How can you put a large lump sum of cash in a whole life insurance policy? In this episode, we will discuss two strategies and the possible tradeoffs.
We often talk to folks who will tell us they have a lump sum of money that they want to use to "start their IBC policy."
How can we deal with large lump sums of cash with regards to The Infinite Banking Concept®?
We can't deal with it like most of us are used to with typical financial accounts. Because life insurance is an actuarial product, we must have a strategy to deal with large lumps sums. The good news is that when we use IBC principles, it's even better than just depositing the money in an account.
If this is something that has been on your mind, go to www.thefifthedition.com and schedule a free consultation.
- Episode number 46, how to handle large lump sums with infinite banking. In this episode, we're going to discuss four things. We'll talk about how whole life insurance is different than quote-unquote account based types of financial tools, like a brokerage account or a savings account. We'll talk about the effects of large lump sums on the scheduled premium, and we'll talk about the effects of large lump sums on the policy payment period. And then lastly, we'll talk a little bit about strategies for handling large lump sums of cash when dealing with an infinite banking whole life insurance policy.
- Hi everybody, this is John Montoya.
- And this is John Perrings.
- We're authorized infinite banking practitioners and hosts of "The Fifth Edition."
- Hello everybody, John Perrings here. I'm running solo today and I had a topic I wanted to cover, and the reason I want to cover it is because it's been coming up quite a bit in my practice, and so I thought it'd be a good topic to relay to you today. And again, that's the topic of dealing with large lump sums of money when either starting or if you already have the process of infinite banking going with a whole life insurance policy.
And so a common scenario that I've been running into lately is where a prospective client will schedule a meeting with me, and we'll kind of have this introductory talk and they'll say, "Hey, you know, I've got this 150,000 or half a million dollars just sitting somewhere, and I want to use that to start my IBC policy." Right? And it's a common thing. And of course it makes perfect sense that they'd want to do something with that money, but infinite banking and whole life insurance are a little bit different from, you know, what most of us are kind of used to out there, right?
Whole life insurance is an incredible financial tool for long term wealth-building, but it's more like kind of planting that first tree in an orchard, right? It takes some time for that tree to bear fruit, which creates more seeds, which then plants more trees. Once the orchard's up and running though, that growth compounds steadily and reliably. What whole life insurance is not great at doing is kind of taking like a freight car of fruit and trying to make an orchard out of it, right? It's like if you dumped a whole shipping container of fruit on the ground, you'd probably plant some trees, you'd get some trees planted, but you'd also have some rotting fruit, right? It wouldn't all make it to the tree planting stage of that cycle. But don't worry, there are ways to work with larger amounts of capital, and that's what we're going to discuss today.
So let's start off and just talk a little bit about the, what I think is some confusion out there where it comes to life insurance, especially from an IBC perspective, where it's often misconstrued or conflated with other types of financial products. And, you know, and so I'm saying like account-based types of financial products, in quotes. And so what I'm referring to are things like brokerage accounts or savings accounts, or really any other type of an account where you can just kind of take a bunch of, as much as you want, really, and put it in there for the most part. And, you know, I think this is mostly just due to the fact that there's a bunch of random info out there. If you get on YouTube, you know, people call life insurance all kinds of things. By the way, you know, we're guilty of it too. So I don't necessarily think it's a, you know, a nefarious thing that people get this confused. We wanna try to meet people where they are, you know, and infinite banking, and using whole life insurance for the purpose, as a tool for infinite banking, there's a lot of education that goes in into it. And so we have to try to meet people where they are and liken things to other things that they already know so that they can sort of connect the dots, right? But the reality is, life insurance is life insurance. It's not an account, right?
You're paying life insurance premiums, not depositing cash. And so, and by the way, this is true regardless of the type of premium you're paying, whether you paying the base premium, the term rider premium, the paid up life insurance, you know, PUA premium, they're all premiums. And premiums are an actuarial calculation, right? And because we're dealing with an actuarial calculation, the amount of money that are that's paid in premium has to make sense, right? There's a limit to how much life insurance you can buy. And there's a limit to how much of that life insurance the IRS will allow you to buy as paid up, right, meaning PUA. And, you know, that's kind of what increases the cash value.
And so the fact that it's an actuarial calculation, by the way, that this is an actuarial product, is really what gives whole life insurance its superpowers. Because we know if you've read the book and you've talked to an authorized advisor, you'll know that the truth is you don't need whole life insurance to perform infinite banking. The infinite banking concept does not require whole life insurance. It just so ha happens that whole life insurance is uniquely, it's a unique product that offers benefits that nothing else out there does that gives you the same liquidity that regular cash does. So that's really what we're trying to do here.
But the, you know, so when someone comes into large lump sums of money, they try to figure out how to, you know, get all of that money into a life insurance policy. And it becomes a little bit difficult if you don't have, you know, some understanding of the different effects out there. And so we'll kind of get into the two effects that we were talking about. You know, a large lump sum, it has an effect on the scheduled premiums, right? And by the way, as we discuss effects, one of the things to understand is that, well, here's another quote that I learned from Todd Langford, who learned it from Norm Baker. And that's that there are no deals in the insurance business. And because everything is a trade off between cost and risk. And so when we design a policy, everything affects everything else, right?
So there's some art form to how these policies are designed. And it's like, you know, if you pull a lever over here when you're doing your policy design, another lever goes up over there because everything is a trade off. And so the art form that I'm talking about is really just determining the specific situation of the individual and providing guidance on which levers to pull, okay? And so a specific situation could be something that, you know, where they have a big lump sum of cash, which is what we're talking about today. So there's, in terms of premiums, and the premiums that are scheduled to be paid, there's what I call kind of scheduled and non-schedule premium. So when we're designing an IBC policy, we say, okay, what we're gonna do is we're gonna design a policy that has a scheduled premium, which will, by the way, include base, it can include a term rider, and your PUA, right? All that stuff can be part of your scheduled monthly or annual premium.
But then there's the idea of, you know, if we're gonna do infinite banking, there's kind of two sides to it, right? There's the strategic capital accumulation, which is the whole life insurance cash value. And then there's what are you gonna do with that, with that capital? What are you gonna buy with it? And if we're going out and buying, and we're finding arbitrage to either buy liabilities or buy assets, that means if we're an honest banker, that means interest is going to come back to us over and above whatever the loan payment is going to be back to the life insurance company, right? There's gonna be some, some kind of profit there because we're the banker. Where does that profit go, right? So if you design a policy and you just completely max it out with cash value, all of a sudden now you don't have anywhere for that money to go back that it can't go back into your bank, so now it's gotta go back outside of your banking system.
So typically, and again, nothing's written in stone here, sometimes it makes sense to just completely max it out. But I'd say in most cases, it makes more sense to leave some quote-unquote room in a policy so that money can flow back to you, and then you have a place to put it. And that's where non-scheduled premiums come in. And so these are some things to kind of consider when dealing with a large lump sum.
The other side of it is, you know, what are the MEC limits going to be? You know, how is the policy design going to affect the MEC limit? And so we know that the MEC limits, the death benefit determines the capacity for cash value. You have to have a certain ratio, it's called the seven pay test, a certain ratio of death benefit to cash value, or the policy will become taxable. So the higher cash value in, generally speaking, you know, all the carriers kind of have different, you know, design software and things like that. But higher cash value, you know, to accept a lump sum premium requires a higher scheduled premium ongoing, right?
The longer I can pay a premium, which we'll get into in a second, and the higher that scheduled premium is, in general, the more I can actually fit, the more of a lump sum I can kind of fit, like fold into the policy to accept that additional lump sum premium. But what I'm saying is that all things being equal, like we have to have a framework of a policy, and then we kind of fold that schedule or that lump sum amount of cash into it. So that's kind of from the scheduled premium side. So a higher premium will allow for more room for a lump sum to go into it. And now we're gonna talk about the payment period. The longer we can pay that premium, the more room it will create to fit a lump sum premium in there. So the longer you pay that, the more capacity there is for unscheduled premiums.
And so let me just circle back here, when I'm talking about lump sums, that's really just another type of unscheduled premium that's gonna go in on top of the regular premium that you're gonna commit to that's scheduled on a monthly or annual basis, right? So what happens with unscheduled premiums, if you don't have a large enough scheduled premium, you're gonna end up having to create what's called a short pay policy that uses up, you know, most or all of the capacity to take unscheduled premiums every year. It basically turns your additional unscheduled premium into scheduled premium, and you can't put any more money into it, and you have to pay it up in five years or seven years or 10 years, whatever the number is. So we would call those like a short pay policy.
And so what I'm getting to here is the trade offs, right? So a lot of times, you know, I'll see examples where someone's like, "Hey, I've got $100,000." And someone would recommend, "Well, here's what we can do. We can set up a five pay and you just do $20,000 a year. And we'll just fit all that $100,000 in over five years." But to me, and again, like, just in generally speaking, to me, that's like dumping the fruit truck the shipping container of fruit on the ground into a small plot of land, and now the orchard doesn't have any room to grow. Like you just dumped all the fruit into this little parcel, and now you don't have any room to grow from there. Once you're done in five years, you're just done. And so a lot of people, for whatever reason, think that they like that.
But what they're not seeing is when you do that short pay policy, yeah, you most efficiently kind of capitalize the policy from that one lump sum perspective, but now you've got this policy that every dollar, if you could, every dollar that you pay in premium would create more than $1 of cash value. So, you know, let's pretend you did another $20,000 the next year, which you can't do with this one, because it has to pay up in five years, you'd have $25,000. And then five years after that, you pay $20,000 and you'd have $40,000, right? So you basically missed this opportunity to keep growing your orchard, because you had the short-term thinking opposite of what Nelson Nash talks about, think long range. We had the short term mindset of just dealing with this $100,000 lump sum. And so the longer you can pay a premium, the larger the policy will be. I mean, that's really the secret to policy design is pay a premium, right? That's it. It's really not that complicated. It's not as complicated as all the, you know, YouTube people talk about ratios and all that stuff. Just pay a premium. It's really that simple.
So there's kind of this balance that we have to deal with. And by the way, the reason we even have to do this, we didn't even used to have to do this, but, you know, we have the MEC rules, and now the MEC rules being modified endowment contract, which if you have too much cash value relative to death benefit it, the policy will become taxable similar to how an IRA is taxable. So in general, we try to avoid that. Is it the end of the world? No, but you know, that's something we want to try to avoid if we can. And so now we're kind of working with these rules that create these trade offs. And that's really what's going on.
So what do we do? What do we do with large lump sums? So going back to the windfall, you know, why is it important to design a policy with capacity and for a long period of time, right? Here's a question. If you had a place to put money that earned a respectable tax-deferred, accessible tax-free return, so to speak, where it had uninterrupted compounding growth, was liquid, had creditor protection, you know, would you want to only be able to put that money there for a little bit of time or for as long as you could? Right? And so that's why I'm saying, generally speaking, I try to recommend policy designs that allow you to pay a premium for as long as possible. And the, you know, the argument to that is, well, you could do a short pay policy and then just buy your next policy after that. And that's fine, as long as you can qualify. Also, I've done the numbers, and there's no numerical advantage to doing a bunch of short pays versus one long pay with all of the things being equal, with the same premium inputs. Because every time you do a new short pay policy, you have all those costs to overcome. So you're restarting that capitalization period. So, and oh, by the way, you're also older. You're five years older if you do that, if you do multiple five pays, for example.
So let's talk about some strategies for actually handling large lump sums. So, you know, if you're one of those people that you you've come into some money, and you want to quote-unquote start your IBC policy, so the idea here is you don't want to just, I'm just kind of giving you my opinion here, you don't just want to start your IBC policy with the lump sum. I think a better way to do it is to start an IBC, a whole life insurance policy designed for the infinite banking concept, and then add the lump sum, right? So you create your banking system with other income, right? You capitalize with other income. And then we find a way to build in that lump sum so that we have a perpetual system moving forward to provide all of your banking needs, right?
So here are some ways we could do this. So lump sums can happen kind of automatically if a large scheduled premium can also happen, right? So going back to that scheduled premium, and if it can be paid for a long period of time, there's tons of room, quote-unquote, to put additional PUA into the policy. So people in their 50s are sometimes a good example of this, where what I've seen is a lot of times, people in their 50s, they've already done a lot of other investing. They've contributed a lot of large amounts to other financial tools like qualified plans, you know, brokerage accounts, all that stuff, real estate, whatever it is. And so by the time they get to their 50s, sometimes they're in a position where they're kind of like, "You know what, I actually, now that I understand what whole life insurance, what type of asset it is, I actually..." They have less FOMO, fear of missing out, where they've already done all this other investing. So now they feel a little more confident to pay a larger premium, maybe reallocate some of their income instead of continuing to just go to the investment side, to now go to the actuarial side.
And so now they're comfortable paying a big premium for a whole life insurance policy. And when they do that, and then if we, you know, set it up correctly, set it up for the long term, a lot of times, you know, you can fit hundreds of thousands of dollars in there right at once, right? But it takes a pretty big ongoing premium to do it. But that's an example. And by the way, those same people, sometimes they're the ones that are experiencing windfalls at this time, because maybe a parent passes away or maybe they sell their business or some other asset.
So they've got this big windfall and potentially a big income, and also potentially, you know, they feel comfortable to pay a big premium because they don't feel like they're missing out on the investment side. By the way, when I say, feel like missing out, I'm not saying that that wouldn't also be correct for someone younger. It's just that their mindset at that time, they don't feel like they're missing out anymore, where I feel like younger people sometimes do. They have a hard time getting their head around, you know, buying life insurance, because they're kind of caught in that rate of return mindset. So anyway, 50s, pretty good time.
Another way would be, you know, for the Robert Kiosaki fans out there, in his book, "Rich Dad Poor Dad," you know, Kiosaki talks about how he was going to, he wanted to buy a car. But instead of just going and buying the car directly, first, he goes and buys an asset. In his case, likely real estate. He buys a real estate asset that produces an income and that income pays the car payment for him. So in his particular case, we're not really, you know, going by the becoming your own banker thing, because we're, you know, the bank is still involved in that particular case, but the principle still works.
Where if we have a large lump lump sum of money, we could go out and buy an income-producing asset, and then that income that's being produced from that asset goes to paying our life insurance premiums. And if we're buy assets to do that, we now have, we've created a system that pays our premiums in perpetuity. And then of course, now we're infinite banking. Now we're doing infinite banking. We have implemented the infinite banking concept, because now that those premiums are being paid from the other asset, now we're generating cash value, and now we just go redeploy that capital again to keep it going, and that's what truly what makes it infinite.
Okay, I went through a lot there. Again, we're talking about how to handle large lump sums with infinite banking. And again, the reason I talked about it today was it's kind of come up quite a bit in my practice. So if you're out there listening right now, maybe this is resonating with you, and maybe this is something that's been on your mind that you've been wondering how to handle. If so, you can head over to our website, thefifthedition.com. You can book an introductory consultation right there, no cost to you. And we can talk about your specific situation and see how the infinite banking concept and what we do might help you out.
Thanks for listening, everybody, and we'll see you on the next episode.