If you have never considered implementing the Infinite Banking Concept (IBC) into your practice, now may be a good time to do it. Here’s an overview of the IBC, how it benefits your clients, and the impact it could have on your business.
The Infinite Banking Concept is a strategy that was popularized by R. Nelson Nash in his book, Becoming Your Own Banker®, published in 2000. Since the first edition of Nelson’s book, the Infinite Banking Concept has become a popular strategy with many financial advisors. IBC uses life insurance to take advantage of U.S. tax laws and life insurance contractual obligations to help clients reduce the effect of income taxes, pay less interest on debt, and redirect that interest to build wealth. The Infinite Banking Concept is a simple strategy, but it can be difficult for many advisors and clients to comprehend.
Using Participating Whole Life
The IBC is a strategy, but it is based on only one product. Nelson realized the unique qualities of participating whole life insurance that make it the best vehicle for the IBC. Participating whole life is a combination of guaranteed premium, guaranteed death benefit, and guaranteed cash value growth. No other financial product provides these guarantees. In addition, participating whole life companies are mutual companies, which means they are owned by their policyholders. Policyholders are the owners of a participating whole life carrier and share in the profits of the company. The guaranteed cash value growth plus dividends in a whole life policy accumulate and can be accessed on an income-tax-free basis.
Cash value is the primary focus in most IBC policies, so most IBC policies use a Paid-Up Additions (PUA) rider to help grow cash quickly inside the policy. PUAs can be thought of as single pay whole life policies because they are very cash rich and provide a relatively small amount of additional death benefit. A PUA by itself would be considered a Modified Endowment Contract (MEC), which is an IRS status that treats the cash value in a whole life policy as an investment and changes the tax treatment from FIFO to LIFO. This means that any withdrawals or loans of the cash value in a MEC policy will be treated as a taxable event to the extent there are gains in the policy above the cost basis. Because of the potential of becoming a MEC, it’s important to design an IBC policy with sufficient cash value to meet the client’s goals, but not with so much of it that the policy becomes a MEC. Typical IBC policies will have about 60 percent of the total premium directed to PUAs. The amount of premium to PUAs can be higher, though, with the addition of a term rider, which will increase the death benefit and maintain the non-MEC status. Once an IBC policy is established and accumulates sufficient cash value, the client can begin to take loans against the policy whenever needed to purchase anything they can’t afford to pay for in full with their monthly cash flow. This puts the client in a position to negotiate the best interest rates on loans.
Reducing Headwinds for Your Clients
The Infinite Banking Concept can help your clients reduce two big headwinds in their financial plan: Taxes and interest. Many Americans use alternative financial vehicles to accumulate some of their retirement nest egg. They could be safe, but they may also be taxable. Clients often need to report the interest they earn and pay taxes on it to the IRS every year. While the client’s wealth is growing in these alternative accounts, it could be eroding by a growing tax bill. Not only is the client losing money to taxes, but he or she is losing the opportunity to earn interest on those tax dollars. As previously discussed, cash value grows income-tax-free within a properly structured whole life policy. As a result, IBC clients can reduce their tax burden and earn more interest on the additional savings.
Another financial headwind is debt. As Nelson explains in his book, Americans pay 34.5 cents of every dollar to interest on debt. Meanwhile, we have been trained to focus on getting a higher rate of return on our investments. However, there is much more to be gained by reducing interest payments on debt than by chasing higher rates of return. The sheer volume of interest being paid makes it difficult for many to save money to invest. According to the Bureau of Economic Analysis, the personal savings rate of the average American is five percent. We can help our clients increase their savings rate by showing them how to “become their own bank” using whole life insurance. Obviously, the client cannot use whole life to duplicate all of the aspects of owning a bank. For example, banks have the advantage of taking in other people’s money, paying them some interest, and lending those funds out to other people at a higher interest rate. IBC clients must fund their IBC policies with their own money. Further, banks take advantage of “fractional reserve banking.” According to Quickonomics.com, “Fractional reserve banking is a banking system in which banks only hold a fraction of the money their customers deposit as reserves. This allows them to use the rest of it to make loans and thereby essentially create new money.”
So while IBC clients cannot create new money, they do put themselves in a position to negotiate the best rates in the market. This is true because they have the cash value in their life insurance policy to use as collateral. Nelson equates this to owning a grocery store. The cash value in the policy is the inventory. If the IBC practitioner takes a loan at wholesale rates, i.e. the rate the insurance carrier charges, they are essentially stealing from their own store. So the “honest banker” should repay the loan against his or her policy at the “retail rate,” meaning the best alternative rate in the market had they not established their IBC policy. For example, if the best interest rate on a traditional personal loan from a bank is eight percent and the client can take a loan against his IBC policy at five percent, the client should take the loan against the policy and make payments equivalent to the eight percent interest rate the bank would have charged. In this case, the client is recouping the three percentage points that would have gone to the bank and redirecting it into his own personal economy to grow wealth.
There also are additional benefits in taking a loan against a whole life policy versus taking one from a bank. IBC policyowners are able to take loans against their policies simply by requesting the loan. No credit check is required. In addition, the loan doesn’t show up on a credit report and no scheduled repayment plan is required. It’s important to review the lending policies of the carrier to make sure the policyowner can take loans against a policy within an acceptable timeframe and as often as needed to meet the client’s objectives. It’s always best to pay off loans as quickly as possible, too, but the IBC client has the flexibility to determine how and when policy loan repayments are made. The Infinite Banking Concept can help your clients build wealth by reducing the burden of interest on debt and income taxes, but what can it do for your business?
Growing Your Business with the IBC
Infinite Banking using whole life insurance is a great opportunity to diversify your sources of revenue and organically grow your business. According to LIMRA, whole life insurance has increased premium market share over the last 11 consecutive years, growing from 22 percent in 2002 to 37 percent of all life premiums written in 2017. Whole life now represents the highest market share of premiums written in the U.S. During the same 11-year period, the combined market share of UL and IUL fell from 46 percent in 2011 to 36 percent in 2017. The market share of term insurance fell slightly from 22 percent in 2007 to 20 percent in 2017, and variable universal life dropped from 14 percent in 2007 to seven percent in 2017.
While all of these products serve a purpose for the right client and objective, according to Nelson Nash participating whole life insurance is the best product to use for the Infinite Banking Concept. This makes the IBC a great way to introduce whole life into your practice, start participating in the entire life market, and organically grow your business. In addition, according to the NAIC, whole life premiums per case tend to be higher than the average life sale. Due to the focus on building cash value, the typical IBC policy premium tends to be greater than the average whole life premium. I work with many top producing IBC practitioners and have found that the typical IBC case is about $6,000 in annual premium, although some cases are much larger. This means it doesn’t take a lot of IBC cases to move the needle on revenue for you.
The Infinite Banking Concept, while still a relatively unknown strategy, can help you bring added value to your new and existing clients by showing them how to reduce their interest and tax burden as well as diversify your business and provide a new source of organic growth for your practice.
Kip Walker, JD, CLU
JD, CLU, regional vice president (RVP), midwest region, joined Mutual Trust Life Insurance Company, a Pan-American Life Insurance Group Stock Company, as a sales support specialist in 2010. In 2015, Walker was promoted to national accounts manager and in 2017, to RVP, midwest region. In this position, Walker is responsible for helping Mutual Trust achieve its sales goals by building strong relationships and recruiting field partners in 12 midwestern states. In 2017, his first year as an RVP, Walker won all three of Mutual Trust's RVP regional development awards. The awards include Regional Vice President of the Year, Regional Field Force Development, and Regional Growth. He is a frequent speaker at industry events and has published numerous articles on the advantages of owning whole life insurance. Prior to joining Mutual Trust Walker, who has a B.S. in finance from Northern Illinois University and a law degree from John Marshall Law School, was employed at Allstate Financial where he helped agents drive sales of mutual funds, fixed annuities and life insurance. He also has held positions at Harris Trust and Savings Bank and SunGard Investment Systems. Walker can be reached by telephone at 800-323-7320, ext. 5594. Email: WalkerK@mutualtrust.com.