The IBC: Chess not Checkers

The Infinite Banking Concept, though misunderstood, can be described easily enough- in essence, it is about ‘Becoming Your Own Banker’ (the aptly named title of Nelson Nash’s groundbreaking book about the IBC).

However, the product that the IBC uses — dividend-paying whole life insurance, issued from a mutual company — is not as simply described or understood. Much of the general populace’s incorrect opinion around life insurance products comes from the lack of their own personal study into the asset class. Further, this lack of personal research is compounded by relying on someone else’s misunderstanding (typically a financial advisor/entertainer of some sort).

On the other hand, the financial world has done a fantastic job of coalescing the wide variety of financial products available to the consumer in a way that they can be packaged for quick understanding… the almighty Rate of Return. Other factors may be considered based on timelines, tax implications, cash flows or other factors. But ultimately these are accounted for mathematically, and after all the inputs we can spit out a rate of return, that final number that “proves” one asset is better than another.

Consumers (and many financial experts who advise them) are so focused on rate of return that the idea that other characteristics of financial assets exist is not even considered, much less how they would prioritize those characteristics- above, below, or equal to rate of return. (And just for clarity’s sake, in the truest sense, there is no rate of return in a dividend paying whole life policy. A ‘rate of return’ is a property of investments, which life insurance is not. A return implies that money was given away. A life insurance policy that has cash values that you own in control was never given away, so there can be no return.)

When we consider the IBC, we need to understand the properties of an asset class (life insurance) that has characteristics not found in other financial assets. Dividend-paying whole life insurance built for the IBC has contractual guarantees, cash value accumulation, loan provisions, flexible repayment schedules, paid-up additions, dividends, dividend options, uninterrupted compounding interest, and income tax-free death benefit.

Individual focus on any one of these items is important, and should be done for a proper understanding of the asset itself. But many times, those who attempt to explain the benefits of IBC choose to focus on just one of these properties, and unfortunately impressions are made and opinions are formed based on what is ultimately just a part of the whole picture.

Those who pursue a financial plan without the IBC are stuck playing a game of checkers. All the pieces do the same thing (what’s the rate of return?), and there’s just one type of move you can make. Sure, there’s strategy involved and we can discuss all the different ways that you can give your money to someone else so that sometime down the road (depending on the risk you’re willing to take) you can end up with more than what you put in. And we can use these values to calculate that rate of return.

But those who practice IBC have more pieces to play. And because there are more pieces to control, the IBC practitioner must not only understand each of the pieces (their function, advantages, and limitations), they must also understand the way that the pieces interact. Just as a chess player does not consider the movement of his pieces in isolation, neither can the IBC be understood in isolated silos of financial properties. How does the combination of the obligation to pay base premium combine with the right/privilege to pay Paid-Up Addition premium? How does the lack of forced repayment schedule on policy loans interact with the ability to repeatedly access policy loans that have been repaid? How do the answers to those two questions mingle to create even further possibilities? And probably most importantly, how do the answers to all these questions affect the IBC practitioner and how they think and behave? (a topic covered more in depth here: The IBC and Human Action).

It’s worth noting that the answers to these questions depend on the individual, time-specific circumstances of the IBC practitioner. What is “right” for one person would not be ideal for another person with different needs, values, time-preferences, cash-flows, or liabilities. And what is optimal for somebody today will more than likely not be optimal for them next year and certainly not in ten or twenty years time.

All of this is what makes the IBC so difficult to concisely describe and teach to others. Much like chess, even a novice player may look at the individual pieces and grasp how they function. But until the individual can see (or imagine) the pieces in motion, how they interact, and how they respond to the opponent’s moves (in a near infinite combination of possibilities), he can never truly comprehend the game in a competent manner.

And thus we come back to what Nelson said about IBC long ago… the IBC is a practice that requires imagination, reason, logic, and prophecy. So do yourself a favor; rethink your thinking, pause and reflect, consider the portions of IBC and dividend-paying whole life that you don’t fully understand. Go learn them and spend some time contemplating the implications of that new knowledge and how you would use that in your life. Perhaps you’ll see the chessboard of your financial picture open up.

If you’d like to learn more about the Infinite Banking Concept, you can contact me at whitecoatcapitalist.com