Content: Page 42-43, Becoming Your Own Banker Fifth Edition
Now, let’s look at Method E. We will call this twin “Insurance Sister.” She uses dividend-paying whole life insurance as a depositary of the necessary capital to create her banking system to finance her automobiles. She puts $5,000 per year into very high-premium life insurance with a mutual company. Recall the diagram back on page 41. (There are some exceptions to this requirement – there are some stock companies that have dividend-paying policies that perform very well).
After the seven years of capitalization, she withdraws dividends in the amount required to pay cash for the car. Her cash flow is identical with her sister. In this case she is not making a policy loan. In order to play honest banker with herself, she must make premium payments to her policy instead of loan repayments to a finance company – but in the same amount that she would have to pay to one – in this case, $3,030.00 per year – the same as her sister is using to buy C/Ds.
Notice that in Table (1) the results favor “C/D Sister” up through year 14 – but from that point on the difference favors “Insurance Sister” in an accelerating fashion. There is a very simple explanation for this effect. Hardly anyone takes into consideration that the Banker in Method D that issued the C/D went through a long and costly process of getting a bank charter and winning the deposits of customers (whose money he lends to borrowers). It is just like getting started in the grocery business as described in the first part of this course.
Every time a person buys a life insurance policy, he is starting a business from scratch. There is the inevitable delay in results in getting a business started. The life insurance company is nothing more than an administrator of the plan the policy owner has adopted as his own.
If you have seen an Executive Vice-President at a Life Insurance Company and an Executive Vice-President at a Bank, they could change jobs every six months, and no one would know the difference! For practical purposes they do the same thing. It is the Stockholder (or Bank Owner) that makes all the difference. This is the party that puts up the capital to start the business and earns the rewards or suffers the loss.
Remember the “characters in the play” in the last lesson – both Method D and E is dependent on borrowers to make their business successful. In the Life Insurance method, the policy owner is earning both dividends and interest. There are no stockholders! The cost of administration in both cases is a “wash.” Look at year 52 in Table (1) and compare the difference between the methods. The difference is what went to the stockholders at the bank in Method D, if it were accumulated on a tax-deferred basis for that period of time. To make all this money the Banker had to go through that gory mess that was described on page 21 & 22. But hardly anyone takes this into consideration. They all tend to look at the early years of the two methods and conclude, “Life insurance is a poor place to accumulate wealth.” They couldn’t be more wrong!
In studying Table (1), when you get to year 52, you may realize that you are just now witnessing the real power of the life insurance method – the comparison of the of the retirement income that can come from each method. If “C/D Sister” wants to withdraw $50,000 per year she had better not live very long because she is going to run out of money in five years and eight months! But the cash value belonging to “Life Insurance Sister” is still growing although she is drawing out $50,000 in dividends until the cost basis is recovered and from policy loans from that point on, hence the income is not a taxable event.
Assume that “Life Insurance Sister” dies at the 65th year (age 85). She has withdrawn $650,000 in dividend income and then the net death benefit is $1,365,057!! If she lived longer then the dividend income would continue, and the death benefit would never get below $1,000,000. There is no real comparison between the methods.
This is what the Infinite Banking Concept is all about – recovering the interest that one normally pays to some banking institution and then lending it to others so that the policy owner makes what a bank does. It is like building an environment in the airplane world where you have a perpetual tailwind instead of a perpetual headwind. Isn’t that simple?!
Controlling the environment is much more productive than trying to make the airplane fly 5 miles per hour faster!