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April 23, 2022

IBC: How Much Premium Should You Pay?

IBC: How Much Premium Should You Pay?

A question we are often asked by new clients, just starting their IBC journey is "how much should I fund a policy?" Or "How much does it cost?"

The real question should be: "How much do you want to save?"


A question we are often asked by new clients, just starting their IBC journey is "how much should I fund a policy?" Or "How much does it cost?"

Whole life insurance, for the purposes of implementing the Infinite Banking Concept®, is about capitalizing (aka, storing cash).

So the real question should be: "How much do you want to save?"

When looked at in this way, we start to see that whole life insurance premiums are not a cost at all.

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  • Get access to the online course, Whole Life Insurance Fundamentals, with a 50% discount

 


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Transcript

Episode number 48. How much should you fund when implementing the Infinite Banking Concept?

In this episode we're going to get a little quantitative, maybe not as quantitative as, you know some people would like. A lot of people love to look at illustrations, but, you know because like everything else we do in IBC the name of the game is about principles and process not numbers on the page.

And so in this episode we're gonna talk a little bit about:

  1. what does it mean to actually "fund an Infinite Banking policy,"
  2. how to think about premium payments.
  3. And then we'll talk about some trade offs to consider when funding a new policy when you're kind of thinking about how much should you do.

So let's hop in.

- Hi everybody. This is John Montoya.

- And this is John Perrings.

- We're authorized Infinite Banking practitioners and hosts of The Fifth Edition.

"Funding" a Policy

- Okay, let's talk about funding a policy. This is John Perrings here. Going solo again today, really missing John Montoya, but I'll try to, you know do the best I can here.

And the reason we're using this topic is you know, just like most things we start to get a lot of questions from different people when we talk to them in consultations. And so that becomes, you know typically a subject that we'll push out on the podcast. So in this one it's how much should you be paying?

And a lot of people will use terms like how much should I fund the policy and... So we're just gonna harp on some terminology a little bit here and talk about funding. You are in a sense funding a policy where you're funding your pool of capital and that's really what we're doing, it's a place to store cash and so we're funding our source of capital. But it's, a lot of times people use it because they're still using investment terminology. So, you know, we're not funding a, we're not funding an account, we're not funding an investment, you know, we're not putting money into a fund. What we're doing is we're paying a premium.

And so, and this make, I think it's important to differentiate again, I've talked about this in the past, we're paying a premium and the reason I'm kind of harping on it is because the number one thing that creates cash value is the ability to pay a premium. And so one of the things to understand is when people think about funding something they think about taking a large lump sum of money and putting that into something like an investment and that's not what we're doing here. And so I'm kind of just reiterating the fact that we're paying a premium.

Life insurance is very good at building a lot of value over a long period of time with very regular and predictable premium payments for that policy. We're buying life insurance, we're not funding an investment. So just, you know, again, kind of harping on that just to make sure we're all on the same page and we know what we're doing here. So, how should we start, how should we think about premium payments when we're kind of thinking about how much we should pay?

And you know, what we're really doing is capitalizing right? Every time we pay premiums, we're capitalizing, we're adding to our strategic source of capital as Nelson talks about in the book "Becoming Your Own Banker." So if you still haven't read that, which a lot of people will book appointments with us not having read, "Becoming Your Own Banker." And you know, I'm not trying to shame anyone or anything like that, but it's the source material. So you can, you know, watch all the YouTube videos you want and get a half of an education or get some information that's, you know either not complete or maybe even inaccurate, or you can just read "Becoming Your Own Banker. It's a 90 page book. Most people I think can do that.

So that's where you should be starting. We are strategically accumulating capital and we're using a cash asset, which is life insurance that has benefits that no other cash asset has. And so we should be thinking about life insurance as a place to store cash. And therefore it's kind of like, well how much cash do you wanna store? That's the question in terms of, you know the amount of premiums you should be paying. So I'll ask this question.

If you've ever been on a consultation with me I've probably asked you this, but if you had a place to put money that:

  1. grew 40 times what it would grow if you kept it at a bank
  2. that growth was tax deferred but accessible tax free.
  3. It was liquid, right, has the same liquidity as a bank
  4. provided contractual leverage with guarantees on the underlying collateral in the form of a no questions asked policy loan provision
  5. had creditor protection that's different depending on what state you're in but in general much better creditor protection than anything else
  6. allows for strategies to reduce taxes and increase the income generated on other assets

If you had all those things would you wanna put just a little bit of money there or would you wanna put as much as you could?

And so that's sort of the thought exercise of the day. The question is really, you know, how much should you pay? It's really, how much do you wanna save and how much do you wanna save in a place that has all of those benefits that I just mentioned.

Okay, but how much should I pay?

So, that being said it's kind of like, okay, that's all great. So how much should I pay, right? So it's like, I get it. You know, we wanna have some answers and the thing is it's very individual and I'm gonna tell you why. There are some general guidelines we could use and it gets into what I've talked about before with scheduled premium and unscheduled premium. And by the way, this was in episode 46, dealing with large lump sums. And, you know IBC policies typically have some flexibility regarding the premium amounts built into the design, right? So if you think about the premium amount that is regularly scheduled to be paid on a monthly or a yearly basis, think of that as the amount that you would commit to saving. And so, you know, you could use different rules of thumb.

Like some people say, well you should take 20% of your income and save that, right? So maybe it's 20% of your income. You know, maybe it's 10%, maybe it's 30%, right. But you know, there are some rules of thumb in what you save out there. So maybe that could be where you start in thinking about this. But the other way we wanna think of it is because there's this leeway a little bit you've got sort of a minimum and a maximum that's the flexibility that's built into the premium when we're designing policies with infinite banking in mind. So what that means is you, so you've got your scheduled premium. You could go down a little bit if you needed to and you could also pay more into it if you needed to pay more in premium.

Setting too large of a scheduled premium because you can scale down

And this causes some people to try to like game the system a little bit, not game it, it's not a nefarious thing. It's just, like for example, they'll say, well if I could pay this but I could go down to this maybe what I'll do is I'll pay this even though it might be a little bit above my comfort zone because I'll just scale down to the minimum if I need to. And that's understandable but what happens is it may not be sustainable. And so what people have to understand is especially in the early years, if you are using the Paid Up Additions rider and you scale down to kind of the base minimum of the policy, what you're actually gonna do is you're gonna stop paying the PUA portion of that and that's going to significantly affect your cash value growth, especially in the early years. And so that policy may no longer perform the way you want to if you end up having to do that. So in that case what I'd recommend is scaling down the overall premium and just pay the scheduled premium that's comfortable and sustainable for you. I mean, it should be, you know, as much as you can but it has to be sustainable, right? It has to be something that you would think, okay I can do this for 20, 30 years, whatever the length of time is.

Setting to small of a scheduled premium because you can scale up

The other side of that is sometimes people will say, well, I'll just I'll, I actually could pay more but I'll just schedule this little bit of money, relatively speaking, a smaller amount of money as my scheduled premium knowing that I can put more into it but now I'm not tied to it. And I totally get that. I get that. But what ends up happening is usually people start to you know, when they first start a policy they don't yet realize what it can do for them. And so I have quite a few clients right now that wish they could pay more in premium but they're a little bit limited. And so what's going to happen with the, they're limited to the kind of the modified endowment contract limits that are set by the IRS. So, they started smaller but now they see what they can do with it so they wanna fund more. So now they're kind of maxing out their policy and it's not really even hitting the limit of what they could fund it. And so what's gonna happen is they're going to end up having to pay up the policy sooner than what they had anticipated which is not, you know the end of the world. But now they're going to if they wanna keep having this great place to put cash, now they're gonna have to qualify for another policy and we just don't know what, we don't know what that's gonna look like in the future. You know, sometimes we become uninsurable. And then now, also now we're going to have a new policy that we have to overcome that capitalization period all over again.

So, what I try to recommend is like, let's come up with an amount that you can commit to for a long period of time and let's make that the scheduled premium. And then if anything happens and anything happens outside of the norm, you need to go down for a little bit of time, we can do that. And if, and now you also have room to go up if you run into some money you have some kind of a windfall. So it's really kind of about sustainability of the overall process of infinite banking, right? So there's no right answer. You know, like sometimes people will well, what do people normally pay? And it's like, well it doesn't really matter what other people are paying. What matters is what's right for you.

Maintaining Emergency Fund Liquidity

So another trade off to consider, you know we talked about dealing with lump sums again in episode 46. Sometimes people will want to, you know have that scheduled premium and then maybe put an additional lump sum in the beginning of the policy. And so some things to consider there are how is that going to affect your liquidity, right? So thinking in terms of an emergency fund. So everyone should have an emergency fund, right? If COVID taught us anything, it's that maybe it wouldn't be a such a bad idea to have a year's worth of income saved and liquid so that you can access it if things, you know, really go sideways. And so the thing we wanna pay attention to when we're thinking of amounts of how much premium we should pay, is the money you're going to use to pay especially those early premiums, is that going to affect your emergency fund at all? Because remember in the early years of the policy we don't have as much cash value as what we've paid in premium.

So I'm gonna say some numbers here with great trepidation because I know there's some people out there that are really focused on, you know, ratios of base to PUA. Don't get hung up on these numbers. I'm just gonna do it to make it simple. Let's just say there's a 50% base and 50% PUA. And man, I know some people are just like being like, hey, it's supposed to be 90/10. Maybe, maybe not and I'll talk a little bit about that here in a second but let's just say it's 50/50. And if you pay, let's just say a $20,000 premium. Well, in that first year you're only gonna have about $10,000 of cash value, right? So if that's your emergency fund, you just cut your emergency fund in half, right, the liquidity of your emergency fund. Now over the long term it's gonna be a great move because it's going to, you know grow again much more than it would grow in a bank. But in the short term, if that's your emergency fund, that can create some pretty serious liquidity issues if you ever had an emergency and needed that money. So those are some things to think about.

Base: PUA Ratios - More Noise

The last thing I'll talk about is I guess that that whole ratio question, you know. There's and just going back to like personalized design for your life insurance policy. There's no such thing as like a truly personalized thing. Like there's only so many things you can do with a life insurance policy but there are quite a few things you can do, there are a lot of variables and every time you pull a lever over here for a design option, another lever over there goes up, right? So everything's a trade off and every are thing is a trade off between cost and risk. And we're working within the MEC limits, there's all kinds of variables that cause us to do different things with life insurance policies. How much you should pay is greatly dependent on everything else you have going on in your financial life, right? So while the, you know, if you go on YouTube, all these people are gonna start talking to you about PUA ratios. And if you go down that route, congratulations you just bought a cookie cutter life insurance policy and you're on your way to having a cookie cutter financial life.

The reality is since everything's a trade off we have to consider all the other things going on in your financial life. There's no super secret way to design a life insurance policy that's better than others. There's no correctly designed life insurance policy. The correctly designed life insurance policy is what's correct for you.

And that, when I say that what I mean is everything else that you have going on in your life is part of the equation and there's no, you know, one right way to design a policy. So that's why it's important to find an advisor who you like and trust. And if you're doing this for Infinite Banking, you should look at infinitebanking.org which is the Nelson Nash Institute's website and they list all the authorized IBC practitioners. And you can find one that you like and trust and you can work with them and just trust them to design the way that makes the most sense for you and that's really the number one thing you should be looking at.

So I hope this was helpful for everyone. Again, if you have any questions about how this could, you know, impact you in your current situation, feel free to go to the fifthedition.com. You schedule an appointment right there with us for an initial no cost consultation. And I also have a online course available at thefifthedition.com where you can get a 50% discount whole life insurance fundamentals and it's really for those of you looking at whole life insurance. It's really kind of a general whole life insurance course but also hits on a lot of the topics that we talk about for Infinite Banking. So it's a great thing if you're one of those people that likes to, you know do all the learning beforehand, before talking to someone, this course is exactly for you. So thanks again.

Looking forward to getting back with John Montoya on the next episode and we'll see you then.