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Nov. 7, 2021

Policy Design: Rate of Return vs. IBC Based Principles

Policy Design:  Rate of Return vs. IBC Based Principles

One of the classic mistakes people make before deciding to implement Infinite Banking is focusing on the cash value growth. We encounter it all the time. As Nelson would say, "You're majoring in the minors!"

Though it is initially a challenge getting beyond the "rate of return" mindset that we have been taught by Wall Street, as you learn more about The Infinite Banking Concept you'll start to realize there's so much more value and benefits to IBC beyond the yield Whole Life policies generate.

In this episode we'll discuss what life insurance, as an asset class, should be compared to and help you see the bigger picture about the use of your Infinite Banking cash values.

Take a listen, let us know what questions you have, or even schedule a consultation to start your Infinite Banking journey at https://TheFifthEdition.com.

And if you haven’t yet read it, be sure to pick up a copy of Becoming Your Own Banker directly from the Nelson Nash Institute.

 


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Transcript

- I think it's important when talking with your advisor, do they understand anything beyond showing you the rate of return of cash value? Because if they don't, it's like, that is just one piece of the puzzle that if that's all you're focused on, you're just missing out on a whole other world of opportunity.

- Hi everybody, this is John Montoya.

- And this is John Perrings.

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

- Episode 40. In this episode, we're going to talk a little bit about policy design. Specifically, we're going to get into a little bit of the concepts behind rate of return based policy design versus principles based policy design.

- I know when many people start evaluating the illustrations and ultimately their policies, it's a natural tendency to focus on rate of return, but this type of focus, it has two main problems that we're going to touch on. One, they're incorrectly comparing the rate of return to the wrong type of asset classes. And then, two, it's also short-term thinking that causes people to miss the bigger picture by misunderstanding the use of their cash values. So there's significant trade-offs with policy design that people need to be aware of, and we're going to dig into all this in episode 40.

- Let's talk about the first kind of problem we mentioned, which is a conversation about asset classes. When people look at rate of return, and when they look at the rate of return of a life insurance policy, to determine whether they like that rate of return, or they think it's good, or a bad rate of return, they obviously have to compare it to something just like everything else we do. And more often than not, what people compare the rate of return of life insurance, it is an inappropriate comparison, you know, compare it to, you know, their stock portfolio or their real estate portfolio, or, you know, whatever it might be, and what you should be doing is comparing life insurance to a like-kind asset class, which is cash. You could even compare it to bonds if you wanted to, because it's a safer asset class, it's more liquid, and if you do that correct comparison, it blows all of its competition out of the water. And so, a lot of times the premise is incorrect because they don't really understand what the cash value is for, and the cash value is for having cash. And so it seems simple when you say it that way, but a lot of people really just get caught up in trying to compare it to other types of assets like investments. And so, we've said it on this podcast a million times that life insurance is not an investment, it's a cash asset.

- We've also said, I think as recently as one of the last episodes, you know, it's a contract, it's not an investment. You are transferring the risk to the life insurance company, and that only happens on a whole life policy, but you're exactly right. This is a cash asset with way better attributes. All the benefits that you get with Infinite Banking, you cannot get by simply parking cash in a safe in your home or keeping it in a regular traditional bank account. So it goes way beyond just those two comparisons to provide your family with ultimately peace of mind, with additional protection, the ability to have a rainy day fund, the ability to have access to money that continually grows even while you're using it someplace else to multiply your asset base. I think you nailed it. It is essentially a cash equivalent, but with extra cherries on top, because it gives you so much more bang for your buck.

- Yeah, and if we want it to just do a simple rate of return comparison, you know, so if that's the way we want to, you know, if that's the filter through which we want to look at life insurance, well, you should compare the rate of return of life insurance to keeping your money in a bank. You know, and just as a simple comparison, look at any of the big banks, what are they paying? Like 0.1% interest, so almost zero. And then look at a life insurance cash value, life insurance policy. You might be getting like 4% on that money. That's a 40 times improvement on just your cash. So, if we compare it to the right things, it starts to look pretty powerful. And how many people have an emergency fund out there where they're just keeping, you know, a hundred thousand dollars in the bank just to, you know, cover anything that comes along. Well, if you extrapolate that out, you know, 30, 40 years, that's a lot of money you're leaving on the table, just through the sheer rate of return or the growth of a cash value life insurance policy compared to leaving it in the bank. So that's one thing to think about, where are you keeping your emergency fund?

- Let's cross this off the list. Okay. So, we have cash values compared to basically cash equivalents, and it's obviously superior to any cash equivalent out there. Now, the mistake people make in comparing it to market based assets, I think it's a natural inclination to do, but once people get past that, okay, well, now, I've got this safe money growing at four to 5% tax free each year based off current rates. Well, now what? And I think that takes us to our next point, which is, you know, what is the cash value to be used for? Before the show I was sharing with you how, when I got started teaching IBC, I really had a lot of my first clients who had this mentality, where they like the idea of IBC and they're going to start a policy and they started putting money into their policies. And then what I discovered after one annual review, two annual reviews, three, four years, five years go by and I discover, they're still not taking policy loans. For all you listeners out there, this is really important because if you're going to do IBC, you really have to understand your why, if you're just putting money into a policy and that's all you're going to do with that cash value, just leave it there. Okay. That's fine. That is one use case and you're better off for it because you do have access to money that, you know, otherwise would potentially be tied up in the walls of your house or maybe in a 401 or IRA, and you also have that death benefit protection too but, my goodness, you're missing out on huge opportunities to deploy that capital for another purpose. And this gets into the mindset that I really want our clients to have, I really want you as the listener to have, if you're going to practice IBC, I want you to have a business-owner mindset instead of what I call an employee mindset. An employee mindset, to me, is someone who contributes to their 401 , knowing that they can't touch it for two, three, maybe four decades and they're fine with that, they just set it, forget it, and hope for the best. That's not the right mentality that you should have when you're practicing IBC, because you want to take advantage of that capital that you're accumulating so that you can deploy it and accumulate even more assets with it. This is an asset multiplier. We've had an episode where we called "The More Asset." There's so much that you can do with these cash values, if you're just leaving it there to do nothing. Yeah, it'll grow your four to 5% net of fees and taxes every year and that's fine, but you're really not seeing the forest through the trees.

- And since you touched on 401 's, you know, I'll just go back to what I was saying earlier about those institutional investors control and risk. Those are the highest priorities, so going back to control, when you have control of an asset, you can create secondary values out of that asset that help you grow even more, all along the way. Then we get to risk, look at your 401 . Do you have any control over it? No, you don't. Well, you could cash it out if you want to and take a penalty and pay the tax on it, so you got just that amount of control. Getting back to that side of it when thinking of employee versus business owner, we want to have control over the assets that we buy. And that's exactly what we're doing with cash value. We're either buying additional assets or we're keeping that money in there as an emergency fund. I shouldn't say or because it's and. And we're having that money in there as an emergency fund, we also have the ability to buy large purchases, make large purchases. So, when we ask ourselves what's the cash value used for, remember, you finance everything you buy. You either pay interest to someone else or you give up interest you could have earned. And so when we started looking at it from that perspective, we start to think like a banker, which is the whole purpose of the book "Becoming Your Own Banker", which is everything that this is based on. We start seeing possibilities open up in front of us when we start putting ourselves in the business of banking, quote-unquote "banking", we're not really bankers. We are recapturing the banking function, and all of a sudden, the world is our financial oyster. We have all kinds of opportunities that open up in front of us because we're well capitalized.

- Amen. Hopefully our listeners are starting to see the bigger picture and get past just rate of return. Let's talk about some of the trade-offs where if they're at that point where, you know, they're interested in taking the next steps, obviously an IBC whole life policy or system of policies needs to be designed. Let's talk about how to do that the right way.

- Yeah, earlier in the talk, we said that if we design a policy and rate of return is our only consideration, there are trade-offs with that consideration and a policy design itself is nothing more than an exercise in trade-offs. And so, that's something that I wish people would get their head around a little bit more in understanding the fact that what we're buying is life insurance, this is not an account, it's not an investment, this is life insurance and life insurance has actuarial design behind it that determines how the policy can be designed and one of the big things that we have to work around when we're designing a policy for cash value are the modified endowment contract limits. Those modified endowment contract limits do place some constraints on how we can design a policy and keep it as a life insurance policy, not a modified endowment contract, which becomes taxable similar to how an IRA is taxable. So here's something to think about, because of these limits, the policy designed with the highest cash value in the end is the policy that can accept premiums for the longest period of time. And when we design a policy for rate of return, more often than not, you're either going to have some elements that transfer risk back onto you, or you're going to have to shorten the amount of time that you have the ability to pay a premium. Those are the kind of the two biggest pieces there that need to be understood in terms of policy design, where if you had a place to put money that earned a respectable, guaranteed, tax deferred, accessible tax-free rate of return, or I should say growth because insurance is not a rate of return, it's an actuarial calculation. If you had a place to put money there that got all those benefits, would you want the ability to put money there for only a little bit of time or for as long as possible? And so those are some of the questions that we have to ask ourselves, because if we design a policy for rate of return and we can only pay premium for five years, what are you going to do with your money after five years? That opens up the question, you're going to have to start another policy. Are you even going to qualify for the policy at that point? Are you aware that you're going to now have to overcome all the costs of the policy in the early years all over again? Those are some of the things that I think about when considering policy design and looking at rate of return versus principles.

- Yeah, I think for me, it's coming to a realization, what is going to be the use of this capital that you're putting into a whole life policy? What is the source of premiums? How long can that source last? Is it coming from income? Is it coming from existing assets? There's really a lot of variables that go into designing a whole life policy for Infinite Banking that I think maybe some listeners, if they're new to IBC or new to this strategy, and just in general, they come into the conversations or appointments that we have thinking, "Well, it's going to be as simple as 'here's my budget and I'm X years old, and, you know, I want to retire in 10 years' and let's see what this looks like." Let me just say, it's more involved and it requires more thinking than just those variables, because if we're doing our job right, we're trying to get a better financial snapshot of where you're at, what you've been doing up until this point where you found us? You know, what other assets have you accumulated? What is your overall plan look like? I mean, how efficient is your cashflow plan? How efficient is your retirement going to be? I think IBC accomplishes so much more than what people probably give it credit for. They're just thinking, "Well, it's a place to store money and have access to it." But there's so many other attributes that you can get from it, additional benefits that IBC can really compliment once we suss out your reason for being here and also what you're looking to accomplish so we can figure out what is going to be the best long-term design. That may just be one policy, or it could be multiple policies. It just depends on a number of different variables. You got to think about your premium amounts, how much you can and are able to fund into a policy each year and for how many number of years, your age, your current health, and also to take a look at your overall financial balance sheet, where are your assets? Not just, is it in stocks and bonds and real estate, but take a look at your tax buckets too. How much of your money is tax free? How much of your money is tax deferred? How much of it is in taxable accounts? There's definitely a bigger picture that needs to be painted, and that's part of what we do on our end, to make sure that IBC isn't just one part and only one part of your portfolio, but it actually works to fit in and compliment everything that you're doing.

- Those are awesome points and definitely have talked about that in the past that if you have this in conjunction with other assets and investments, everything just works that much better. You also did bring up a good point that if we design a policy for rate of return, the two things I mentioned before, most likely you're going to have to have some policy elements that transfer risk back onto you, or you may have to pay up the policy in a shorter period of time. That means, a paid-up policy means you can't pay any more premium on it. And sometimes, is it possible that a shorter pay policy could make sense? I think so, especially maybe for an older person. But for a young person, maybe in their thirties or forties, especially like just hitting their stride in their career, why on earth would you want to stop paying a premium in five years? I think those are some of the things that are kind of glossed over, especially like on YouTube, you know, you get a lot of people, just, all they're doing is focusing on rate of return. You do get a lot of noise out there in the industry, you know, Nelson Nash talked about noise in the financial services world while there was noise in the insurance and, you know, even the world and where we are with IBC, where a lot of people misinterpret IBC and they don't understand what's going on, they haven't gone through the authorization program and they're putting a lot of misleading information out there. So, I think it's important when talking with your advisor, do they understand anything beyond showing you the rate of return of cash value? Because if they don't, it's like, that is just one piece of the puzzle that if that's all you're focused on, you're just missing out on a whole other world of opportunity that can happen if you really understand the place of what this asset that we're putting together.

- Yeah. Well said. And I think this comes back to why you should pick up a copy of "Becoming Your Own Banker." Because if you understand the problem, you're going to understand what to do. And the problem that most people don't realize because they're following the noise is they're chasing rate of return. And they come to IBC thinking that, "Oh, I need to get this type of rate of return, and this will only work if I get a rate of return like this." If you're coming to IBC with that mentality, I can tell you right now, you don't get it and you won't get it. Not until you read this book, until you delve deeper into all the attributes that "Becoming Your Own Banker" is going to give you. And these are intangible benefits and the first one I can think of is peace of mind. And I would ask anyone out there who's looking at their portfolio more than once a week, once a month even, how much peace of mind do you actually have? Well, I can tell you this. In the years that I've been practicing Infinite Banking, I don't ever have to worry about checking my statements or going online to check my cash value. These are guaranteed contracts and I know, I have the absolute peace of mind knowing that my cash value is growing every single year from one year to the next, without any luck, skill, or guesswork on my part, and then it gives me the ability, because I do have control and access to those cash values, to deploy it someplace else, to buy more assets with it, and to get back to one of the things I think you said in one of the last podcast, John, contractual wealth versus paper wealth, I'm actually building wealth through my IBC policies. That goes way beyond someone's 401 and the amount of peace of mind that I've been able to garner by being able to do this where I'm now adding assets on top of my IBC policies. It's a whole different ball game, and that's ultimately where all of you need to be. It goes well beyond just starting and capitalizing an IBC policy, it's about getting out of that employee mindset and becoming a business owner. Because ultimately you are the king of your household, and if it's going to be, if it's going to happen where you're going to accumulate a larger net worth, ultimately it's going to be in your hands and you want that control so that you can take ownership of what's going on in your financial life and IBC will allow you to do that. So, hopefully that resonates.

- Yeah. I think those are all great points. Peace of mind and understanding that if you have the ability to create one asset, you can create more values off of that asset if you have control and if you can mitigate risk. And that's why it's very difficult to do these types of things, you know, with your 401 . So I think we've kind of run the gambit on this episode where what we talked about was designing a policy on principles rather than rate of return. And I think if people take a look at the bigger picture, they think long range, they can really come out with a better situation than just looking at rate of return.

- Absolutely. You want to close it out?

- Sure. If you have questions, first thing you should do is read "Becoming Your Own Banker." That's step number one. Step number two is you can always go to TheFifthEdition.com, we have links to, you know, all those types of resources, and if you have questions that you'd like to ask specific to your situation, you can email us, give us a call or book a no-obligation 30 minute appointment, right with us, right on our website. So thanks again, John.

- Thanks everyone. Take care.