EUREKONOMICS.com

The Money for Life Model of Financial Management and The Infinite Banking Concept(TM)

I regularly receive questions that reference The Infinite Banking Concept^TM of R. Nelson Nash.  The Money for Life Model of Financial Management guides its adherents on a path similar to the one Mr. Nash suggests.

A visitor to our web site recently submitted a series of clear and precise questions about three of the core concepts found in both programs; the Paid Up Additions Rider, guaranteed cash values and policy loan interest.  The complexity of each of these makes sense to well-informed agent/advisors, but may befuddle a consumer - or as the questioner puts it a "normal guy."  [Hmmm!  Does that mean those of us who call ourselves advisors are "abnormal guys"?]

The questions and comments of the visitor who wrote to me are indented and in quotes.

"The first thing I am interested in is a "normal guy's" explanation of a Paid Up Additions [PUA] rider.  I cannot believe all the stuff that has been written about Infinite Banking that is lacking a clear explanation of just how it works."

A reading of Money for Life...How to thrive in good times and bad would help clear up some of the ‘normal guy's" questions you have.

"There are certain questions I have:  What is a PUA?"

A PUA has a variety of names.  Basically, a paid up additions rider is a single premium insurance policy that is purchased with separate premium contributions in excess of the premium required by the base policy to which the PUA rider is attached.  A PUA generally has minimal cost associated with it [commissions, policy issue fees, etc.], which makes it a most efficient way to increase both the death benefit and the cash value available for use as your ‘bank.'

There are wide varieties of restrictions and limitations on this rider form by different companies.  Some of these riders lapse if they are not exercised, which means that you have to contribute each year or you forfeit the option to contribute in any subsequent year.  Others allow partial contributions or include ‘catch-up' provisions in case you miss a portion or even all of one year's deposit.

Purchasing paid up additions using the PUA rider may put a policy in jeopardy of becoming a modified endowment contract [MEC].  This would result in the policy losing the benefits that make cash value life insurance so powerful and flexible as a cash accumulation and cash management tool.

"What does it mean that the policy is ‘engineered to increase in value every year.'?"

Whole life contracts are designed to guarantee an increase in the basic cash value each year.  In the early years of most policies, the cash value increase is minimal due to the structure of the policy issue process, the long-term cash accumulation strategy, and the commission program.

The policy that I most frequently recommend is specifically designed - or engineered - to create cash value in the first year.  This policy guarantees that about 90% of the base premium is credited to the guaranteed cash value in the first year and nearly 100% or more of the base premium in every year thereafter.  The annual contribution of the PUA contributes 93% of the annual premium to guaranteed cash value every year it is paid.

"When I take a policy loan, do I or do I not have to pay the insurance company interest?  If yes, then does this interest go into my cash value or go somewhere else?"

It depends on the company, but generally it works something like this; interest on policy loans is always assessed.  If you fail to pay it, the outstanding interest and the policy loan itself are liabilities against both the cash value and the death benefit.  Most policies, however, continue to pay the guaranteed internal interest rate when a loan is outstanding.

In effect this means that the interest you pay the insurer is a refund of the interest the insurer credited your account while the money in your account was on loan to you.  The rate the insurance company charges you is generally a bit higher than the internal rate.  This is to make sure each policy owner covers the cost of managing the loan and other policy owners are not subsidizing loans in which they have no interest.

Loans and interest are often described using reference to the ‘banking' process for simplicity.  It's important that each advisor explain how it works with individual policies and loans.  It makes a great deal more sense when the policy owner can see the actual results.

Conclusion...

Whole life insurance, used as a fundamental component of your clients' personal economic structures, is an extraordinarily powerful and flexible tool.  It is the Swiss Army Knife of financial products.

Over the past three decades or so the financial community's understanding of whole life insurance has diminished dramatically.  Whole life insurance has been misrepresented by those who can't or won't sell it.

The financial mess in America today is the direct result of the failure of the financial community to support the traditional financial values, practices, and products that made America the greatest economy and country in history.  The greed on Wall Street jeopardizes our wealth and well-being as a nation and the wealth and well-being of "we the people."

It's time to again reclaim those values, reinstitute those practices, and recognize those financial products as essential to every successful personal economy.

If we fail at this we will fail completely.