In a post from the popular blog The Simple Dollar, the following suggestion is made regarding the setup and operation of a bank on yourself or pay yourself first program:
“First of all, you have to establish a “master account” of some kind. This can be something as simple as a savings account at a bank or it can be an investment account where you introduce some risk to your “master account.” I’ll talk about the different options in a bit.
This “master account” is where you deposit all of your income. Every single dime you earn gets directly deposited into your “master account.”
Then, once a month (or once a week or however you choose to do it), an automatic transfer pulls a smaller amount of money out of that “master account” into your normal checking account. That is the money that you live on – you use it to pay all of your bills”.
While this is a nice post geared to help people, it did completely fail at explaining the Bank on Yourself concept at all. In fact, it suggests opening two standard bank accounts and earning interest on one (which would be taxed and earn a lot less than 3-5%). You see, the true Infinite Banking concept doesn’t work anything like this. So as the code breaker of how the rich invest their money, I will strive to clear up what the cited post should have said all along. Here goes…
As part of my ventures into learning how to make money outside of conventional means, I came across the Infinite Banking concept, which is also sometimes referred to as Bank on Yourself. I admit that I was taken aback by it because I had not heard of it… ever. After reading at least 3 books on it, I decided to contact a local life insurance agent who specialized in setting up these policies the proper way. I grilled him with lots of questions about it and how it worked. It seemed too good to be true but I decided to open an account and take the plunge. Three years into it, I wish I had opened one 10 years ago, even at birth if that was possible. By now most of you are probably wondering what the heck I’m talking about, so here’s some background on what it is and how it works.
The concept is simple. All you need to do is open up a specially structured whole life insurance policy. It needs to be with a mutually owned insurance company. You can’t just open it with any insurance company and only a handful exist that offer these kinds of policies: most of them you’ve never even heard of. You will also need to find a trained life insurance agent to set it up correctly. You’ll have to pay a fixed amount into the policy for 7 years. As an example, you might have to pay $2,000 per year for seven years. This is because of IRS tax laws. While your policy is active, it will gain in value every year by paying you dividends. The yields at the time of this writing can pay anywhere from 3-5%. Best of all, both the gains and distributions are tax free forever: that’s right, I said tax free. They are not tax deferred like with IRA’s or 401(k)’s. In addition, you can take a loan out on yourself at any time and the loan is never required to be paid back. If you do choose to pay yourself back, you can do so at a premium interest rate which goes right back into your account and then earns dividends on it. This allows your policy to act like a bank while compounding your money tax free.
Although the primary reason to open this policy is for investing reasons, you’ll also have the additional benefit of a whole life insurance policy covering you until about age 105. If at any time during that period you die, your beneficiary will get the insurance death benefit payout. What’s even better is that all the money you invested into your account comes back to your heirs or beneficiaries upon your death. Several financial gurus are pounding the table and talking about how whole life plans are a waste of money and carry high fees. They’re advising people to buy term life insurance and invest the difference. The problem is that most people pay a little bit per month for it (maybe $35 or so) but they don’t die within the 20 or 30 year policy term. The policy then expires worthless and their entire investment is lost. For this fictional policy, your loss would be $8,400 over 30 years. With a whole life policy, you (not you but your heirs or beneficiaries) would get all of the initial investment money back plus the dividends and other gains you received. In addition, your death benefit will still be intact so you will also get that money on top of your original investment. Did I mention that you can have more than one policy open on you and your spouse? Some people have 3 or 6 of these policies active!
After even more study, I found out that some of the richest families in the world use this exact concept to accumulate massive amounts of tax free wealth. My life insurance agent confirmed this by citing some local business owners who own several policies each. My hope is that many of you will read this post and do more research for yourself. I really do believe that everyday people can utilize this same concept to grow wealthy over time just like the wealthiest people in the world do.
Jamie has an MBA from Rutgers University and a Professional Certificate in Real Estate Finance, Investment and Development from NYU. He’s traded stocks since he was 13 and bought his first property within a year of graduating college. He also flipped properties and got out before the 2008 mortgage meltdown because he was able to see the market turning before it happened. He’s started two companies and also has experience in investing in antiques, collectibles, gold, silver and trading futures.