Become Your Own Banker
Hi, I'm Danny Rondberg from The Retirement Research Foundation. In this video, I want to talk to you about becoming your own banker, be your own bank. What does it mean? Is it a good idea? Should you evaluate it? We're going to talk about that in this video today.
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Becoming your own banker, okay? You see, Nelson R. Nash was one of the first authors who came out with this book called "Becoming Your Own Banker," and you know what? I need to start having this prepared, but right here, this is the fifth edition, I believe. Yes, fifth edition. There is now a sixth edition, but this is basically, in my mind, the godfather to become your own banker. Rest in peace, Nelson R. Nash passed away. Dedicated speaker, travelled the country for years and there's been a million spinoffs. All kinds of books that talk about the power of becoming your own bank. Be your own banker and you know, is it a good idea? Is it a bad idea?
Well, let me break down becoming your own banker because I didn't understand it and I was a life insurance agent for up to six years before I really understood what become your own banker really meant. I thought I knew what it meant and I had policies of my own, but I never really understood what it was. And it wasn't until I went out to lunch with a veteran life insurance agent and this guy is just incredible. He's a speaker, he's a mentor, a sweet little Italian guy named Sal. Sal recently wrote a memoir about his life in the insurance business and real estate business. Just a very successful investor and executive for a very large company. And so he retired and we went out to lunch and Sal was talking about be your own banker and how he was friends with Nelson R. Nash. I was interested by that because I've heard Nelson speak. And so he told me, you know, he said, "Well tell me, Danny, what your understanding of be your own banker is."
And I gave him what I thought would really impress him. I threw in some great language and try to prove how smart I was to him and he goes, "Man, it's clear to me that you don't even understand this at all." He goes, "Let me simplify become your own bank to you right now." He goes, "Let's say you take a car loan from a bank, okay? What's going to happen? You're going to get the car, the bank's going to get all the principle and interest payments. When the loan is satisfied, the bank has all your principle and interest. You have the car." Pretty simple, right? Doesn't require a lot of financial education understanding to get that concept of how a car loan works.
He said, "Now, let's say you set up a cash value life insurance policy and you can take a loan from the policy." He says, "Now, as you pay the loan back, you pay all the principle and interest to yourself and when it's satisfied you now have the car plus all of your principal and interest payments." That was when the light bulb started to went off and I saw it, you know, that makes a lot of sense. Now I see the simplicity of becoming your own bank. All you're doing is building a bank, a mechanism in which you can pay yourself back. So by the time these loans are satisfied, you now in turn have all the money back in your policy and you can do it again. Hence the term infinite banking. Okay?
Now here's where it gets crazy. When you take that loan from a bank, the first month you take it, they're going to want a payment and they're going to want to know how many payments of principal and interest you have to make until the car's paid off. That's called an amortization schedule. There's an amortization schedule with every loan we take, except for the loans from life insurance. The life insurance policy that you have that you take a loan from, doesn't come with an amortization schedule. In fact, they don't care if you pay the loan back because if you never pay it back, they're going to wipe it out with the death benefit attached to the life insurance on the back end.
So let's say you have 50,000 of cash value, and 150 of life insurance and you borrowed 25,000 out. Well, they're going to subtract that 25,000 from the 150 plus the interest and your beneficiary will be paid out. So the life insurance will wipe out the loan for you if you can't complete it or if you have a hard month. This is especially helpful for people who have a rough month or maybe even a rough year. Your car payment at your bank is not going to give you time off from that loan. You need to make that payment or that car is going to get repossessed. Life insurance gives you that flexibility to skip a payment or maybe a few payments until you're able to resume those payments because you're paying yourself back. And I always tell people, you didn't buy it for the life insurance death benefit anyway, that's a supplemental benefit and that'll take care of that loan for your beneficiary if you can't complete it.
Now, I'm going to take it up one more level, okay? This is where infinite banking gets really crazy. In some policies when set up correctly, okay? You can have participation on that loan. Let me give you an example, and people ask me this question all the time. I want to buy this $25,000 car. Do I use 25,000 of cash and go ahead and buy the car and I give up my liquidity and earning potential on that 25,000? But I don't owe any interest. Or do I use a bank's money, pay them interest for it, and I get to preserve my liquidity and earning potential? What's the better choice? What should I do? Well, that creates an opportunity cost that you're always going to be weighing that out to determine what's the best thing.
Life insurance has a participating loan, so when you pull the $25,000 out from the life insurance, it can be over here buying the car and still earning interest in the policy as if it's still in there. Now, this is the foundation that I want to build upon for future videos because this strategy actually can create a very, very successful safe money funding plan down the road that we can elaborate on in future videos. But what I want to get across in this video today is that you can get a double compounding effect where you get to use your money over here and still earn interest in the policy as if it's sitting in the account. That is a phenomenal benefit and you can see how this can, in turn, puts you in a better financial situation over time than just the regular savings and lending portfolio used to, you know, saving in a bank and getting paid very little interest depending on your savings account and then borrowing money from a bank at a much higher interest rate than what they're paying on savings. That is your current savings and lending and debt portfolio.
Life insurance is not an investment. I tell everybody this, you have to make sure this is where life insurance agents have screwed this up royally. They try to make it seem like it's some great investment where you're going to make all this money. That is not true. Life insurance should not be contending in the investment arena. It's not an investment. However, where it's very effective is in the savings, lending and debt portfolio because it is another choice for you to choose from. If you just have, you know, do I borrow money or use my own? Well, those are your choices. But if you have life insurance that's set up as a be your own bank, it can give you a supplemental option, another option to choose from to determine where it makes the most sense.
I've used my cash value life insurance policy to start companies, to borrow for other things that I may need and it is phenomenal because as I'm paying myself back, I'm getting all that interest and it's a much more pleasant way to borrow money. I don't have to ask anybody's permission. I don't have to qualify with a FICO score. In 2008 when businesses were starving for credit and capital, these policies would have been there to be able to provide those. In fact, there's a great article called "Six Brands That Were Saved By Life Insurance." Some of those brands may surprise you, companies that you're very familiar with that were started or built or saved on the backs of these cash value policies. Very, very large companies and we can put a link in the comment section of that article down below.
But again, is it a good idea or a bad idea? Look, it's going to depend on your health. Some people won't be able to qualify for the plan to set it up properly. It's going to depend on your age, it's going to depend on your situation. I'm not here to say whether it's a good idea or bad idea and I'm not here to say whether you should use it or not. I'm here to say that is a tool that should be part of the consideration because it usually takes about seven years to set up and build, okay? But here's what I always tell people, in the next seven years, if you do nothing, you're going to have the same lending and savings portfolio issues that you have today. If you don't do anything different, in seven years you're going to have the same lending and savings needs you have today and you're going to have the same solutions that you have today if you don't add another one.
If you take time to build it, you'll be able to establish it. It's like the old Chinese proverb, when was the best time to plant the tree? 20 years ago. When's the second best time? Today. So you have to get started in order to determine over time what is going to be a good solution for you. Become your own bank is a valid possibility for some people and it should be a consideration. Most people just don't know where to get the resources. There are tons and tons of books on becoming your own banker, setting up this type of strategy. I don't go into any of the specifics of what type of policy to use, what kind of riders. I leave those to the insurance professionals, and if you have a dedicated, qualified professional, an agent that's proficient in the strategy, that's using it themselves, that understands it very well, they should be able to give you the advice and assistance on what to do there.
If you have questions or comments, please feel free to reach out. I'm going to put a list of resources, look before you, become your own banker, tax free retirement. There's a ton of great books out there about this subject, but the key is to find a trusted, dedicated, competent agent that can help you build these plans or see if it's right for you down the road. Thanks again for stopping by. As always, I'm Danny Rondberg. Take care.