The basic banking business model is one of the most powerful business models.
A very simplified version of the banking business model, without complicating it with fractional reserve banking, quantitative easing, banking bailouts and all the other acronyms that are used by mainstream financial media that describe, free and cheap money, would look like the following:
A simplified version of the traditional banking business model, has two components, deposits and lending.
Depositors make deposits into the banking system and receive privileges for doing so. Depositors could earn interest on the deposits and they also have access to value added services like checkbook services, receiving direct deposits from employers, and clients and customers and more recently, online banking and online bill pay.
On the lending side, the bank lends out deposits to borrowers in the form of business loans and lines of credit, auto loans, home loans, home equity lines of credit and student loans.
To illustrate the power of this banking system, let’s say, I make a $10,000 deposit into this bank and received 1% of interest on my deposit. The bank then takes that $10,000 and lends it to a borrower and collects 10% of interest on the loan.
Most people would agree and say that the bank made a healthy profit and spread of 9% on the transaction.
Let’s look at the numbers closely. I made the deposit of $10,000 and received $100 dollars in interest. The bank lends out the $10,000 to a borrower and received $1000 in interest for a $900 profit.
The bank however only invested $100 in this transaction. The $100 dollars is the only money that actually came from the bank! It’s my $10,000 and it was lent to a borrower.
The bank turned $100 into $900. This brings the return of this transaction to the bank to 900%.
Who benefits from this transaction? The owners of the bank and system.
This example did not include any fractional reserve banking trickery and assumed like in the good old days that the bank actually had to receive a deposit to make a loan.
So how to we use similar principles to reclaim the banking function in our own lives and create a system, that we own and control.
In a previous article I shared how we use a dividend paying whole life insurance policy with a mutual insurance company structured a very specific way to maximize cash value according to the Infinite Banking principles.
It is known within the industry and family offices as high cash value life insurance.
The insurance policy provides the platform and the “banking” is the process within this system that you create and control and benefit from.
As you can see in our own system, we make deposits monthly, quarterly and or annually that builds up and grows through contractual guarantees, tax free. Your policy also earns dividends and although it is not guaranteed, the top mutual insurance carriers have been paying them consecutively for over 100 years through depressions, recessions and market crashes.
Mutual insurance companies are paying a dividend of approximately 6-7% currently. It’s important to note that this is not the same as earning 6-7% like a in the case of a money market and or checking account. It is an insurance vehicle and there are insurance costs. Internal rates of return depending on the specific case and life of a policy can be around 4-5%.(Remember these returns are tax free)
On the lending side of our system, we then have the ability to access funds through a policy loan from the insurance company’s general account, not our own policy at currently 5%.
It is important to note that your policy cash values are not accessed and the balances are not drawn down as in the case of loans from your qualified retirement plans. The funds come from the insurance company, and the policy loan is secured by your cash value in your policy and your death benefit.
As everyone should run their lives as a business, especially their investments and finances, it is important to be cognizant that businesses know that there is a cost to the capital they have on their books. Knowing your cost of capital allows you to make better business and investment decisions since you have to get a greater return than your cost of capital.
It is important to note that you can access up to 90% of your cash value available at any time through the policy loan. You are in control of the payback schedule of the loan since it is an interest only loan.
After you have taken the policy loan to invest in a specific investment like real estate, private lending, your business, cannabis and crypto related businesses, the cashflow for the investment is directed back into the policy repaying the policy loan.
As the policy loan is paid back, the money becomes available again to be accessed through another policy loan. There are no limits on policy loans and policy loans do not have to be paid back in full in order for you to access another loan. Policy loans also do not count as income, so they are tax free as well.
Since you are going to save and warehouse money again, the policy simply becomes a warehouse for your wealth outside of the banking system and the Wall Street casino.
This is where I warehouse my wealth and my family’s wealth, outside of the banking system in a mutual insurance company that provides the privacy (these accounts and policy loans are private and have no public record) and asset protection (46 out of 50 states allow full asset protection of the policies) I desire.
So, what would an infinite system of wealth creation look like?
In this illustration we have created a system of investing in real estate. As you can see, we funded the policy and bought an investment property with a policy loan. (you can combine a policy loan with mortgages as well.)
We paid cash for the property at a purchasing price of $100,000 through accessing a policy loan at 5% interest and received $1000 per month in rent, $12,000 annually, generating a 12% cash on cash return.
We made $7000 per year in profit on the property and directed the $12,000 of cashflow back into the policy, since we are saving and warehousing our wealth in this mutual insurance company.
As we continue to fund the premiums and pay back the policy loan, soon we will have enough money available again in our cash value to purchase another property and do it all over again!
This can be done over and over, infinitely and with any asset class.
In this example of real estate, you took control over two assets simultaneously that both provide cash flow, tax advantages, equity build up, appreciation, controlled leverage and an inflation hedge in a system that perpetually grows and expands your wealth.
That is how you use the concept of Infinite Banking in combination with investment strategies inside a system.
Remember, you are a business, treat your financial life and wealth like a business, and let powerful systems run your business.
Live a Life of Passion and Purpose on YOUR Terms
M.C. Laubscher is the President and Chief Executive Officer of Producers Wealth (formerly known as Valhalla Wealth Financial) and creator & host of the popular business, investing and financial podcast, the Cashflow Ninja podcast.
You can access all of his educational resources at www.producerswealth.com