When it comes to the Infinite Banking Concept, there’s one major key to consider before you get started. Is your company a direct recognition company or a non-direct recognition company? Today, we’re going to take a deep dive into this.
A lot of times people are looking to get started with IBC and a huge mistake they can make is choosing a company that uses direct recognition. You may be wondering, what does direct recognition even mean?
Basically, the insurance company recognizes the fact that you have a loan against your policy and they credit you a lower dividend on the loaned balance. That’s analogous to having money in a CD with a bank that’s paying you, let’s say, 2% interest and at the same time borrowing from that same bank for a car loan. Let’s say they’re charging you five and a half percent interest. Then the banker says, well, you know because you have a car loan with our bank, we’re going to give you a lower interest rate on the CD. Would you want to do business with that bank? Here’s the point. If the purpose of getting an insurance policy is to borrow against the cash value, why in the world would you want to be penalized for doing what you want to do with your policy?
At the end of the day, the insurance company has to invest that money somewhere and they’re limited as to where they’re able to invest. They could invest in commercial real estate, bonds, or policy loans. And most of the investments are in bonds and commercial real estate. But at the end of the day, policy loans are one of the best places for insurance companies to earn interest.
The reason why policy loans are the best investment for insurance companies is that the entity that is making the loan – the insurance company – is also the entity that is guaranteeing the collateral – the cash value in your policy. They don’t have to pay somebody to do an appraisal or to do an audit. They know it. That’s their job. They’ve already done the administration. So it’s a no-cost or low-cost way for the insurance company to pick up a guaranteed rate of return. When it comes to direct recognition, they’re really just increasing their already guaranteed rate of return because you’re paying interest on that loan. So by lowering your dividend, it’s just increasing their gains. We always preach to our clients – regain control of your money. Are you regaining control of your money if the insurance company is penalizing you for borrowing against your policy?
So we’ve created a cheat sheet for choosing the best company to work with for an infinite banking concept policy. We have five criteria that we’ve used when choosing an insurance company.
- First, it’s got to be a mutual company. Why? Because mutual companies share the profits of the company with you, the policyholder. In essence, you’re the owner of the company as it relates to your policy.
- Second, the company has got to have been around for over a hundred years.
- Third, it’s got to have been able to have paid dividends for over 100 consecutive years.
- Fourth, it should be non-direct recognition, meaning that they’re not going to penalize you if you borrow against your policy.
- And fifth, the company should be licensed to do business in the state of New York. Why is that important? Because New York has the highest level of regulatory protection for the policyholder. And in insurance law, if you want to do business in New York, you have to follow New York law in the other 49 states.
If you look at these five criteria, you’ll be able to choose an insurance company that will best benefit you for the infinite banking concept. If you’re shopping around and looking for the best company to use for the infinite banking concept, check out our website at tier1capital.com to schedule your free strategy session today.
And remember, it’s not how much money you make, it’s how much money you keep that really matters.