Arbitrage is as old as the Bible. In this educational episode, I'm going to address
the question "What is the infinite banking concept?" And this term is
actually synonymous with Bank on yourself, be your own banker, a bank of
you. But when I explain this to you, you're going to understand a good way to go,
a better way and what I know without question is the best way to employ this
concept in your life.
So, I'm Doug Andrew and I've been doing this for 46 years --helping people
optimize their financial assets, minimize unnecessary taxes and prepare for a
retirement where they do not outlive their money. And this concept is very
powerful. The actual term infinite banking, I
believe we should credit to Nelson Nash. I know him. And this is the term that he
would use. Pamela Yellen is also an author and she calls it bank on yourself.
I have been using the term be your own banker for 45 years. And they're
sort of synonymous terms. So, let's talk about the basics of how money works
first and then segue into how this infinite banking concept can be a
benefit for the way that you use your money for living, for retirement, for
buying a car or anything you want to do. And if you run a business why this is
one of the best ways to manage your working capital. So, let's go back to an
example in the New Testament in the Bible.
Now, many people have heard the parable of the talents. That is actually recorded
in the Gospel of St. Matthew chapter 25. But a similar parable is in Luke 19, the
parable of the pounds. And they are basically the same concept. But in the
parable of the talents which is most recited, we have this master that has
3 servants. And he gives unto one of them 5 talents. And another 2 and
another 1. And he goes away for a little while on a trip or whatever. And
he comes back and he basically says, "So, how did you do? What did you do with the
talents I gave you?" And the one with 5 did what? Doubled it to 10. "Well, done
thou good and faithful servant. You've been faithful over 5. Now, you have 10."
And he was rewarded. Now, how did the one with 2 do? "Oh, I I doubled it to 4." "Oh,
well done good and faithful servant." So, rewarded
there. But the one with 1? What did he do? He was afraid. He knew that his master
sort of wreaked where he did not so. He was an austere man. And he said, "I wanted
to make sure that I had it for you so I hid it in a napkin. I buried it. And here
it is." And you know some of the harshest words in Scripture were spoken to that
servant? --"Thou wicked and slothful servant I'm going to take it away from you and give
it to the one that has 10." and sometimes people don't understand that what he was
trying to save what he had. Well, the lesson was that the one with one buried
the talent didn't go out in motion and multiply that talent. He just wanted to
preserve it. And some people are like that
with natural talents. If you do not multiply your talent in music or in
speaking or in software engineering, whatever you do, if you don't multiply it,
it's going to wither up and die. So, there's a lot of messages to that parable that
can talk about our actual talents. But back then, a talent was a form of
monetary measure, it was money. And so, it also deals with money. You need to put it
to work instead of just putting it in your mattress or heaven forbid even in a
bank earning a measly 1% if it's a long-term goal. So, let's segue into what
this means with money in this Bank on yourself for infinite banking concept.
And I want to explain to you how money really works. So, there are 4 things
you can do with money. You can spend it, you can lend it, you can own with it, you
can give it away. Okay? Now, what I've taught my audience is
for years and in my various books is I actually own and I loan on the same
money. So, simply put if I own a piece of real estate, I am owning a home or a
rental property. And I own it but I also take the equity and I
keep it separated over into my favorite vehicle which is a max-funded indexed
universal life insurance contract or a portfolio of those. Because I know where
I can average between 8 to 10 percent compound interest tax-free. And
if I take out mortgages on the property, let's say at even 6% interest
and lately I've been paying way less than that. But at 6% tax
deductible interest, it's a net cost of 4% in my 33%
combined federal and state tax bracket. So, every million that I borrow to own a
piece of property, I'm paying a net of 40,000 a year of interest if I'm
borrowing at a gross rate that's tax-deductible or 6%. Recently, I
borrowed money for as little as 3%. 3% is the gross rate
if it's tax-deductible in a 33% bracket. It's not 3, it's 2.
So, every million, I'm only paying 20,000. Over here I have the actual
cash that I could have paid in a huge downpayment or I could have paid off the
property. But the property is going to go up or down in value regardless of
whether it's mortgaged to the hilt or free and clear. What I want to do is earn
100% or 200% percent more than the cost of the funds because
this is what banks do. This is what credit unions do. This is what insurance
companies do. This is the parable of the talents. Because in that parable, you
should have taken your money and put it in the bank with usury and earned
interest. Now, when you put your money in a bank they're paying you interest, right?
Now, I'll admit it's pretty pathetic maybe 1 or 2 or 3 percent. But
why are they paying you interest? Are they just some benevolent institution? No,
your money's not sitting in a vault. They are loaning that back out again at
5, 6 or 7 percent. So, if they pay you 3 and they loan it back out and
invest it at 6 how much more 6 and 3? It's 100% more. It's
twice as much. On a million bucks, they pay 30,000 of interest to you
and they make 60,000. 60,000 is 100% more than
30,000. So, let's connect the dots. If I'm borrowing let's say on a
million bucks and I borrow it 6%, a net cost of 4%
after the tax deduction, that's 40,000 a year I pay an interest. That's actually
my friend, not my foe. I pay 40,000, but on that million, I have it over here
earning 8% in my indexed universal life. And I have raised 8% without
even using the indexing strategies. How much more is 80,000 and 40,000? It's
twice as much as 100% more. Would you hire an employee for 40,000
that made you an extra 80,000? That's a 100% return on employment
cost. Would you buy a widget machine for 40,000 that made you an extra
80,000? That's 100% return on equipment cost. This is just business.
This is how money works. This is how banks operate. Banks thrive. Why? Because
their greatest asset is their liabilities. If they stop paying interest,
if they stop borrowing OPM, other people's money, they would wither up and
die. They borrow their liability is the greatest asset. They pay interest to make
higher interest. That's called arbitrage. So, when you're using this for yourself,
inside of an insurance contract like I do, you can use whole life insurance and
it's okay because most whole life policies were designed for accumulation
of cash value and for death benefit. Unfortunately most whole life policies
do not perform optimally for tax-free income. If you were to accumulate money
inside the whole life insurance policy, can you take money out income, yes? But
you'd be hard-pressed to have a payout of much more than 4 or 5 percent.
The reason why I like universal life is because I can take a payout of 10%.
How much more is 10 and 5? 100% more income. If a whole
life policy that has a million of cash value could generate 50,000 a
year which most don't even come close to that even. But let's say they do, if it
generates 50,000 a year, I can have a million generate 100,000
a year. And so, you want to use the bank on yourself concept for your
business, for managing real estate. But in retirement, when I
go in to access money, I can settle just for 8%. On a million bucks, that's 80,000.
But if I borrow my income out, it's tax-free because loan proceeds are not
deemed earned passive or portfolio income. Those are the only three types of
income people pay income tax on in America. If I borrow it out, the insurance
company will charge me 5%, let's say. But they'll credit me 8,
9, 10 percent. I've averaged 10.07 for the last 25 years. But in 2017,
many of our clients borrowed out at 5% and earned 16 percent that year.
Some, 25%. You borrow out at 5 and you earn 25 on the money while you're
using it for something else. Did you catch that? In other words, we
have clients who borrowed a million dollars to acquire a new apartment
complex. They're being charged 50,000 of interest on their money. But
they don't have to write out a check for that because it's deducted from the
250,000 they earned that year on their indexed universal life policy. 250 minus
50 is a net of 200,000 or 20%. There is not a whole life
insurance policy around that can do that and protect you that if the economy went
down that you wouldn't lose. Because then you'd be using a variable whole life
insurance policy. I don't want to lose when the market goes down. But I want to
make money when it goes up. And that's why I've earned average returns of
slightly over 10%. If I borrow my money out at 5 and I earn 10, it's the
same concept. It's 100% more than the cost of the funds. This has
allowed people to be able to have payouts of ten percent out of a million
dollar nest egg. Every million dollars that I could accumulate for my clients
and they're indexed universal life policies, I knew predictably could
generate 80,000 of income. But by using this Bank on yourself arbitrage concept,
we can tweak it to 100,000 of tax-free income into
perpetuity. And that's the magic behind infinite banking using the right
products. So, how can you learn more about how to implement these strategies using
the best vehicle --indexed universal life? I have written my 11th book called The
Laser Fund. It's actually 2 books in 1. This book is about 200 pages.
Comprised of 14 chapters with all kinds of charts and graphs and explanations of
how this works if you're a left-brain learner. If you're a right-brain learner,
you learn by stories and examples. You read this book. You flip it over. And it's
100 pages, 12 chapters with 62 actual Chicken Soup for the financial
soul stories of how this works. If you want to use your whole brain, the right
and left, read both books. If you would like a copy of this book, I'll tell
you what. I'll buy the book. You just $5.95
shipping and handling. And I'll fire one out to you. Go to laserfund.com.
Laserfund.calm and there's other options there if you like to learn
by listening or watching. There's video and audio forms of this education also.