Anyways… I spent so much time writing it that I needed an outlet for it, so here it is, my response. The blog is located here if you really want to dig into it: thelongrunblog (dot) wordpress (dot) com/2009/04/22/be-your-own-banker/

The title is Called “Be Your Own Banker.”

My comments:
“I agree thoroughly with some of the comments you’ve made and am glad you made them, but I just want to suggest that there may be an angle on this that is of value. I, too, cringe when I see the over-the-top websites that portrays a too good to be true sentiment, but I think you find that in most industries. Just to be clear, because someone will ask it, I am an advisor and do help clients implement this strategy. I’m actually the founder of becomingyourownbank.com, which most people come across when searching this concept. (notice there is no hyperlink- not looking for one)

First and foremost, there is a large misconception with this strategy that most people, including agents, believe. It is that you borrow from yourself and pay yourself interest. In reality, you do not pay interest to yourself. You are paying interest to the insurance company. This, in my opinion, is where the true value is. We are essentially taking advantage of the fundamental difference between compounding and amortizing interest. The outcome is an alternative to paying cash that is more profitable. We do this all the time in real estate and business, we use other people’s money to create value for ourselves. This is no difference here. The strategy is to let my money compound while paying down a balance. Over time I will pay less in interest on the borrowed money than I accumulate in interest growth (Might be a good exercise to do the math here if you don’t understand what this means). This is a great alternative to using my cash, because if I use my cash I will have nothing to show for it in the future. I simply value the compound growth more than than the interest paid on the borrowed dollars. Now in finding the best place to use the strategy, we find that insurance works best. It has favorable, steady growth, competitive interest rates, tax advantages, flexibility, guaranteed loan access, and other factors that make it far superior than other vehicles. If there were a better vehicle then I would be certainly interested in hearing your opinion as to where.

That being said I want to reference your post above. You are correct that these are similar examples, but you are locking your view into a 10 year window. In the 10 years, especially the first 5, there are many vehicles that could perform better. But the truth is I’ll need money in 10 years, 30 years, 50 years… my whole life. What happens past the 10 year point is where the value of this strategy picks up and surpasses your alternatives. Even in your scenario, focusing on a small part of the equation, there is far greater value to locking in the insurance costs now. The term insurance will only increase in cost, and will ultimately be too expensive. You are essentially giving a choice here, would you rather die with insurance or die without it. This is a factor rarely considered, but since you bring it up, I’ll entertain it. The family wealth in the 2 examples is dramatically different- you can either die with a couple hundred thousand to leave to your family, or die without any at all, but still have the same cash situation. I will choose the insurance everytime. I believe the point is to die with it.

That being said, from a cash growth standpoint alone, you need to look a little farther into the future. and that cash value to shine. If you have the time frame to do it, it is worth the wait.

Unfortunately there is a lack of understanding both in general, and amongst agents that sell this type of strategy, which ultimately takes away from the real objectives, in my opinion.”

Jake Thompson

“When you borrow you pay yourself back.”

This is by far the least understood aspect of this strategy. It’s a common belief that, just like a bank account, your policy allows you to borrow funds that are yours, and pay yourself back the principle and interest. This is not the case. The cash value of your policy is simply that, cash value, or the value of the policy based on today. It is not a cash account, or side fund. When you borrow funds, those funds are given to you by the insurance company with your policy as collateral. When you make payments back, they are paid to the insurance company. This misconception is unfortunate because paying the insurance company is in your best interest. The real value is the ability to let your money compound while using someone else’s money to make your purchases.

“You need to charge yourself more interest”

This isn’t so much a misconception as it is misunderstood. The idea of paying yourself more interest does not result in interest being paid directly into your policy. It is an unnecessary way of saying you should pay off the loan quicker. Increased interest rates result in increased payments, which is the ultimate goal of this statement. Since you are not paying yourself back, you are simply adding extra principle to the loan, which pays the loan off more efficiently. Once the loan is paid off, you can now use that extra cash flow to add additional premium into the policy, or start a new one. I don’t recommend simply paying yourself more interest, but recommend paying loans off as quickly as possible with excess monthly cash flow. This results in decreased interest expense, which saves you money, and ultimately enhances your financial situation.

“The faster you pay off a policy loan the better your policy performs”
“The principle and interest you pay will result in increased cash values”

These are a spin off of the first two. When you understand that your policy is collateral for the loan, it becomes obvious that no matter how fast or slow the loan is paid back it will not affect the policy performance. The principal and interest is paid back to the insurance company while leaving your cash values untouched. The principal and interest you pay, therefore, cannot result in increased cash values.

“Using a policy loan you can recapture the principle and interest you spend”

This is a spin off of the first. You are not recapturing interest, because you are not paying yourself interest. The interest is paid directly to the insurance company, not to you. The value is not in recapturing interest, but in allowing your dollars to compound, while using the insurance company’s money. In other words you are taking advantage of the difference between compound and amortized interest.

Jake Thompson

Here is the table referenced in the podcast:

The Debtor
When the debtor needs to make a major capital purchase, he leverages his future earnings to pay for the purchase now. He is always in debt to someone else and never earns interest and never saves dollars. He constantly falls below a zero balance and works constantly to pay back his debts and get back to a zero balance. Not only does this individual lose interest, but also loses the opportunity for those lost dollars interest dollars to earn future interest.

The Saver
The Saver handles his finances a little bit differently. He too makes a payment, a payment to himself, in order to save for his major capital purchase. He avoids paying interest, but every time he makes a purchase he drains his savings- setting him back to zero. His strategy is defensive, and he never takes advantage of compound growth.

The Wealth Creator

I would like to introduce you to the Wealth Creator. The Wealth Creator realizes the value of compound interest and never wants to set himself back to a zero balance. Just like the saver, the wealth creator saves money into his own account for those major capital purchases. We will call this account his private reserve. Unlike the saver, the wealth creator knows that if he empties his private reserve he will start back at zero, so he utilizes other people’s money to continue to employ the benefits of compound growth. He collateralizes that reserve to access capital for his purchase. By doing so, he knows that the compound growth will always increase his reserve substantially more than the interest expense on the money borrowed. His money never stops compounding, and he guarantees himself a substantial amount of money in the future, while providing the money necessary for his major capital purchases today. He creates far more value than the Saver and The Debtor.

Private Reserve Strategy™ is a trademark owned by MoneyTrax, Inc

The purpose of my post today is nothing more than to illustrate some very interesting characteristics of 1 Trillion dollars, and then give you a visual of what that looks like.

First of all, a “Trillion” is a 1 with 12 zeros, it looks like this: $1,000,000,000,000.

Here are some characteristics:

- If the printing presses ran from 8-5 every working day, 5 days a week, it would take 72 years to print 1 trillion dollar bills.

- Stacked on top of one another a trillion dollar bills would be 70,000 miles high.

- You would have had to spend over 1.3 million dollars per day since the birth of Christ (2011 years ago) to spend a Trillion dollars.

- One million seconds ago was 10 or 11 days ago
One billion seconds ago was during the Nixon administration
One trillion seconds ago was 30,000 years BC.

- If your annual salary or wage is $50,000 it would take you 20 million years to earn a trillion dollars.

- We could wrap the earth about 4700 times with a trillion one-dollar bills laid end to end around the globe.

The Visual

So those are some interesting facts, but in my opinion the visual is even more intriguing.

Here’s a comparison of a trillion dollars as it relates to you or me.

Let’s start with $1 million dollars.

Next we have $100 million dollars. This can be neatly stacked on a pallet about 4 feet high.

Now we have $1 Billion dollars. This is 10 pallets of $100 million each. This used to be a lot of money…

HERE IS 1 TRILLION DOLLARS!

A trillion dollars is compiled of 10,000 pallets (double stacked so they are about 8 feet high) and each pallet has 100 million dollars on it.

Notice the man in the left corner…

As you can see, a trillion dollars is a lot of money. As for another interesting fact, we have added over 1 trillion dollars every year to our national debt for the last 5 consecutive years. This misuse of our tax dollars is causing serious burdens on our economic growth, and could ultimately be the cause of slow economic growth for years to come. We welcome your comments.

Becoming Your Own Bank
This is a simple idea that uses a 200 year old, incredibly safe financial vehicle. Instead of using others’ money and paying them interest to make your purchases, you build up a pool of cash value inside a dividend paying whole life insurance policy. This pool of cash value can be used by you whenever and however you want. In the mean time you are benefitting from tax free growth and piece of mind that comes from knowing that you will NEVER lose your money. By eliminating market losses you will be able to create a much larger nest egg than you otherwise could while riding the market roller coaster.

Self Financed Insurance
This concept is typically used by those who are making over 200k per year on a consistant basis. The idea behind self financed insurance is simple – you leverage someone else’s money in order to build up significant cash value inside of a whole life insurance policy and by doing so create large pool of compounding money that you will never able to outlive. Again, this strategy is not for everyone, please contact one of our representatives to learn more about this unique retirement plan alternative.

There Are Alternatives

These are just two of the non-traditional IRA alternatives that exist, there may be others that would better suit any given situation.  The main thing to realize is that you have options and alternatives to your IRA.  Instead of putting your money at risk and hoping that it grows enough to support you during retirement, take control and make sure that you will have money in your account for your golden years.

Buying gold, silver and other precious medals can be a great way to hedge against inflation. With precious medals you are purchasing a commodity that will always have some value.

Real Estate and other hard assets can also be a great way to retain your dollar in the event of monetary crisis.

Whether commodities are you choice or you decide to use other vehicles to store your “safe money” – running your money through you infinite banking policy first will always give you an advantage.

Here is how it would work: The cash value inside of a banking system would be used to purchase the gold, silver, or other commodity typically used as a hedge against inflation. Then, just like any loan taken from one’s banking system, the policy owner would pay back the loan over a term of their choice. When all is said and done the policy owner has the commodities that will be an excellent hedge against inflation as well as the cash inside the policy that is easily accessible for current or future purchases. This means having cash on hand as well as a commodity hedging against inflation.

Unfortunately the bottom portion of this graphic urges Americans to continue making the same mistakes made by baby boomers and soon to be retirees. Namely, put all your retirement savings dollars at risk in government sponsored 401(k) plans and IRA plans.

If the past 10 years is any indication of future performance, betting on a 7% growth every year is overly optimistic in my opinion. Over the past 10 years market performance has been painful at best. On December 31, 1999 the S&P closed at 1469.25.  On August 22 2011 the S&P closed at 1123.82….an average loss of -29 point per year. Do you have another 10 years to see if the market makes up for past losses? Maybe the better question, do you have the ability to stomach the fact that your money is completely out of your control?

We all know the definition of insanity – isn’t it about time to shift our thinking?

*Always consult with your legal advisor to fully understand the laws in your state.

For years here at Wealthonomics we have worked hard to help our clients understand that the losses you suffer have a much greater impact than the gains. Studies show that if you could get 30% of the market growth and never suffer a loss you would end up the same as the investor who rode the roller coaster known as the market.

We all know that we can learn from the past, but how many of us really are? We have watched as thousands of baby boomer nest eggs have been cut in half – if not worse, yet we continue to throw money at vehicles whose success relies on market growth. The individuals who are breaking the mold are those who understand that control, consistent growth and no losses is the most efficient way to wealth.

The Banking Effect provides the control and security so many of us know we need but do not seek because we are lured away by visions of grandeur in the form of double digit returns. The fact of the matter is that if you are tired of losing money you have to do something different and the real way to wealth is to keep more of what you make not risk more of what you keep.