Wednesday, February 1, 2023

There is No Secret Ingredient

One of my favorite movies is Kung Fu Panda and the lesson about the secret ingredient applies to Whole Life.

When people learn about Infinite Banking, they feel like they discovered something that wonderfully new and magical.  The truth is though there is nothing magical about Infinite Banking or Whole Life policies other than the perceived newness of it.

There’s a mystical feeling about making a discovery, traveling some place new, and the a-ha moment with Infinite Banking and Whole Life is like that, too.  But there is no magic about it, no sleight of hand.  This is a good thing because if there was something magical or some sort of con involved to distract your attention, Whole Life insurance would be, well, Universal Life insurance.

Same thing with Infinite Banking.  It’s perhaps a novel idea at first until you realize banking has been around for thousands of years.  People who have saved will lend to those who need capital and the cost to the borrower is interest.  

If you’ve ever loaned a friend or family member money, you’ve banked at the individual level.  It’s that simple.  At a larger level, that’s the role traditional banks have filled for people who haven’t saved enough capital for what they want or need.  But the banking function of lending is not exclusive to banks.  We are just conditioned to think it is.

Enter Infinite Banking at the individual level.  The “you and me” level as Nelson Nash used to say.  He would also tell people the banking function doesn’t have to be done with Whole Life.  It can be accomplished with a Bank Line of Credit (Home, business, or personal).  It can be done with a checking/savings account.  However, his conclusion was Whole Life was the best financial vehicle to harness the banking function. Infinite Banking was born and his book Becoming Your Own Banker was written to help people understand a different way of solving for our greatest financial need:  financing.

To be clear, Infinite Banking and Whole Life are two separate things.  The former is a strategy, the latter is a financial product.  IBC requires a financial product.  Whole Life doesn’t require Infinite Banking.  

What Whole Life accomplishes through its guarantees and predictability is make it the best choice to practice the banking function in your own life.  Rather than relying on traditional banks for all the major capital you’ll require in your life, you can instead Become Your Own Banker.  

And Whole Life works so well because there is no magic to it.  Or as say, “no luck, skill, or guesswork.”

Premiums paid result in guaranteed cash value.  Only in a Whole Life policy does the cash value represent the equity you own in the death benefit.  Consider a 30 year fixed mortgage as an analogy:  level payments for all years where each mortgage payment results in an increasing equity position for the home owner.  Same thing for Whole Life where each premium results in a growing equity position of the death benefit until the cash value ultimately must equal the death benefit. This never happens with Universal Life policies.

I’ll explain Universal Life this way:  you lease the death benefit, you never own it.  

The reason why is because the cost of insurance in Universal policies in designed to increase every year and any additional amount paid above the cost of insurance is unbundled into an interest bearing account which is the cash value in a Universal policy.  Since the cash value floats based on whatever interest crediting option available in the product in Universal policies, performance requires “luck, skill, and guesswork”. The cash values must also stay above the increasing cost of insurance or the policy will begin to eat itself.  There is nothing certain about Universal policies unlike a Whole Life policy.  

To sum up, there’s nothing magical about Infinite Banking and Whole Life.  No secret ingredient.  Whole Life is based on guaranteed numbers (math).  As a result, its performance is guaranteed by the life insurance companies that offer it.  Infinite Banking is the idea and strategy eliminating the middle man banking institutions.  

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