Episode 27: Family Bank

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Family Bank

Introducing The Family Bank Strategy

We are talking about what is called the Family Bank Strategy, sometimes called infinite banking, cashflow banking on yourself. I prefer the term family banking because I’m a very family-oriented guy, and you guys hopefully know that about me. I have got six kids, for that matter. Good grief. Stop having so many kids, right? Hopefully, you guys appreciate that.

The family bank strategy is about unifying the family around the financial resources that you have. Husband and wife are the primary decision-makers, but as the kids get older, they can start to participate in understanding what money is, the value of earning a dollar, the value of spending a dollar, and buying things that are of value versus things that break all the time.

We want to train our kids to learn these lessons while they are young. We talked a little bit about learning some lessons in a prior episode with my guest Josh Mason. We want to teach our kids lessons while they are younger, and we want them to have a very healthy relationship with money. Now, perhaps your kids are older already. You still have influence in their lives, and you can help them understand the value of setting money aside and not depleting it when you buy things, but having a system for replenishing that money back into your life so that it can have a perpetual use during your life, but ideally, also the ability to have generational wealth. Transferring assets, financial resources, and most importantly, the values and priorities of your life through to the next generation so that they are also productive and perhaps even more productive and helpful to society than you were.

Understanding The Family Bank Principles

The family bank strategy, let’s talk about what it is and how it works. We are going to get into this more. I’m going to have some guests for you with regard to this. It’s a pretty comprehensive thing. I’m going to have some interesting dialogue with some colleagues that I have worked with over the years, but I want to give you a basic understanding.

Money, as I mentioned prior, comes in five areas, physical, mental, spiritual, social, and then financial support, and all those other things. As we do the solution provided in our communities, in our work, and our businesses, financial resources come to us. It is a temporary store of value. Where do we store it? It’s in a bank, isn’t it? Banks have four main things they do. They gather deposits. They then lend out those deposits in the form of loans. For them, that’s investing.

For a business called a bank, how they invest money is lending it to other people. The third thing they do is get that money back with interest. The fourth thing is with interest or with a gain. When we use the term family bank, we are thinking about how we apply these success principles of banks. How do I gather “deposits?”

My deposits would be contributions to a savings account, and then once it’s in a savings account, how do I determine what the highest and best use of that dollar is? We have our lifestyle costs, and we are not talking about that. We are not talking about day-to-day expenses. We are talking about the surplus that you are setting aside that’s intended to help grow wealth and prepare for retirement.

What’s its highest and best use? That takes some discernment, that takes some thought and consideration, and setting up some criteria. Let’s talk about banks again to understand that criteria. Do banks lend money to anyone for any reason at any time? I spent four years in banking. The answer to that is no. You can’t walk in and say, “I need $100,000,” and they will write you a check that day.

What are they going to do? They are going to check your background. They are going to do a credit pull, and they are going to look at your debt-to-income ratio based on the total debts you have outstanding and the minimum payments on those debts to determine your current cash flows. That’s another thing. They are going to check your income. They are going to ask you to verify that with W-2 or tax returns, and then they are going to evaluate your percentage of total income to debt. That’s the debt-to-income ratio, and determine if the new amount of money you are asking for and the length of term you are asking to repay it over is going to stay within a reasonable ratio so that you are not overextending yourself and cause a higher risk of not being able to make that payment.

Based on the risk they perceive, and if there’s collateral, like if you are buying a car, the car is collateral. If you are buying a house, the house is collateral. If you are starting a business, you might have equipment, that’s computer equipment, desks, chairs, furniture. You may have some, like X-ray machines. You may have any number of assets. If you are in manufacturing, you may have manufacturing equipment or transportation vehicles. All that stuff is considered possible collateral to back up that loan.

The bank wants to get its money back. It wants to have a high likelihood of returning that money, and that’s referred to as the principal portion, the money they lend out to you as the principal, and then we repay a portion of the principal and a cost called interest through our payment. The bank is not going to lend money unless they have a high likelihood of success in getting the money back, and their track record indicates that they are good at doing that.

The bank is not going to lend money unless they have a high likelihood of success in getting the money back.

That’s why they have the biggest bank buildings in the world. That’s why they have the most access to funds in the world because they are very good at what they do. They incentivize us to give them their money, to let them hold onto it for a long period of time, and make it somewhat difficult, somewhat discouraging to get it back because they give us little interest. They incentivize us to leave it there so that it can earn some interest.

Leveraging Whole Life Insurance

Banks teach us to do the opposite of what they do. To enhance the family bank system, we need to add an asset that banks use on their executives and their key employees. Also, big companies like GM, Walmart, Microsoft, and all these big companies that have a long track record, 50 to 100 plus years, are using whole life insurance contracts on their executives, key employees, and founders to assure that if those key employees pass on and they have had financial obligations to the families, they have paid out bonuses to those employees, there’s a cost to replace that employee if they pass away. The death benefit replaces or helps replenish some of the money that is necessary to replace that person. There’s a protection aspect of having a whole life policy.

There’s also this interesting and valuable cash accumulation that occurs. The cash accumulation that’s often referred to as equity in a piece of real estate or a car is called cash value in a permanent whole life insurance policy. If you look at the publicly available balance sheets for these large companies and banks, there is over $200 billion of their “Tier 1 capital”. Tier 1 capital is the money that’s necessary for reserves and for being available for the opportunity to enhance their business. It’s liquid cash that’s necessary to give them confidence that if something adverse happens, there’s plenty of ability to deal with it.

We likewise need to have that. We need to have an emergency/opportunity fund. It sits at the foundation of our financial life. If banks are going to use whole life insurance as a place to store their surplus and most precious capital for reserves and opportunities, wouldn’t it make sense that we understand that asset as well and find a way to apply that in our lives? That’s what we do with the family bank strategy, infinite banking, or cashflow banking.

Family banking encourages us to accumulate money similar to how banks do, but then adds advantages that come through whole life insurance. The advantage of the protection of the death benefit in case of early death is the advantage of the money that’s stored in there is protected against creditors or bankruptcy situations if you get into a tough financial situation. The tax benefit of tax-free growth, tax-free accessibility, and tax-free transfer of those dollars at your death to your heirs, that’s a huge deal. All these tax advantages that happen to come along with the asset of whole life insurance.

Borrowing And Investing Through The Family Bank

How do we use it as a bank? Remember, banks gather money and then they lend it out. The money builds up in the “family bank,” using the whole life policies as the primary place to store the money for the family bank. When we decide on an investment that matches our investment criteria, that’s highly likely to be successful, we can then borrow against not from, but against the value of that life insurance contract.

When we use the policy as collateral, the insurance companies give us an automatic line of credit against the value of that cash value. That automatic line of credit allows us to access the funds at any time for any purpose and then repay it whenever we want. There’s no forced repayment plan. It’s like cash from your bank. You can take the cash out and go do whatever you want and then put it back whenever you want.

The insurance company has a line of credit so that it keeps the money in the policy, and the money in the policy continues to grow uninterrupted. Meaning if you pull the money out of the bank, it stops earning interest, but if you keep the money in the bank, it earns interest. With life insurance, you keep the money in the policy, you use it as collateral, and the money keeps growing at the same time. You still have the ability to go do this other interesting investment.

Now you’ve got two assets. You have the asset of life insurance and all of its benefits, and then you have the asset of whatever the other investment is. It might be buying a rental property. It might be flipping a property. It might be getting into some commercial or multifamily. It might be your own business, for that matter. Expanding the business, hiring an associate, opening a second location, and acquiring a new piece of equipment that supports you in serving the community better.

As that investment that you do starts to pay out a cashflow, or if it’s a capital gain investment, such as flipping a property, when the payout happens, when you sell the property, you simply replenish the money back to the policy, and whatever interest rate you were charged by the insurance company, that’s already accounted for. If you want to charge yourself a little bit more interest to make it more of an interesting scenario, you can pay yourself a little bit more interest back to the policy and enhance the overall pool of funds that are available for investment.

Now we start to apply the principle of how banks make money. They gather it, they make very careful lending decisions out to other people with a high likelihood of success. They get the money back plus growth, and they repeat and repeat. If we can apply a similar strategy, that’s what family banking is about. It teaches us and prepares us to be more successful with money.

Family banking teaches us and prepares us to be more successful with money.

Generational Wealth Through The Family Bank

Let me give you some counterexamples. I have had many clients over the years who have thought about having generational wealth, but they also feel this sense of responsibility to their children to help them with education, for example. I have some clients who have paid tens of thousands, sometimes hundreds of thousands of their own money for their children’s education.

With no indication that the children will have a need to repay the family, the parents back for that investment in the child’s education. Some of you might be thinking, “That’s perfectly normal.” In many cases, it is normal to help support our kids, but it’s even better if we can train the child to recognize the value of the money that is being utilized. If you as the parent choose to invest in your child’s education, you’ll no longer get to choose to invest it in your future for your retirement, and oftentimes it’s thought of as an expense as opposed to an investment. Remember, investments are supposed to come back with growth.

My point of view is that I’m training my children to think about the investment in a college education or a trade school or something like that helps them enhance their skills, that can solve problems in the community, that they are problems that want to be solved, that people are willing to pay for, that they can get a salary in a W-2 position or start a business and solve those problems. The money comes back not only as an income to them but also the money that they get needs to be replenished back to the family bank.

When I pass on or when my wife passes on, they will inherit the funds in the family bank, and throughout their lives, they will have access to come to request a loan from our family bank, saying, “Mom and Dad, I have this cool venture I’m considering doing. These are the criteria of this thing that I have researched and it seems like it’s going to be a good fit. I’d like to take some money from the family bank to go do this. What would be the terms?” I want to train my kids to think about having a plan to replenish the money, and if something happens and that money gets lost, that’s a big bummer.

As there’s a guarantee of death benefit, at least at the end of our life, the money will be replaced, because the death benefit is always significantly higher than the cash value buildup. If we say $10,000 and it gets lost, I have $10,000 less death benefit, but my death benefit was significantly higher than the cash value anyway. My family’s better off having had the death benefit than if we had a bunch of cash and the money was lost without the death benefit to replace it at the end of our life.

This is how large corporations are able to sustain 100-plus years in business because they have protections like this in place so that if adverse situations happen in their business, they lose employees at their deaths. Money comes back to help replenish the coffers and keep the business functional. They also have a long view. Rather than us thinking a few months out, business owners have the fiduciary responsibility to the business to think multi-years, decades down the road about how to make this business sustainable.

Our family unit passes on at our death, but there are ongoing children, grandchildren, and great-grandchildren. We are like a business. Businesses are largely patterned after families. If we can have a longer view of not our life, but the next generation, we might think and act differently about money, and that’s what the family bank strategy is about, is to help influence our thinking so that we are wiser stewards over the money that we have. We’ll make better decisions and be less likely to waste money.

We have more coming on that. This is a primer on the family bank system. There’s plenty more available. I’m going to launch some resources as well on this to help give some more training, but look forward to the next few dialogues with some of my colleagues as we talk about more in-depth, practical applications of how whole life fits into the family bank strategy. Thank you. Take care. Like, subscribe, and share this with people that you love and care about. Help me reach thousands of people, and I will see you in the next episode.

 

Episode Resources

• Josh Mason Episode