B n ank otes - Nelson Nash’s Monthly Newsletter - February 2013 Agreement, and completed the program, I cannot Infinite Banking verify how they will use BYOB titled products. Institute Thank you for your belief in IBC, your support of Nelson’s important message, and your understanding as to why we implemented the program to fulfull our Nelson Nash, Founder dream of achieving the 10%. [email protected] -- David Stearns David Stearns, Editor [email protected] 1.0 IBC PRACTITIONER’S PROGRAM OVERVIEW Infinite Banking Concepts® LLC 1.1 Q: What is the IBC Practitioner’s Program? 2957 Old Rocky Ridge Road Birmingham, Alabama 35243 A: It is an educational program designed for financial professionals who wish to make the Infinite Banking BankNotes newsletter archives are located on our website: Concept (IBC) part of their client relationships. www.infinitebanking.org/banknotes.php The IBC Practitioner’s Program consists of online educational videos, a Program Manual, and an IBC Practitioner’s Program Exam. Graduates of the Program can be sure that they will possess a solid foundation in the theory and We had an overwhelming positive response to the implementation of IBC, as well as an understanding unveiling of our new IBC Practitioner’s Program at of Austrian economics and its unique insights into our the recently completed IBC Think Tank Symposium. monetary and banking institutions. Fully half of those licensed agents in attendance registered for the program and received the first run 1.2 Q: Why did you create this course? Nelson of the IBC Practitioner Training Manuals - THANK Nash already published two books and gives a 10- YOU. The on-line program module will go live hour seminar. shortly. A: Nash’s previous efforts focused on educating For those of you that are new to IBC or have not the general public. In contrast, this new Program had a chance to check out our new web site (same is exclusively designed for financial professionals, URL: www.infinitebanking.org); we recently posted including insurance producers but also attorneys, our IBC Practitioner’s Program FAQs to outline CPAs, financial planners, and anyone else who important course information. To help, the FAQs are interacts with clients concerning their money. The provided below. purpose of the IBC Practitioner’s Program is to gather and nurture a group of trained and credible financial For those of you that regularly buy our products professionals that the public can trust for their needs in bulk quantities, the IBC Practitioner’s Program related to IBC. impacts you significantly. Why? I have made the decision to restrict bulk sales of Becoming Your 1.3 Q: What is the structure and content of the Own Banker titled books, audio CDs and DVDs to Program? IBC Practitioner’s only. Other materials will still be A: The Program is divided into three main sections: available in bulk quantities to all. Why did I do this? THE PROBLEM, THE SOLUTION, and THE Because the purpose of the Practitioner’s program IMPLEMENTATION. Within each section there are is to ensure the integrity of IBC. Unless those separate lectures, covering topics such an explanation producers have signed the mandatory program User of the housing bubble, an actuarial treatment of the www.infinitebanking.org [email protected] B n ank otes - Nelson Nash’s Monthly Newsletter - February 2013 whole life insurance product, how to read policy time, the “class of 2013” will then have a guaranteed illustrations, and an overview of tax considerations in ceiling on future renewal fees, which will rise policy design. For a full course syllabus as well as according to the Consumer Price Index but with a cap samples of the videos check the end of this article. of a 5% increase per year. There will be a similar fee structure for students enrolling in the Practitioner’s 1.4 Q: How long will it take me to become an IBC Program in future years, but the baseline enrollment Practitioner? and renewal fees (i.e. $1,095 and $495, respectively) A: The financial professional who enrolls in the may be adjusted upward for them. Once a financial Program must read the Manual (approximately professional becomes an IBC Practitioner, his or her 300 pages) and watch the series of online videos renewal fee structure is locked in place, forever, with (approximately 12 hours of material), to prepare for no additional payments for other products or services an in-depth, online, multiple-choice exam that has a necessary to remain in good standing in the Program. time limit of 2 hours. Once they have been admitted 1.7 Q: Are there group discounts available to the Program, enrollees can move through the to agencies who may sponsor/subsidize their online videos at their own pace, and can schedule an insurance agents or other employees to enroll? online exam at any time, but for most enrollees, it will take at least two weeks to absorb the education and A: Yes. Parties interested in group discounts should adequately prepare for the exam. Upon completion of contact IBI directly. the exam, the Infinite Banking Institute (IBI) website 1.8 Q: Who was involved in the creation of this (if the graduate desires) will be updated to reflect the Program? new IBC Practitioner, typically within one week. A: The initial creation of the IBC Practitioner’s 1.5 Q: What are the technical requirements to Program was a collaborative effort between the enroll? discoverer of IBC Nelson Nash, the creator of the A: The enrollee needs a computer with an adequate Infinite Banking Institute David Stearns, businessman internet connection to watch streaming video, and a L. Carlos Lara, and economist Robert P. Murphy. webcam to allow for proctoring of the Exam, which [Names will have hyperlinks to our bios.] Throughout will be provided by a third-party service. the process of designing the Program, its four creators sought the advice and review of various insurance 1.6 Q: How much will it cost me to become an IBC actuaries, attorneys, and practicing producers to Practitioner? ensure the integrity and accuracy of the instruction. A: The initial enrollment fee for anyone who enrolls 1.9 Q: Why do you specifically mention “Austrian in calendar year 2013 is $1,095. The new enrollee will economics”? What does Austria have to do with life be provided with the course Manual, and access to insurance?! the pre-recorded videos as well as any supplemental education that may be provided by the Program A: The creators of the Program felt that any administrators. When he or she feels ready to be tested, professional advising clients on their money must the enrollee is responsible for paying the fees for the have an adequate grounding in how the economy online exam directly to the testing agency (which will actually works. For decades, Nelson Nash has been be approximately $20 per test, in 2013). After passing a student of Austrian economics, which is the name the Exam, the enrollee is responsible for a Membership for a certain school of thought (whose founders came Fee of $495 to become an IBC Practitioner (through from Austria) that specializes in the role of money calendar year 2013). Annual renewal fees will be and banking in the economy. Nash has described IBC required to maintain IBC Practitioner status, with as “Austrian economics in action.” It was particularly the fee for calendar year 2014 being $495. After this appropriate to incorporate the Austrian perspective in 2 www.infinitebanking.org [email protected] B n ank otes - Nelson Nash’s Monthly Newsletter - February 2013 the IBC Practitioner’s Program, as one of the creators, magazine catering to those with an interest in IBC Robert P. Murphy, has a Ph.D. in economics and has and Austrian economics. Issues of the LMR will spent years educating the general public in this area. often have articles of general interest to the public, and IBC Practitioners are encouraged to distribute 1.10 Q: What is the relationship between the PDF copies of the magazine to potential clients to the Infinite Banking Institute, and the IBC start conversations. Finally, in order to ensure that the Practitioner’s Program? public trusts the integrity of the IBC brand name, only A: The Infinite Banking Institute (IBI) is an IBC Practitioners in good standing with the Program educational institution with the mission of educating will be allowed to attend sessions of the IBC Think the public and financial professions about the Infinite Tank (in Birmingham, AL); only IBC Practitioners Banking Concept, as developed by Nelson Nash. (The will be eligible for insurance-based seminars from IBI website has the same URL as the previous Infinite Nelson Nash, Carlos Lara, and/or Robert P. Murphy; Banking Concepts website.) The IBC Practitioner’s and only IBC Practitioners will be allowed to make Program is simply one aspect of the IBI’s broader bulk purchases of Becoming Your Own Banker and mission of consumer and producer education. Nelson How Privatized Banking Really Works from the IBI, as Nash was personally involved with the transition well as the sought-after Becoming Your Own Banker from the original IBC online presence to the Infinite Seminar ProKit on DVD, featuring actual PowerPoint Banking Institute, and he was also involved in every slides from Nash seminars. (Commercial booksellers aspect of the creation of the IBC Practitioner’s will still be eligible for bulk book purchases.) Program. One very important connection between 2.2 Q: What if I’ve been selling IBC policies for the two entities is that only IBC Practitioners in good years? Am I going to actually learn something in standing with the Program will be allowed to attend this Program? sessions of the IBC Think Tank, as explained more fully in Section 2.1 below. A: Yes! It’s true, the purpose of the IBC Practitioner’s Program is to provide a broad base of knowledge 2.0 BENEFITS TO THE IBC PRACTITIONER to ensure a minimal level of competency in all of 2.1 Q: How does it benefit me to become an IBC the areas a financial professional needs, in order to Practitioner? adequately discuss IBC with his or her clients. Even so, the old pro will still benefit from the training. A: Once passing the Exam, graduates of the Program Veteran IBC producers already know that IBC works, will be, if they desire, listed at the Infinite Banking but after taking the Program they are very likely to Institute (IBI) website as “IBC Practitioner,” and have a better understanding of why it works. will receive permission to use an official IBI logo on their website to advertise their new status. Not 2.3 Q: If I join the Program, will I receive only will this lead to possible referrals from the IBI specialized computer software to show my clients, site itself, but it will also allow the IBC Practitioner and/or other marketing tools to help me promote to reassure potential clients that he or she has been IBC? through a rigorous educational program, designed A: No. The purpose of the IBC Practitioner’s Program in collaboration with an outside economist and is to train and educate financial professionals, not to insurance actuaries, validating the theory and create a “selling system” for IBC. The Program will implementation of IBC. Graduates of the Program not directly provide marketing tools, except for the will also receive customized excerpts of various specific items (listing at the website, excerpts from materials from the course Manual, for use in client the course Manual intended for the general public, education. Furthermore, all graduates of the Program free subscription to the LMR, etc.) described above. will receive complimentary subscriptions to the Lara- The IBI or other entities may provide such IBC- Murphy Report (LMR), which is a monthly financial www.infinitebanking.org [email protected] 3 B n ank otes - Nelson Nash’s Monthly Newsletter - February 2013 specific marketing tools, but these will not fall under other legal requirements to practice in his industry. the umbrella of the IBC Practitioner’s Program, which The student agrees not to reproduce the contents of the is strictly educational. However, keep in mind that videos or the course Manual in any way, save for the many of these other “tools” will be available only to customized handouts he will receive upon graduation. IBC Practitioners in good standing with the Program. Finally, the student agrees for those clients who want an IBC policy, he will design it according to certain 2.4 Q: If I become an IBC Practitioner, will I be characteristics to ensure that these specific clients are permitted to train other financial professionals in getting a “Nelson Nash” policy, as described in his IBC? books and seminars. A: No. The IBC Practitioner is someone whom the 3.3 Q: What does the Program mean by a client IBI will publicly recognize as trained to work with wanting an IBC policy? the general public in financial matters related to IBC. However, passing the Program’s online Exam is A: If an IBC Practitioner is dealing with a client not sufficient to receive permission from IBC LLC who asks for an “IBC,” “Nelson Nash,” “privatized to train other financial professionals in IBC. Going banking,” or “banking” policy, or if the Practitioner forward, the IBI will draw upon the ranks of IBC recommends such a policy to the client, and/or if the Practitioners for education of the growing community, client has come to the Practitioner by referral from including speaking roles at the IBC Think Tank and his listing at the IBI website, then and only then the even contributing materials to the evolving IBC Practitioner must be sure to set this particular client Practitioner’s Program itself. Naturally, being an IBC up with a dividend-paying, whole life policy. Practitioner will be a necessary, but not a sufficient, 3.4 Q: Am I allowed to sell policies other than condition for these opportunities. whole life to my non-IBC clients? 3.0 RESPONSIBILITIES OF THE IBC A: Yes! The restriction of a dividend-paying whole PRACTITIONER life policy applies only to those clients who desire 3.1 Q: What’s the IBC Practitioner’s Agreement? an IBC policy, as described above. It is perfectly acceptable for the IBC Practitioner to provide other A: When enrolling in the Program, the financial types of insurance policies for clients, so long as these professional must sign the IBC Practitioner’s clients do not believe they are receiving policies to Agreement. This is a legal document between the serve the purposes conceived by Nelson Nash. student and IBC LLC, spelling out the respective commitments of both parties. This FAQ will 3.5 Q: If I join the program, but then eventually summarize its essential elements, but for a copy of decide to stop my renewal fees, can I go back to the actual Agreement, contact. my old way of doing business—which involved handing out Nelson’s book? By signing the IBC 3.2 Q: What’s the gist of the IBC Practitioner’s Practitioner’s Agreement, am I somehow restricting Agreement? my future marketing strategies? A: The Agreement specifies that IBC will provide a A: By joining the IBC Practitioner’s Program, the course Manual, a series of restricted-access online financial professional grants no more legal power educational videos, and an Exam to become an IBC to IBC over his practices, than what IBC LLC Practitioner. The student, in turn, will provide the already owns. Specifically, IBC LLC already has initial enrollment fee and membership fee (for the the legal power—with or without a signature on first year), and then renewal fees in subsequent years. the IBC Practitioner Agreement—to stop financial If the student is a financial professional who wishes professionals from using its trademarks “The Infinite to advertise his status as an IBC Practitioner, he Banking Concept” and “Becoming Your Own acknowledges possession of the proper licensing and 4 www.infinitebanking.org [email protected] B n ank otes - Nelson Nash’s Monthly Newsletter - February 2013 Banker,” and/or reproducing or creating derivative outlines the explanations for the housing bubble works of IBC LLC’s copyrighted works without offered by three major schools of economic thought: permission. Generally speaking, the “penalty” for an The Chicago School, the Keynesian School, and enrollee violating the terms of the IBC Practitioner’s the Austrian School. The focus in on the Austrian Agreement is merely removal from the ranks of explanation, which (if correct) implies that the U.S. IBC Practitioners. The only additional penalty that economy is in store for another major crash. could possibly emanate from the IBC Practitioner Lecture III: Money, Inflation, and Fractional Agreement per se, would be the case where an Reserve Banking enrollee takes material from the course Manual and/ or its online videos, and attempts to reproduce it for Because the “experts” do not understand our modern the general public or other financial professionals, money and banking system, in these lectures Lara without permission from IBC. But with respect to gives a brief historical introduction to these topics. He Becoming Your Own Banker and How Privatized gives a thorough yet comprehensible explanation of Banking Really Works (two of the texts for the the process by which the Federal Reserve buys assets Program), the IBC Practitioner’s Agreement does not and creates new reserves in the banking system. The grant the copyright owners of these books any legal commercial banks may then create new loans on top of rights that they don’t already possess. the Fed’s injections, leading to a many-fold increase in new money creation. The result is a depreciating dollar (rising prices) and artificially low interest rates. IBC Practitioner’s Program In addition to general financial education, this lecture Course Syllabus will also serve to underscore the benefits of financing cash flow needs through life insurance policy loans. In -----------------THE PROBLEM----------------- contrast to lending from the commercial banks, policy Lecture I: The Typical American’s Problem loans are not inflationary nor do they contribute to the business cycle. Closely following the treatment in Becoming Your Own Banker, in these openings lectures Nash explains -----------------THE SOLUTION----------------- that Americans devote a shocking percentage of Lecture I: The Economics of Life Insurance their monthly income to finance charges of various kinds (credit cards, car payments, mortgage). Yet Murphy walks through the nature and operation of life they brag at the water cooler about the rate of return insurance from an economic perspective. This will they are earning on that small sliver of wealth help IBC Practitioners really understand how a whole they have invested. Americans focus on the rate life policy works, making it easier to give intuitive of interest and ignore the volume of interest they explanations to their own clients. Murphy will cover pay out each month, which for most is a surprising several topics, from both a theoretical level and percentage of their monthly income. Nash discusses through an actual policy illustration, including: (a) the various psychological pitfalls plaguing Americans using mortality data and portfolio returns to compute (Parkinson’s Law, Arrival Syndrome, Willie Sutton’s the “actuarially fair” level premium on a whole life Law, Golden Rule, Use It or Lose It.), which are policy, (b) the definition of surrender cash value, and snares that will impede disciplined saving. why it grows differently depending on the premium structure, (c) the process by which dividends are Lecture II: The Causes of the Housing Bubble distributed, and (d) what actually happens when Paid and Lessons for Today Up Additions are purchased. It is important for IBC Practitioners to know the Lecture II: Using Whole Life to Become Your Own basics of the current discussions about the economy “Banker” and government/central bank policy. This lecture www.infinitebanking.org [email protected] 5 B n ank otes - Nelson Nash’s Monthly Newsletter - February 2013 The treatment closely follows Nash’s book and understands the main features of each type. Then seminar. Nash first uses parable of setting up a grocery Murphy explains why Nelson Nash prefers to “do store, then compares it to setting up a traditional bank. IBC” solely with Whole Life. The second lecture will He then shows how this can be achieved through will explain direct vs. non-direct recognition, and dividend-paying whole life insurance. Explains why insurers adopt different rules. He will explain the concepts of “pool of money” and Economic Value impact on a client from these different products and Added (EVA), and gives rules for a successful features. business (“don’t steal the peas”). Lecture III: Matching the Policy to the Client In the second part, Murphy walks through the Lara walks through the construction of two actual examples of car financing and equipment financing policy illustrations, tailored to two hypothetical from Nash’s book. Murphy will use the same numbers clients. The first is a middle-income, 35-year-old as in Nash’s book, but will stress that the point is a salaried man, while the second is a high-income, relative comparison, to see which strategy does better 50-year-old business owner. over time. Today’s lower interest rates do not alter the conclusion. Lecture IV: Legacy Lecture III: The Sound Money Solution and Its Nash opens with a discussion of building up a system of Connection With IBC policies on one’s children and grandchildren. Perhaps discusses the option of giving child / grandchild an Lara outlines the “Sound Money Solution” as insurance policy with cash value to start a business, discussed in How Privatized Banking Really Works, rather than a college education. Murphy then explains in which the dollar is tied back to gold (which the nuts and bolts of taking out policies on other prevents the government from debasing the dollar) people, or for other people. This knowledge will be and government returns money and banking to the essential for clients who are uninsurable. market. The climax of the lecture will be that insurance policy loans are not inflationary, meaning that each Lecture V: The Importance of Mutuals and a household that embraces IBC can “secede” from the Good Reputation broken system and put the entire economy on a more Lara explains the emphasis that Nelson Nash places secure footing. The IBC practitioner realizes that his on mutual companies, and goes over the stock/holding or her individual efforts to educate clients and make a company/mutual classification. This is a powerful living, actually promote the general prosperity of the message that will spread not only among households country. but business owners. ------------THE IMPLEMENTATION------------ Lecture VI: Building the 10% Lecture I: Tax Considerations in Policy Design The themes of Austrian economics, the Sound Money Overview of the tax rules governing life insurance, Solution, and the Infinite Banking Concept all come including “MEC” limits and the use of PUA and term together when a “tipping point” of the proper segment riders. Explain that PUA buys a “mini policy” that is of the citizenry have been properly informed about the effectively a single-pay with same structure of base true nature of our financial problem, and the solution. policy. At this point the demand for IBC will exponentially multiply. For this reason, it is critical that IBC Lecture II: Choosing the Right Product and Practitioners adopt a strategy of educating the public, Features From a Bewildering Menu using the books, videos, and other materials from The first lecture covers the nuts-and-bolts of the the Infinite Banking Institute and other appropriate different product types (UL, VL, IUL, etc.), explaining sources. Lara will explain that this is not a “chore” how they work, to make sure the IBC Practitioner but in fact is an excellent way to ensure a stream of 6 www.infinitebanking.org [email protected] B n ank otes - Nelson Nash’s Monthly Newsletter - February 2013 interested potential clients who already understand over a four-year period before turning in the truck and how IBC works and realize its ability to solve their buying a new one. Based on the specific details that financial problem. existed when Nelson constructed the example, the market rate of interest on this commercial loan was a Equipment Financing With IBC, bit higher than 15%. Since the man (by assumption) turned in the trucks every four years, it worked out that Part II: Using Policy Loans to 27 cents of every dollar paid to the finance company Grow Wealth Faster was in the form of pure interest. Illustration 1 depicts a “life paid up at 65” policy Robert P. Murphy, PhD with a base premium of $15,000 and an initial death August 2012 benefit of $1,233,439. (This information appears at the top left of the illustration in Nelson’s book.) In last month’s issue, I discussed one of the most This means the owner of the policy is contractually important parts of Nelson Nash’s book Becoming obligated to pay $15,000 per year in premiums until Your Own Banker, namely Part IV on Equipment age 65, at which point he no longer owes the insurance Financing. I walked through (what I called) the base company any money. case, where a hypothetical individual had a whole life policy and did not take out any policy loans. Nash’s As I spelled out in detail in last month’s issue, the purpose in this portion of his analysis was to establish death benefit on this policy grows over time, because a baseline so that we could isolate the effects of the the man reinvests his dividends by paying Paid Up Infinite Banking Concept (IBC) proper, as opposed Additions (PUA). In effect each burst of a dividend to just using whole life insurance the way a textbook reinvestment gets him a “mini-policy” configured would recommend. much like the original policy, except that these mini- policies are 1-pay, meaning the man’s base premium In the present article, I will finish the analysis by doesn’t change. Each one-shot purchase of additional walking through Nelson’s treatment of the hypothetical insurance is fully funded at the moment of purchase, individual using his whole life policy to finance so that the death benefit, cash value, and future purchases of large logging trucks for his business. dividend earnings increase, but without any additional We will see that our individual grows wealthier even premium obligation. relative to the base case. In other words, we will see that if you use your whole life policy productively, Last month, I spent most of the article explaining you will hit wealth milestones faster than if you let the ebb and flow of the total death benefit (in the far it sit in the corner and merely make your premium right column). It fell from Age 34 through 45, because payments on it. in these years the contractual premium payment of $15,000 was higher than the dividend earnings, and Refresher: The Base Case the man was no longer kicking any money into the Because we need the base case to understand policy. (In order to build up the cash value early on— the (relative) advantages of using IBC to finance which would be necessary in order for this policy equipment purchases, we reproduce Nelson’s to serve as a “bank” that could finance equipment “Equipment Financing Illustration 1,” which appears purchases—Nelson had the man front-load the policy on page 54 of the Fifth Edition of his book. in the first four years with $40,000 contributions.) Recall the precise context of our story: We are However, from age 46 through 65, the dividend dealing with a man who runs a logging company with payment each year is higher than the $15,000 four trucks. Initially, the man finances all four trucks contractual premium. That’s why the death benefit through a conventional, outside lender. For each rises annually in this period, because the man is truck, the man must finance $52,600, which he does www.infinitebanking.org [email protected] 7 B n ank otes - Nelson Nash’s Monthly Newsletter - February 2013 paying the premium with his dividend earnings, then Illustration 1 at all; their presence would confuse the using what’s left over to buy additional insurance. reader and make it harder to isolate the contribution of IBC per se, over and above the simple strategy of From age 66 onward, the man begins drawing out getting a whole life policy at age 30 and hanging onto passive income of $92,000 per year, which knocks it until death. down the death benefit. (Technically, the man is surrendering some of his additional insurance, in When the man in Illustration 1 takes money out order to suck the cash out. It is the exact opposite of through partial surrenders—this is what makes buying PUAs.) But eventually, even with the $92,000 the death benefit go down in certain years—he is annual withdrawals, the death benefit begins rising effectively undoing the work he had done earlier, when again, because the dividends grow so large that they building the policy up. Since Nelson’s philosophy eventually exceed $92,000. Thus, what happens at the views the policy as a “bank” that is being capitalized, end of life is that the man draws out his $92,000 from such behavior is counterproductive. It would be akin the dividends, and uses whatever’s left over to buy to selling off pieces of your business whenever you additional insurance (thus boosting the death benefit). had cash flow difficulties. Tax Consequences: Why Partial Surrenders Rather than this strategy, the man in Illustration 1 Might Be a Bad Idea could have used policy loans. With this technique, the insurance company allocates the needed money to the As I alluded to last issue, Nelson does not think man—such as $92,000 per year in his later years— our hypothetical man is using his whole life policy but in those years when dividends don’t cover the in a wise fashion, as depicted in Illustration 1. In full amount, the difference is lent by the insurance particular, Nelson recommends that people pump as company itself, with the underlying cash value of the much money as possible into their policies, rather policy serving as collateral on the loan. than turning them on “autopilot” by letting dividends earnings pay the premiums. There is also the fact To be sure, there is a major downside of borrowing that this hypothetical man (in Illustration 1) relies from anybody, including the insurance company: You on partial surrenders of insurance, rather than policy have to pay interest. The actual, contractual interest loans, whenever he needs to take money out of the payments on a policy loan go directly to the insurance policy (on net) in a given year. company, not “back into the policy.” (In the next section we’ll see the sense in which a portion of a So why did Nelson set the table up in this typical interest payment really does accrue directly fashion? Why would he walk newcomers through an to the policy owner, not the insurance company.) illustration, that has a man doing things Nelson might Whenever the man carries a loan balance on the not endorse? insurance company’s books, his net worth grows more The reason is that this Illustration 1 isn’t supposed slowly than it would, other things equal, because the to teach the reader about funding retirement income loan grows with interest. (although Nelson doesn’t like that term and prefers However, not all things are equal. For starters, “passive income” since he doesn’t let anybody off since the man wouldn’t have partially surrendered the hook from working until death!). Rather, Nelson any of his insurance coverage, his death benefit would is building up to the equipment financing powers of continue to grow year after year, meaning his annual IBC. So he needs Illustration 1 to be the base case, dividends would continue to grow. Thus the income namely to have a whole life policy that would be stream from his insurance would be larger, compared capable of providing financing for the first logging to the situation where he took no loans from the truck, but where this capability isn’t exercised by the insurance company and instead financed his needs owner. Since financing the logging truck will involve through surrenders. The numerical tradeoff between policy loans, Nelson doesn’t want any policy loans in 8 www.infinitebanking.org [email protected] B n ank otes - Nelson Nash’s Monthly Newsletter - February 2013 these two forces would depend on many factors, but surrendering. the important point is that they are both relevant to the Finally: Equipment Financing man’s overall wealth. Now that we’ve covered the preliminaries, we can However, there is another major consideration: finally jump into the heart of the example: We can taxes. When taking dividends as cash or when partially now analyze what happens when the man uses his surrendering a policy, the owner can only take up to whole life policy—at first configured just as it was in the historical “cost basis” (how much he has pumped Illustration 1—to finance the purchase of a logging into the policy in premiums, without considering the truck. The new scenario is laid out in Illustration 2 time-value of money) with no tax event. In Illustration below, on the following page. 1, the cost basis is $160,000 by the fourth year (see the second last column, “CUM NET OUTLAY”). In Illustration 2, the man first has to capitalize his “bank.” That’s why he can’t finance his trucks with Notice what happens to the cumulative net outlay it in the first four years, because in this period he is column once the man begins drawing out $92,000 per building up his cash value with large contributions year. Not only does the death benefit start dropping over and above his contractually required $15,000 (again), but the cumulative net outlay is reduced premium. (In other words, he is kicking in an extra dollar-for-dollar. When the net outlay goes negative— $25,000 per year via a Paid Up Additions rider— this happens at age 67, when the $92,000 draw knocks bringing the total outlay to $40,000—even though he the previous cumulative outlay of $68,000 down to is not obligated to do so, by his insurance contract.) a negative $24,000—the IRS will suddenly become quite interested in the festivities. It will now say to In Year 5 (Age 34) the fun begins. The man has the man, in effect, “At this point, in your 67th year to borrow $52,600 initially, because that’s the net of age, you are finally taking out more money from out-of-pocket expense to him of a new logging truck this policy than you ever put in. Clearly then, this has (after accounting for the trade-in value of his old generated net income for you. Thus, we are going to truck). In other words, back in Illustration 1 when the start taxing it, just like we would tax your investment man wasn’t using his whole life policy to help with earnings in other financial assets.” his business, he had to finance $52,600 from outsiders whenever he acquired a new truck. Yet what if the man at age 67 took out the $92,000 not by a partial surrender, but instead through a Now, Nelson supposes that the man keeps a given $92,000 policy loan? In this case, the IRS would truck for four years before turning it over for a new not treat it as taxable income. This is for the simple one. That means his financing strategy must pay off accounting reality that a loan isn’t really income. the policy loan after the fourth year. Well, $52,600 divided by 4 equals $13,150, so you might at first Thus we see that a policy loan, rather than a partial think the man has to pay back $13,150 each year to surrender, might be the more sensible way to draw the insurance company to knock out his policy loan a cash flow out of a whole life policy, especially in by the end of the cycle. later years. Even in the “worst” case, where the policy owner never pays back a cent on the loan—letting it Ah, but there is interest. In Nelson’s example, when grow exponentially with interest until he dies and the the man borrowed the $52,600 from the insurance policy loan is extinguished by being paid out of the company as a policy loan, there was a contractual 8% death benefit proceeds—it’s possible that the savings interest rate. Thus the man would actually have to pay in income tax more than compensate for the lifetime more than $13,150 per year, in order to reduce the interest charges on the policy loan. Considering this total outstanding policy loan to $0 by the time he had factor, as well as the higher growth in dividends, the to turn in his old truck and finance the purchase of a policy loan route might be far wiser than partially new one. Using an online amortization calculator, I www.infinitebanking.org [email protected] 9 B n ank otes - Nelson Nash’s Monthly Newsletter - February 2013 reckon the man owes the insurance company $1,284 up to $160,000 by year 4, just as in the base case. But per month, in order to knock out a $52,600 loan at 8% then it drops down, reflecting the net policy loan of after four years. $34,600. (This figure results from the gross loan of $52,600, less that year’s loan repayment of $18,000.) Here is the crucial part of the story. Nelson does Notice that the cumulative net outlay has thus dropped not recommend that the man merely pay the bare by precisely $34,600, from year 4’s value of $160,000 minimum to the insurance company. Instead, Nelson down to year 5’s value of $125,400. says the man should stick to his original stream of payments on the truck. In other words, even though In years 6 through 8, the man makes $18,000 annual the man can borrow from the insurance company at loan repayments, just as he would have done to the 8%, the man should still make monthly payments outside financing agency in Illustration 1. To repeat, on the truck as if he had borrowed the $52,600 from this $18,000 outlay doesn’t represent a new burden the outside finance company, which (Nelson shows) to the man; he was already paying it in Illustration 1, charges him about 15% on the loan. it’s just that we couldn’t see it anywhere, since it had nothing to do with his whole life policy. Notice that Back when the man financed using outside lenders, in each of these years, the “CUM NET OUTLAY” his monthly truck payment was $1,502 (as Nelson column grows by $18,000 per year. For example, reports on page 52). Rather than pay only $1,284—as $18,000 + $125,400 = $143,400, which is precisely the arrangement with the insurance company would the cumulative net outlay shown in year 6. require, if the man wants to achieve a $0 loan balance after four years—Nelson wants the man to send the Now notice something interesting: By the end of insurance company the full $1,502 per month. To the 4-year loan cycle—i.e. by year 8, the loan is paid repeat, the man’s overall household cash flow situation off completely; that’s why the “CUM LOAN” column is the same in Illustration 2 as it was in Illustration 1. shows $1, because of rounding. The cumulative net That is, the man is still able to go to the movies, eat outlay is now $179,400. Notice that this is higher than out at restaurants, and take vacations just as he did in it ever was in Illustration 1. So now we see what’s the first few decades of Illustration 1. going on: In Illustration 2, the man is kicking more money into his policy on net than he ever did in So what’s the magic trick? We can look at the cash Illustration 1. That’s why the cash value and death value and the death benefit columns in Illustrations benefit are higher in Illustration 2, year by year, 1 versus 2, and clearly in the second case the man is compared to Illustration 1. growing wealthier, faster. What precisely is driving this result? What is the source of the “magic” of IBC But where did this extra money come from? How in this simple example of equipment financing? is it possible that the man kicked in more money over the 4-year loan cycle, compared to his behavior in To get a hint, look back at the “CUM NET Illustration 1? Didn’t we stress the fact that the man’s OUTLAY” column in Illustration 1. It grew by household lifestyle was exactly the same in both $40,000 per year until maxing out at $160,000 in scenarios? year 4, and then it stayed there until retirement. This underscored the fact that the man didn’t kick another The answer is that the insurance company was penny into the policy after the fourth year. (To repeat, only charging 8% on the policy loan, but the man now we are going to see exactly why Nelson had the continued “making payments” as if it were charging man behave this way in Illustration 1, even though in him the 15% that the original finance company reality Nelson would never recommend that someone charged. Remember, the man actually only needed to do so!) pay about $1,284 per month to not fall behind with the insurance company. Yet in practice he paid $1,502. Now look at the net outlay column in Illustration 2. Thus in the first month, the man paid an additional At first, as the man is capitalizing his “bank,” it rises 10 www.infinitebanking.org [email protected]