How do the ultra-wealthy go about accumulating wealth? There’s a little-known strategy called the Rockefeller Formula or Infinite Banking Concept that Walt Disney, J.C. Penney, Ray Kroc, John F. Kennedy and Franklin D. Roosevelt have used to fund their companies and grow their wealth. This concept will challenge everything you’ve ever thought about how to structure your finances.
Our guest this week on RealEstateCoach Uncensored is Chris Naugle — “America’s No. 1 Money Mentor” and the author of Mapping Out the Millionaire Mystery. Naugle starred on HGTV’s Risky Builders show and has used the Infinite Banking Concept to flip 263 houses.
Before diving into how the Infinite Banking Concept works, let’s begin by looking at some typical interest expenses most real estate agents have.
How much are you currently paying in interest?
Let’s assume you just leased a car for $400 per month for 60 months and obtained a $300,000 refinance on your home at 3 percent interest for 30 years. You also have $10,000 in credit card debt at 18 percent interest. Over the next five years, you will pay at least the following amount in lease and interest payments to the bank. (For the purposes of this exercise, we’ll use simplified, fictional numbers, rather than mortgage calculated numbers.)
- $400 per month car lease, which equals to $24,000.
- $300,000, 3 percent 30-year home mortgage for $45,000.
- $10,000 credit card balance at 18 percent for $9,000.
The total would be $78,000. What if you could pay that interest to yourself rather than a bank? The Infinite Banking Concept applies a different set of rules to how you grow your net worth.
Two important concepts
Before discussing the details of how infinite banking works, it’s important to understand two important concepts.
1. Simple vs. compound interest
In 2006, when I moved from California to Texas, I received a $10,000 distribution from my retirement account. I invested the money in an account that guaranteed a rate of 7 percent compound interest rate.
Today, that investment is worth a little over $30,000. If that money had been invested at 7 percent simple interest, the value would only be $19,800. In other words, instead of my money doubling with simple interest, compound interest tripled it.
2. Bank-owned life insurance (BOLI)
You are already probably familiar with term “insurance.” The insurance on your car or home is a “term” policy, usually for one year. There are also term life insurance policies. A different option is a “whole life” insurance policy that remains in force for the insured’s entire lifetime.
Naugle introduced me to an entirely different type of whole life insurance, which the Infinite Banking Concept is based on. These types of whole life policies are sometimes called “banking” or “cash flow” policies and are available through “mutually owned insurance companies” such as Mass Mutual, Mutual of Omaha, Northwestern Mutual and Penn Mutual.
Now this next fact really shocked me. Did you know that banks are the biggest owner of whole life banking policies, and their BOLI holdings exceed the value of all their real estate holdings?
According to Investopedia, BOLI “is a form of life insurance purchased by banks where the bank is the beneficiary and also usually the owner of the policy. Such insurance is used as a tax shelter for the financial institutions, which leverage its tax-free savings provisions as funding mechanisms for employee benefits.”
According to Naugle, the secret to dramatically increasing your wealth is to use the same mechanism the banks do, a “banking/cash flow” whole life insurance policy that creates cash flow, leverages the tax-free savings provisions and enables you to start paying yourself interest rather than paying a bank.
How banking/cash flow insurance policies work to create wealth
The Rockefellers originally created the “privatized” or “infinite” banking concept prior to the first federal income tax. These policies earn compound interest plus whatever dividend the mutually owned insurance company pays.
For example, the company Naugle uses is currently paying a guaranteed rate of 4 percent compound interest with a dividend of 2.2 percent.
What differentiates a “banking” policy from an ordinary whole life policy is you can borrow up to 90 percent of the amount of cash you have in the policy. The money you borrow, however, is not taken out of your cash deposit. Instead, it’s taken from the insurance company’s general account. (The current rate is 5 percent.)
In other words, you never touch your money that’s compounding. To illustrate this point, even after taking out a loan from the insurance company’s general account at 5 percent, you’re still coming out 1.2 percent ahead, and the entire amount of your principle is still earning compound interest. Your insurance company loan is at 5 percent simple interest.
Putting the infinite banking concept into practice
In his book, Mapping the Millionaire Mystery, Naugle explains how the Infinite Banking Concept works. His approach mirrors exactly what the big banks do, and you can duplicate this approach to build your wealth.
Using the credit card scenario above where you owe $10,000 at 18 percent interest on your credit card, all you have to do is to change one thing — where your money goes first. Assuming you open your banking insurance account with $12,000, here’s what you would do.
- Move $12,000 from your savings, the stock market or some other investment, and put it into banking whole life insurance policy. Your $12,000 is earning 4 percent compound interest plus a 2.2 percent dividend.
- Set up a separate segregated bank account (a regular checking account) to keep the money separate for tax purposes.
- Take out a loan of $10,000 from the insurance company’s general fund at 5 percent simple interest.
- Begin paying back your insurance loan at $150 per month through your segregated account.
Now, consider the return. Your banking policy is paying you 6.2 percent minus 5 percent for a return of 1.2 percent. Because you’re paying yourself back, however, you’re now earning the 18 percent interest that you were formerly paying to the bank. Your total return is 19.2 percent!
Upping the ante
Assume you’re feeling nervous about the stock market and decide to open your whole life policy with $100,000. You can use the same approach to buy a car, to pay business expenses or to put toward a real estate investment.
Using the car purchase as an example, assume you buy a $30,000 car. Go to the dealership and see how much they would charge you to finance the car. Assume the amount is 4 percent interest with a payment of $500 per month.
You would then borrow the $30,000 from the insurance company’s general account and pay yourself back the $500 per month using your segregated account.
The beauty of this approach is your original $100,000 is earning 4 percent compound interest, plus the 2.2 percent dividend (again, this is an example). Also, as you pay back the amount you owe the insurance general fund, you’re increasing the amount you can repurpose for other reasons such as covering business expenses.
Now, you may want to know what happens if you don’t pay the insurance company back. It’s not an issue for them. Assume you borrowed $30,000, and you have death benefit of $500,000. They simply deduct the $30,000 from your death benefit, reducing it to $470,000.
The 4 steps you need to take
According to Naugle, here are the four key steps to implement infinite banking:
- Get back control of your money.
- Learn how to earn uninterrupted compound interest.
- Mimic exactly what the banks do with your money.
- Change the bank to you.
I spent several months investigating this process before we decided to move forward with our first banking policy. What sealed the deal for me was when I learned how banks use these policies, which I talk about in today’s episode.
Do your own due diligence, and then decide what’s best for you and your personal financial situation. To learn more about infinite banking, begin by listening to today’s show.
Bernice Ross, President and CEO of BrokerageUP and RealEstateC
