Being Your Own Bank UNRAVELED How to Control, Reuse, and Recycle Your Money
ALEXANDER G. BEBIS Prosperity Economics Advisor
CONTENTS
"Everyone should have two businesses – the one that gives them a paycheck and the banking business." 0|Page WealthyWithoutWallStreet -R. Nelson Nash, Founder of the Infinite Banking Concept
“The problem in America isn’t so much what people don’t know; the problem is what people think they know that just ain’t so.” – Will Rogers
What you’ll learn here is not a new idea. But an easy, concise, simplified summary of: The Infinite Banking Concept, Becoming Your Own Banker, Lifetime Economic Acceleration Process, Cash Flow Banking, Bank on Yourself, Your Family Bank, and the Private Reserve Strategy. The purpose of this exposé is to not only simplify these strategies but to introduce you to the concept. When trying to be your own banker, it is not accurate to say that high cash value whole life insurance is the only option, like some of the above named strategies suggest. Although it is important to have, the philosophy is what really is critical. While deciding which products to buy, it is vital to understand what you can DO with them. By referencing the 7 Principles of Prosperity, you will be able to determine which products allow you to apply the banking processes. For further, more in depth information, analysis, and examples, you can download the eBook of Kim Butler's Live Your Life Insurance by visiting wealthywithoutwallstreet.com/your-private-family-bank.
Contradicting current popular belief of typical financial planning, it is NOT the rate of return that is going to create wealth; even though that is what most advisors talk about, it is controlling the banking equation in your own personal economy. Most advisors will focus on spending YOUR money which you use to maintain your current standard of living (for example, the money you use to go on vacation, buy things to enjoy etc.). This forces them to spend time chasing higher rates of return which increases your risk.
1|Page
WealthyWithoutWallStreet
Instead, we should be focusing on the transferring of your wealth to others, like: interest charges, taxation, inflation, and other associated costs and fees.
Here is an illustration of the concept: Imagine you have your outdoor faucet and a bucket, and you want to fill it to the top. You place the bucket under the faucet and turn the water on. As it fills, you notice there is water spilling out everywhere; you investigate and find the bucket is full of holes. Now what most advisors will do here, is have you turn the faucet on as high as possible to increase the flow of water in order to fill the bucket (similar to finding the highest rate of return). Meanwhile you are still losing water through the holes. Is that the most efficient way? The other option is to fix the inefficiency by filling in the holes first. If that is done, you don’t need to have the faucet at full blast, instead, the bucket can actually fill up with just a trickle.
Just like in our financial lives, if you can determine where you are being ineffective with money you are already spending unknowingly and unnecessarily elsewhere, you can redirect those payments to an entity that you own and control. Nelson Nash, founder of the Infinite Banking Concept and author of Becoming Your Own Banker coined the term, “You finance everything that you buy”1. We either pay interest to use somebody else’s’ money, or pay cash and give up the opportunity to earn interest. For those who do recognize that their own money has a cost, should have a SYSTEM in place to RECOVER that cost. By controlling the amount of money we transfer away to others, we will dramatically increase our financial security and wealth throughout our lifetime. And, we can do this WITHOUT taking on unnecessary risks.
2|Page
WealthyWithoutWallStreet
First, you must have a system that will:
STOP the TRANSFER of your wealth to banks, finance companies, wall street, and the gov’t capture the benefits of UNINTERRUPTED compound interest by using “other people’s money” and keep your money in MOTION and serving MULTIPLE purposes.
How do you do this? In a word: BANKING
How Banks Make Money “You will either own your own bank, or, you will be the customer of someone else's bank. You cannot take banking out of the equation.” – Nelson Nash
Why do you willingly give banks your money? Because you feel confident the banks will take care of your money for you. You believe they will return your money to you when you want it. You are convinced they will not lose your money. What do banks give you in return for your money? In some instances, you may be charged account or transaction fees; in other instances, they will pay you interest in certain accounts or transactions. Regardless of whether you pay the banks or they pay you, what is really going on is the banks are borrowing your money.
“Banks do not lend their money. They lend the money somebody has left there”. - Adam Smith
3|Page
WealthyWithoutWallStreet
When a bank has your money in an account, they do not just let it sit there to earn interest. If they were to simply earn the difference between what they are paying you and what they are charging someone else, they would be out of business. Newton’s third law of physics states, “that objects at rest tend to stay at rest and objects in motion tend to stay in motion.” The same principle applies to money. The entire business of a bank is to keep money in motion, moving and constantly at work. That’s how banks make so much money. They lend YOUR money to someone at a higher interest rate than they are paying you, and keep repeating the process over and over again earning at least five times the difference. This is what is called the “VELOCITY OF MONEY”, or “movement of money”.
Velocity is not the only function that makes banking lucrative; it's the VOLUME of interest. Volume is the amount of interest paid over a specified period of time in comparison to principal. In this example, in year one, 16% of every payment went back to the bank even though the interest rate charged was only 5%. So you see why, combining volume with the velocity of money which the bank uses to turn that volume into more dollars to keep and re-lend over and over you have a system which is extremely profitable. Especially in times with low interest rates; the more and more people refinance, the more and more each payment goes to interest.
4|Page
WealthyWithoutWallStreet
Some people think that banks “invest” their money. However, investing involves, by its very nature, a risk of loss. Banks have kept the confidence of people because they DO NOT “invest” depositors’ money. Remember, banks have to provide your money to you upon request. To invest your money would be to put it at risk, having the potential to lose it, and that would cause a breakdown in trust. Banks practice and apply the “Prudent Man Rule” which demands they use their depositors’ money in ways that promise the return of that money whenever they ask.
Banks are successful because they…
Look at the overall picture of finances and how an economy works. Control the money. Make certain their money is safe. The most important aspect is to get their money back. Employ the “Prudent Man Rule”. Make sure their money is being as efficient as possible; reducing opportunity costs to a minimum. Make sure that their money is moving and never at rest. Practice the multiplier effect, which means, they have each dollar do as many “jobs” as possible, not just one.
So why don’t we control the money in our personal economy the way bank's control money in the general economy? In other words, why don't we handle our money the way banks handle depositors’ money?
How to Recapture, Reuse, and Recycle Your Money We do this by emulating the way banks act and make money. It is done by establishing a “conceptual bank” that YOU OWN AND CONTROL so YOU benefit from the 5|Page
WealthyWithoutWallStreet
movement and multiplier effect of YOUR dollars the way a banking institution normally would. The multiplier effect, is the result of your money moving and having multiple uses. As opposed to typical financial advice which will have your dollars’ stationary serving a single purpose. Think of the difference between four times four versus four plus four. The numbers are exactly the same, but it’s what you DO with the numbers that makes all the difference. Creating your own personal bank is not about investing; it is about CONTROLLING YOUR MONEY AT ALL TIMES, USING IT OVER AND OVER AGAIN, and HAVING MORE THAN ONE USE OUT OF EACH DOLLAR. It is a process not a product. It involves both being more EFFICIENT AND EFFECTIVE WITH YOUR MONEY. It is the development of a personal economic system which mirrors the way a general economy works. A major mistake of the way we think, is, that wealth creation is a function of finding the best rate of return. It's not. The key to its success, is you must be able to recognize where your money is going, how it’s being spent, how to recapture those dollars, and how to keep those dollars moving, performing multiple jobs.
Goals in Securing Your Ideal Strategy
Improve your lifestyle while you reduce and/or eliminate the transferring away of your wealth to others
Reduce the amount of risk and taxation you are exposed to
Increase your overall money supply now, and in the future
Requires little or no additional out of pocket costs than you’re currently spending, because it’s about redirecting money that’s being spent elsewhere unknowingly and unnecessarily.
6|Page
WealthyWithoutWallStreet
Creating Your Own Private Banking System So now that we have an idea why you should start your own private banking system, the question now is...where do you capitalize your bank? There are Many Places Where You Could Build Your System:
Savings Account Checking Account Money Market CD Mutual Fund Bond or Bond Fund Indexed Universal Life Insurance Investment Real Estate Home Equity Line of Credit 401(k) Dividend Paying Whole Life Insurance
All of the options above are available to use to build your own family bank, however, some of the options work better than others. When it comes to your private money supply, the most important thing is to “protect it” (remember, banks want their money back). Here are some other extremely important factors to take into consideration when capitalizing your banking system:
Guarantees Tax-deferred Growth Tax-free Access to Your Money Control, Liquidity, Use, and Equity (CLUE) No IRS Involvement Unlimited Contributions No Age 59 ½ or 70 ½ Rules for Distribution No Probate Competitive Return
The most efficient home for your money, which contains most of the above characteristics, is a properly designed dividend paying whole life insurance 7|Page
WealthyWithoutWallStreet
policy. A problem usually encountered with permanent life insurance, is that it is designed improperly. Its usual focus is on death benefit, instead, it should be designed to get as much money as possible into a policy with the least amount paying for the insurance portion; maximizing its cash value savings.
Why Whole Life Insurance? “Each and every year millions of ¼ inch drill bits are sold. Is it because people want to own a ¼ inch drill bit? Or is it because they need to bore a ¼ inch hole?” - Theodore Levitt
Because it is already set up like a bank, and performs a lot of the same activities and functions, without one going out and trying to get a bank charter. In his book Becoming Your Own Banker Nelson Nash discusses the word “co-generation” and “how it is a term used in the production of electrical power.” My example will be that of solar power and your electric energy provider. With solar panels, if you get enough solar energy to power your home and end up with a surplus, you can actually sell the excess energy. As Mr. Nash describes, in order to sell the surplus would you, “erect power distribution lines, get a sales force, and ask potential customers if they would like to buy from you?” No. Of course not. You would simply use the system that is already set up through your current power supplier, tie into their system, and sell the surplus to them. That is the easiest and most effective way. You see, whole life insurance is the most efficient tool to accomplish our ultimate goal.
8|Page
WealthyWithoutWallStreet
Dividend paying whole life insurance can provide you with a guaranteed, permanent, growing, tax-free death benefit and a guaranteed lifetime premium regardless of health changes. The same dollars that create your death benefit simultaneously create and build your cash value. The guaranteed continual growth of cash value provides full cost recovery. The interest and dividends are not reportable as taxable income (Under the Internal Revenue Code section 72e and 7702, the accumulation of the cash value inside the insurance contract is tax-advantaged. It accumulates tax deferred and can be accessed tax free, so long as it is designed properly). Cash values and dividends are liquid and contractually guaranteed to be available upon request of the policy owner. It can include a benefit to complete the plan if disability occurs. The disadvantages of whole life insurance, even if designed properly, is that you have to qualify for the insurance. If you do not, someone you have an insurable interest on (spouse, child, employee, etc.) has to qualify. It is a long term strategy, similar to a bond, your focus should be on 10-30 years. Like starting a new business, it takes time to begin earning a profit from an “interest rate” perspective, usually 5-10 years. Higher rates of return can be achieved elsewhere. If it is not designed properly it could cause you major tax consequences in the future. If you are looking for immediate cash flow or short term purchase, whole life insurance should not be considered. Again, it is a long term insurance product and should be considered to be part of your lifelong financial objectives.
How Does It Allow You to Be a Bank? You have the capability to MULTIPLY EACH DOLLAR by applying the VELOCITY EFFECT. An instrumental aspect of being your own private banker is INTEGRATING THE PRINCIPLES OF HOW A BANK FUNCTIONS BY EMPLOYING THE MOVEMENT OF MONEY. You do this through the application of CLUE, which stands for: CONTROL, LIQUIDITY, USE, and EQUITY. Kim Butler, author of Live Your Life Insurance and founder of the Prosperity Economics Movement defines CLUE as: “The cash value is your CLUE account. Cash value and death benefit are 100% in control of the owner (not the insured), and the cash value is 100% liquid. You (the 9|Page
WealthyWithoutWallStreet
owner) can use both the cash value and the death benefit while you are living, and they work like equity in real estate — with one major exception: they can never go down, only up.” Here is what each point means:
CONTROL: You don’t have to go through a third party to access YOUR MONEY. No permission. No qualifying. No government interference. No questions asked. It’s yours. You own it, YOU MAKE THE DECISIONS.
LIQUIDITY: You are able to GET YOUR MONEY WHENEVER YOU WANT. No penalties. No Fees. About 95% of your money is accessible, usually within 20 days. You can withdraw cash, borrow against it, or let it sit there and earn interest.
USE: Because the cash value is yours, its liquid, and you have control, you can USE IT ANY WAY YOU WANT (major purchases, vacations, college, investment opportunities, etc.)
EQUITY: Similar to home ownership. Homeowners can use their equity as leverage (or collateral) to borrow against, while the underlying asset keeps growing, unaffected by the outstanding loan.
A whole life insurance policy resembles very much so, home ownership or ownership of an investment property and how each can use the same dollar more than once. The key to both property ownership and whole life insurance, is the ability to use them as collateral and get your money to do even more jobs…like a bank does. Another example of having something do more than one job is a smart phone. A smart phone has many different uses; it can be used as a phone, camera, mp3 player, you can use the internet, play games; just to name a few. By owning permanent life insurance there are multiple ways to receive money from a policy: withdrawals, dividends, and loans. You have the opportunity to take withdrawals from the cash value account (which however, will lower your cash value and death benefit) and do as you like. You can choose to receive dividends as cash, and do as you like. You also have the opportunity to borrow against the cash value of a policy (either 10 | P a g e
WealthyWithoutWallStreet
from a life insurance company or bank) and do as you like. If you choose to receive a policy loan from an insurance company, you will have greater flexibility in deciding how and when to repay the loan than you would if you got a loan from a bank. There are also no fixed repayment requirements. As long as the policy is sufficiently funded, it may be possible to carry the loan until the death benefit is paid. During the startup/capitalization phase, the optimal way to receive money is through policy loans.
Your Whole Life Policy as a Line of Credit US Gov’t Accountability Office Document
Your policy will be your warehouse for your pool of money and acts like a “conceptual bank”. Once you decide you want those funds to finance your next purchase, (vacation, furniture, health care, vehicles, investment opportunity etc.) cash can be drawn from your “bank” up to the available cash value in the policy. The policy is then used as collateral, which will secure the policy loan (similar to a home equity line of credit). Loan interest is charged on the outstanding balance until the loan is repaid (simple interest). However, the interest and dividends continuously accumulate to the policy values as if you did not borrow any funds. Thus you continue to earn UNINTERRUPTED compound interest. This is the essence of being your own private bank through the tool of dividend paying whole life insurance, and HAVING YOUR DOLLARS CONTINUOUSLY WORKING FOR YOU WHILE YOU ARE ACCESSING AND USING THE EQUITY.
11 | P a g e
WealthyWithoutWallStreet
"Loan Interest is Charged? Why Do I have to Pay Interest to Use My Own Money?” Kim Butler answers it best in Live Your Life Insurance:
“You can withdraw your money out of the life insurance net-cash-value account and go on your way. Or you can leave your money in there to grow and borrow the insurance company’s money using your cash value as collateral, similar to a Home Equity loan and a CD-secured loan. You pay the insurance company an interest rate for the use of their money. The cash-value account is yours to do as you want.
The insurance company will pay you dividends and/or interest on your policy based on the gross cash value, regardless of whether there is a loan against the cash value or not.
If you choose not to collateralize your account and get it to do more jobs (for yourself), the insurance company will collateralize it among their general account assets and use it to do many jobs for them.”
Putting it all Together In Live Your Life Insurance Kim Butler outlines the 5 different phases of how you can use a whole life insurance policy. For acting like a bank, and directing wealth transfers back to yourself, phases 1-3 are the main focus, but all 5 are included, for each phase represents multiple uses of your dollars: Phase 1 – The Start-up or Capitalization Phase (Years 1-5)
Just like starting up a new business, you have to write checks, write checks, write checks, and only then do you see any benefit. You have to work against the naysayers. You are converting cash to cash value and a death benefit. Both can provide a tax-free income when used properly. Both are wonderful things to have, but hard to get started on. However, one start-up (though you may have many) equals a lifetime of benefits.
12 | P a g e
WealthyWithoutWallStreet
Phase 2 – The Leverage Opportunity and Investment Capability Phase (Years 6-30)
This is the phase where you begin to USE your life insurance. It can begin as early as year 2 or as late as you like. Enables you to finance needs as well as to make better investment decisions. Every dollar you put in turns into more than one dollar of cash value. Gives you opportunities for leverage and opportunities for investments.
Phase 3 – The Spending Other Assets Phase (Years 20-40)
This is the cross-over between Phase 1 and Phase 2. Using your cash value as a cash account to borrow against and using your death benefit to borrow against. How you use your life insurance at this point will depend on how long you’ve had it, as well as how many dollars are currently borrowed against it.
Phase 4 – Using the Death Benefit or Face Value Phase (Years 41-50)
There are seven ways you can use your death benefit or face amount while you are living. These can be combined or used as stand-alone strategies. Helps those with a modest income, since the premium payments become an important strategy for forced savings. Helps those with a medium income to have more dollars saved outside the policy because of a controlled, liquid, useable, equity-oriented (C.L.U.E.) flexible account, and the lack of a financial roller coaster impacting them. Helps those with larger amounts of money as they head into retirement age by enabling them to spend their own assets more efficiently.
Phase 5 – Setting Up the “Family Bank” (Years 51+)
Ideally, you’ll die late in life with (1) most of your assets used up and (2) your entire net worth, at its highest point, paid to your family and charities in the form of an income tax-free death benefit from the life insurance you own.
13 | P a g e
WealthyWithoutWallStreet
With proper estate-planning documentation, this lump sum of cash could create a “family bank” whereby your grandchildren and great-grandchildren could borrow sums of money to pursue opportunities. This is the way wealthy families stay wealthy for generations — they replace their assets at each generation’s passing and buy life insurance at each baby’s birth. Your family’s bank can have a Board of Directors or Trustees that make loan decisions. Ideally, each borrower should sign promissory notes, pay interest and principle, and generally treat the asset like they would a commercial bank’s (penalties included!). How specific you wish to design your family bank is up to you. And the legal document itself that governs the family bank is generally a changeable trust until you die, at which point it becomes irrevocable. You can also leave specific amounts of the death benefit to charity or particular family members based on your desires.
Permanent Life Insurance: Who Has Used It
Senator John McCain secured initial campaign financing for his presidential bid by using his life insurance policy as collateral. 3 Walt Disney borrowed against his life insurance in 1953 to help fund Disneyland, when no banker would lend him the money. 4 In 2002, Doris Christopher sold her kitchen tool company, the Pampered Chef to Warren Buffett for a reported $900 million. Seven years earlier, she launched the company with a life insurance policy loan. 3 Even in the midst of the Great Depression, J.C. Penney used a loan against his $3 million life insurance policy to resuscitate his retail stores after the 1929 crash. 3 The nation's large banks invest immense sums of their Tier 1 capital reserves, a bank's most important asset and a key measure of its strength, into permanent life insurance. 3
14 | P a g e
WealthyWithoutWallStreet
Where Do We Go from Here? “The greatest obstacle to discovering the shape of the earth, the continents and the oceans, was not ignorance, it was the illusion of knowledge.” – Daniel Boorstin
To continue, you must be OPEN MINDED and cannot listen to the masses or naysayers. Do your due diligence, but be cautious of other people’s opinions. As Napoleon Hill author of Think and Grow Rich has stated, “Opinions are the cheapest commodities on earth.” If you choose to listen to “financial gurus”, consider their ulterior motives. This way of personal economics will most likely be a change to your current way of thinking. Keep in mind, the “herd” of people, who follow conventional “wisdom” blindly, will be led to an unwanted destination. You see, the issue with most Americans, and why they fail financially, is that they have things they don’t own and own investments they cannot control; in other words, they go into debt to make purchases and invest all their money subjecting it to constant risk. In his book, Man’s Search for Himself Rollo May writes, “The opposite of courage in our society is NOT cowardice, its conformity.” There’s a saying that I like, “If there is a fire in a building and 95 out of 100 people are running one way, and 4 are running the other…follow the four people.” Unfortunately, most people have to unlearn that they must “accept” RISK, VOLATILITY, SPECULATION, LOSS OF CONTROL and UNPREDICTABLE results in order to grow their wealth; when in fact the EXACT OPPOSITE IS TRUE. Banking is NOT a product. It is NOT about rates of return. It’s not about hot investments that boom today and bust tomorrow. It is not a “get rich quick” scheme. IT IS A PROCESS. A WAY OF LIFE. It requires you to save first, then buy. It’s about UNDERSTANDING HOW MONEY MOVES, AND HOW YOUR OWN PERSONAL ECONOMY WORKS. It’s about TAKING CONTROL of your financial life and not leaving it up to an “expert” that you pay whether you lose money or not. It’s about RECAPTURING the money you are spending elsewhere unnecessarily and DIRECTING those payments back to you. It’s about using numerous financial products and integrating them into a COHESIVE STRATEGY.
15 | P a g e
WealthyWithoutWallStreet
The reality of financial planning is that even if money is earning a decent rate of return, it may NOT be working as hard and efficiently as it could be. Only when you put your MONEY IN MOTION, BEING USED MULTIPLE TIMES, and COORDINATING various financial products you buy into what you can DO with them in combination with another, will you achieve personal economic success. Whole life insurance is a cornerstone tool of the “banking” concept, and plays an integral role to your success. With its ability to be used as collateral, YOU CAN FINANCE things you buy throughout your lifetime, BYPASSING lending institutions, and AVOIDING emptying your tank when paying cash, which over time leads to EVERINCREASING GROWTH. It will also allow you to make better investment decisions, because your focus is not on chasing the highest rate of return, but of the movement of your money through other investment opportunities. If you wish to learn more about whole life insurance, how to have it properly designed for you, how you can utilize the banking practices in your own personal economy, or other alternative investments please visit wealthywithoutwallstreet.com. Citing: 1. Becoming Your Own Banker, Nelson Nash 2. Live Your Life Insurance, Kim Butler 3. The Pirates of Manhattan, Barry Dyke 4. justdisney.com Recommended Reading: • Becoming Your Own Banker by Nelson Nash • Live Your Life Insurance by Kim Butler • The Pirates of Manhattan by Barry Dyke • Financial Planning has Failed by Kim Butler • The Mystery of Banking by Murry N. Rothbard • The Creature from Jekyll Island by G. Edward Griffin
16 | P a g e
WealthyWithoutWallStreet