are essentially just big lenders of money. That’s why it’s part of the whole system, why this works. So they take our premium dollars and it starts producing this cash value or this cash on the books, and they’re putting that money to work mainly through the use of lending money, bonds and loans and mortgages and things like that.
Nate Scott [12:16]:
But here’s where it gets interesting. Inside of your contract, your life insurance contract, there is a contractual provision that says, hey, this policy loan feature that essentially says you can borrow up to your cash value anytime you want to, and we’ll lend you the money back and you outrank everybody else. In other words, anytime you want the money, we would prefer to lend it to you in a lot of ways because it’s essentially a risk free loan.
But it’s not like you’re withdrawing money out of the policy in that transaction. What actually happens is you’re just using your policy as collateral and the insurance company is lending you money against your policy. So all of your cash value is still continuing to grow and earn dividends on the full amount, and you’re receiving a loan against that. And the interest that you pay is the interest that really the interest company has to earn in order to be able to pay you interest and dividends. So if they choose to lend it to you, then you are like the investment for the insurance company.
Nate Scott [13:23]:
So you borrow against your policy and you pay back with interest. That’s the interest that either you pay or they were going to lend it to somebody else and somebody else was going to pay. But either way, the interest company needed to earn interest. Of course, obviously, in order to be able to pay you the interest that your policy is earning and the dividends that you will receive at the end of the year, the profits.
And so what’s actually happening? Your policy, you’re not actually taking withdrawals. It’s kind of like if you were to borrow against your home. And something that we all kind of aware of, just because you have a mortgage on your house doesn’t actually impact the house’s ability to appreciate in value. So you’re just using your home as collateral to receive a loan.
Nate Scott [14:01]:
So if you open up like a home equity line of credit or something like that against your house, to be able to access some of the equity built up in there, of course it doesn’t have any, like the house itself, the value of your house is determined by the market, not by whether or not houses have mortgages on them or not. We’re just tapping into the equity. That’s the same type of thing with a policy loan.
The policy is going to grow, it’s going to compound, it’s going to earn dividends whether you leverage it or not. You can choose to leverage it. And of course, now they’re lending you money instead of somebody else. So we’re the ones paying interest as opposed to them lending to someone else to pay interest. But we need the money, we want to use the money, and we want to have total control and access to the best of our capital.
Nate Scott [14:39]:
That’s part of the whole reason to do IBC. So how can your policy still grow even when you borrow from it? Well, you’re not taking out your own money. You’re using your cash value as collateral to receive a loan from the insurance company. And so all of the cash value that’s inside the policy is still going to grow and earn dividends, and you’re going to pay it back with interest. That’s essentially how it works behind the scenes, you become the investment for the insurance company as it relates to your own cash value kind of scenario. So I hope that makes sense.
The third one I wanted to dive into is for those of you who have heard, and you could skip ahead if this is getting too detailed, but a lot of people have questions on direct recognition versus non direct recognition, like what’s the difference? Do I want to work with a policy that’s non direct? Do I want to work with a company that’s direct recognition? Which one’s better? All these types of questions when it relates to direct recognition and non direct recognition.
Nate Scott [15:31]:
And what this whole conversation refers to is the fact that the insurance companies. There’s kind of two ways to determine how big of a dividend, or how to apply dividends on policies that have loans. So that whole direct recognition versus non direct recognition concept is how the insurance company gets to decide how they’re going to apply dividends to policies with loans.
Non direct recognition means that there’s one dividend scale for the entire company, and it doesn’t matter if you have a loan or if you don’t have a loan. Everyone gets applied the same dividend scale applied to their policies. In other words, non direct means they don’t recognize policy loans when determining dividend amounts.
Direct recognition is essentially a situation where there’s two dividend scales. There’s kind of the overall scale for policies that don’t have loans, and then there’s a dividend scale for policies for the loaned out portion, and they don’t have to be the same.
Nate Scott [16:37]:
So in other words, in a direct recognition, they will recognize that you have a policy loan. And a dividend adjustment might be made depending on how things happen now. So that’s the overview. I’m going to dive into some of the details, but from the outset, most people, just by me giving you the basic overview, would assume that the non direct recognition is kind of a better way to do it because you don’t want to have a dividend adjustment or something like that to the policy.
The truth, though, is that it’s way more nuanced than this. And I know there’s a ton of people on YouTube and online making articles and making videos about direct versus non direct. And most of the people that are on the non direct camp accuse direct recognition of being something that it’s not. And so, once again, if the question was, well, does it really matter? Which one does it matter if it’s direct recognition or nondirect? The answer is no, it doesn’t matter.
Nate Scott [17:32]:
The vast majority of people in this industry are of the opinion that over long periods of time, it really won’t matter whether the policy is direct recognition or non direct recognition. There’s some myths, though. Like one of the myths is that a direct recognition company reduces your dividends when you borrow. That is actually a myth. It’s a statement that’s not true because it doesn’t go to the furthest extent that it should. Here’s actually what direct recognition is.
Nate Scott [18:02]:
Direct recognition essentially says that the company is going to have essentially two dividend scales. One is their announced dividend scale that’s applied to essentially non borrowed money across all the policies, they will then have a different dividend scale that’s applied to the borrowed money.
And in every direct recognition company, the dividend scale that’s applied to borrowed money is tied to the policy loan rate. So in other words, in some fashion, by the way, whether sometimes it matches the policy loan rate, sometimes it’s a little bit less than the policy loan rate, sometimes it’s a little bit less to start with, but then after, like five or ten years, it matches the policy loan rate.
So essentially the idea would be like, let’s just pretend that the direct recognition policy example for the interest company we’re talking about says that whenever we have a dividend payment on borrowed money, the dividend rate that we’re going to apply to the borrowed money is going to match the loan rate. Let’s just pretend that that’s the case for the company that you’re working with.
How that would play out is, let’s just say the loan rate is 6% at the time, and the dividend scale is, let’s say 6.5% under normal circumstances, if you don’t borrow the money. And so in this case, you would get a 6.5% percent dividend if you were to not borrow any of the money. That would be the dividend scale applied to the whole policy.
Nate Scott [19:23]:
And if you were to borrow some money out on that portion that’s borrowed, it wouldn’t earn the 6.5% percent dividend scale, it would earn the 6% dividend scale. Because the dividend scale on the borrowed money is tied to whatever the loan rate is. That’s direct recognition.
The reason why we’re saying it’s not a reduction is because technically it works in reverse and has happened many times throughout history where the policy loan rate is actually bigger than the dividend scale. So you reverse that and you could say, well, what if the loan rate is six and a half percent, but the ongoing dividend rate for the insurance company right now is only 6%?
Then if you borrowed from your policy, then all of that borrowed money wouldn’t be earning the company’s 6% dividend rate, it would actually be earning the six and a half percent borrowed money rate because the dividend scale applied to the borrowed money is tied to the loan rate. So what I was trying to say is, it’s not a reduction of dividends, it’s just a different way of calculating your dividend payment when you borrow. It’s always somehow in some fashion tied to whatever the loan rate is.
Nate Scott [20:19]:
And this is why overall, most of the people who are not like in a camp are saying, yeah, it doesn’t really matter. On top of this, Nelson Nash, who wrote the book becoming your own banker and coined the term infinite banking, the godfather of IBC you could say, he used direct recognition examples in his book.
I mean, it’s all direct recognition examples. What we’re trying to say is that at the end of the day, direct recognition versus non direct recognition is an overplayed concept that in reality, it doesn’t really matter which one you utilize. It’s not a make or break one way or the other over long periods of time. There won’t be a big difference made if you will have a direct recognition policy or a non direct. It’s kind of a non issue. But at least now you know what it is.
Nate Scott [21:11]:
Number four: How should I design my policy? Do I want a bigger base premium or a small base premium? And what’s the difference?
And by the way, if you’ve been around IBC for a much period of time, you kind of know there’s multiple camps that are getting built out from the crew that wants tiny little base premiums and versus the other crew that wants a larger base premium, and they’re arguing and bickering with each other all the time. And as you can see, I’m kind of a guy who likes to live in the middle. I don’t live in either camp.
How could I? If there’s pros and cons to each different policy design, how can I sit here and say I’m going to be in a camp and I’m only going to do one thing? I’m only ever going to build policies this way. I’m never going to build policies this way and vice versa. At the end of the day, there’s pros and cons to everything you want to do.
So in this debate, do I want a big base or a small base? Essentially what occurs is people would say, well, hey, since the paid up addition writer portion of the premium is really what drives all the cash value in the early years, if we do a tiny base and then blend in a ton of term insurance to keep the policy from becoming a modified endowment contract and being taxable, which I’m not going to get into today, I’m just saying that’s kind of in this discussion.
Nate Scott [22:30]:
So if you have a little tiny base premium, like a 10/90 style policy design, then you’re going to have a small base premium and a whole bunch of term insurance to get enough death benefit in the policy to pass the MEC test and avoid having to pay taxes on the policy. So you build it that way.
What they’re saying is that since the paid-up addition rider produces all of the early cash value, then you can get started quicker doing things. Whereas if you build a policy that has a higher base premium and no term insurance or something like that, then it would take a little bit longer to get going. Here’s the biggest issue with this debate.
The biggest issue with this debate is that if you build a policy built with a tiny base or a larger base and you blast it out over like 30 or 40 years, the difference is always almost completely negligible in the grand scheme of things, the actual growth of the policy.
Long term, there’s very little difference between a policy with a 10/90 and like a 30/70 or something like people make up these terms for the ratios of base to paid up additional writer premiums, and at the end of the day, the actual difference in the long term is not huge, no matter what. The biggest issue with the 10/90 style designs is, almost all of them produce a short funding window when it comes to mech concerns.
Nate Scott [23:53]:
So it’s a preferred design to have a small base and a larger PUA and blend in term insurance if you’re planning on funding for a short period of time, and the higher base policy designs are typically built for those that want to have a longer ability to fund at a high level. So if you’re asking my preference, yeah, it’s somewhere in that middle range.
I don’t want to have a policy that I can only put paid up additional premiums at a high level for like seven to ten years. I want a policy that can fit paid up additional premiums for as long as I can. And because of that, my natural tendency would be to go more towards the middle of the road, like a 30/70 style policy design. But the 30/70 policy design ratio doesn’t always work. If someone does just have a short term funding window that they’re interested in doing, or maybe some large dump-in that needs to go in or something like that.
Nate Scott [24:45]:
So I’m not in a camp. There’s pros and cons to each. But just for your average everyday 40 year old person who wants to buy a policy and pay big premiums and practice IBC for the rest of their life, I would want to go with more of a typical design, not like some tiny base, tons of term insurance, short term funding window build out.
Honestly, I feel like the people who build them and are in that camp and say the only thing you can do is this, are really just doing that because it’s kind of easier maybe to stomach for the client versus just no. If someone is only in it for the short term, they probably shouldn’t even work with me anyway because I’m focused on long term wealth generation to begin with. But there’s a time and place for it. That’s what I’m saying.
Nate Scott [25:29]:
So sometimes you’ll even kind of have a mix of both. We have clients with that where there’s like some that have a little bit of a larger base premium and a longer funding horizon, whereas they may have a policy that’s built like that and a policy that’s built more for a short term funding for a specific scenario. Or maybe they have a specific need for it to be a tiny base, large PUA, tons of term insurance because of quick access to capital that they need for the specific thing. And so they have a bit of both.
That’s actually pretty common, is to kind of have your foot potentially in both places if need be. But for the most part, you want to typically, in my opinion, have a typically built, decent base, because really, the growth long term and the ability to fund PUAs for a longer period of time is all really from the base premium. You don’t want to have to keep paying term insurance premiums for the rest of your life just to fund PUAs. And I’ll stop with that.
Nate Scott [26:16]:
And lastly, number five, can I run everything through the policy? Can I run everything through the policy? Can I run all my money through the policy? This is a fun question to answer. At least we’ll put it that way.
Anyone who shows up to me and says, Nate, I’ve been listening to your videos, I think I want to go all in. I want to put everything in. Can I really fund everything through this? It’s a fun question to answer. There is so much complexity in this that my first response is this. This is my first response. And by the way, I mentioned to everybody that almost all design and function questions can be answered.
Nate Scott [26:56]:
If you go watch the four stages of IBC webinar that we recorded, you can find it on our YouTube page. You can find it on our website, www.livingwealth.com. The four stages of IBC, I refer back to that in almost every podcast episode. So, I mean, if you haven’t watched it, or if you haven’t watched in a while, go watch it again. But what I’m trying to say is this is my answer to everybody. The very first step for everyone is not to run everything through the policy. Do not do that. That’s ridiculous.
Nate Scott [27:26]:
The very first step for everybody is to figure out, at least my recommendation is to figure out what your free cash flow is. And your free cash flow is like the money that’s left over in your life after you have spent all of your money for lifestyle expenses, for taxes, everything. Like what’s left over, what’s your completely free cash flow that’s going to be saved, that’s going to be invested.
And it does not have to be consumed in any way for taxes or charitable giving or lifestyle expenses. It’s just free cash flow. The very first step is, in typical, my opinion, is to start with that only fund into policies to start with at a max, your free cash flow. Sometimes you can be a bit higher than your free cash flow.
Nate Scott [28:12]:
If you already have existing liquid assets that you want to dump in on top of that money, that’s fine, too. It may go further if you’re funding it with assets, like having a whole bunch of cash already sitting around, plus adding in your free cash flow. But nonetheless, that’s where we would start. Then once we’ve got that foundation laid, we can start adding in new policies, potentially over time, to run additional things through things that you would already be spending money on, like monthly expenses or taxes or charitable giving or things like that.
But the reality is, it’s not so simple. I’ve seen some YouTube videos from some guys on this very subject that I think are a little deceptive, a little bit mystical. Like, I run everything through my policy. And Ray would talk about stories when he first got started with IBC, where he thought that the power was really in the loans and loan repayments.
Nate Scott [29:10]:
So as soon as he learned about infinite banking back in 2001, he read the book. He started spending time with Nelson. There wasn’t a ton of community to figure all this out. There wasn’t anywhere you could go to get real information other than like Nelson Nash himself. And so with that being said, he would tell you stories where in the early years of practicing IBC, they would take policy loans out to do everything.
Like every month they would be taking a policy loan out to go on vacation, to go do this, to go do that. Everything that was over like $500 or $1,000, they’re taking policy loans to fund, and then a lot of their cash flow would just go back into paying loans back and they would pull more money out and they would just kind of churn the money. I’m going to borrow, I’m going to repay. I’m going to borrow and repay.
Nate Scott [29:53]:
And at the end of the day, they found out at the end of the year, at the end of the next year. Wait a minute. Whenever I take a loan and repay the loan, it actually doesn’t change my growth trajectory. So if I take out $10,000 to pay my lifestyle expenses and then I put $10,000 back in, and then I take $10,000 back out and I put $10,000 back in and I do that forever.
A loan and a loan repayment in the policy doesn’t actually increase the growth of the policy. The only thing that will increase the growth of your system is premium. That’s it. Anytime you pay a premium, it adds new cash value that will be earning interest and dividends.
Nate Scott [30:40]:
And that’s the case whether it’s base premium or paid-up addition rider premium, either form of premium going into the policy will produce additional growth. So what I’m trying to say is when someone says, can I run everything through the policy? I think that what they’re trying to say is, should I borrow from a policy to pay my lifestyle expenses and then put money back in and borrow and put back in? You can do that.
I’m just saying it’s not going to push the needle forward for you if you never actually add any additional capital to the policy in the form of a premium. So that’s why you’ll see this in the stage four example.
But that’s why I talk about creating a strategic loan balance, funneling, let’s say, your tax money, if you pay 50 grand a year in tax, starting a 50K policy like funding 50K in premium to pay the tax, borrowing money from your system of policies to pay for the tax. But since your cash flow that used to go to pay the tax people is now paying a premium, we can’t repay the policy loan. We’re using the $50,000 of tax cash flow that we used to pay to the IRS.
Nate Scott [31:44]:
We’re using it to pay the policy premium now on this new policy. So we’ve expanded the system, which means you’re going to build in a loan balance to your policy that we call a strategic loan balance that adds complexity to the system. It can add value, but it also can add some complexity. So it’s not for everybody. That’s stage four, like the lifestyle stage. So the brief answer to can I run everything through the policy? Yes, you can. It doesn’t always make sense. In fact, it makes sense for very few people to technically run everything through the policy.
Nate Scott [32:13]:
And it definitely never really makes sense to do it all from day one. Like, for sure, Nelson really started this. But Nelson actually started this in his book when he said it surprises people when I say that premiums and income should match. And he goes through this discussion of, hey, doesn’t all your money go through banks right now?
If you started a bank, shouldn’t you run all your money through your own bank? That’s the policies. And so I understand where they’re coming from. But the practicality of it is it becomes very, very difficult to essentially make $200,000 a year of income and pay $200,000 a year in premium and then just take loans to live your lifestyle and just have this ever increasing loan balance. There’s some nuance to it, people.
Nate Scott [32:59]:
So I love the question. It’s a fun question. There’s not an easy answer. The easiest answer I can give is that I would not recommend for the vast majority of people that you start off thinking that you’re going to get to the point where a 100% of your income goes through policies.
I’ve talked about this in the past, though, that with the idea, and I’m not going to dive into it right now, but with the idea of velocity banking, that’s catching steam in a lot of circles, or the idea of building your life around lines of credit as opposed to checking accounts.
You can do something very similar to that with policies, especially if you open up a line of credit against the policy, which I know some people are against. I’m just saying that there’s a way that you can kind of operate with velocity banking through policies that really can make sense. I’m just saying it’s not for everybody and it adds some complexity that not everyone wants to deal with and not everyone should.
Nate Scott [33:51]:
I hope that’s helpful. So guys, thanks so much for being here. It was fun to do some frequently asked questions. Remember, whether you’re on YouTube, whether you just want to shoot me an email. We’re going to compile a list of frequently asked questions that people are desperate to learn about, and we’re going to do more frequently asked question podcasts and videos coming up. So feel free to submit your questions by leaving them as a comment or emailing me. And I’m happy to answer them. Thank you guys so much for being here. This has been Dollars and Nonsense. If you follow the herd, you will be slaughtered.
Nate Scott [34:19]:
By the way, before you leave, I do have a free IBC course at livingwealth.com. You can go to livingwealth.com/escapethebank. It’s a free course on infinite banking. I really do believe that it does a better job than anyone else’s course really out there at getting you from A to Z on what it really takes to get infinite banking launched. So I think you’re really going to enjoy it. You can go to livingwealth.com/escapethebank to get free access to it. I hope you enjoy it. We’ll see you there.
