The Infinite Banking Concept: Testing Your Knowledge & Understanding
Quiz
Try to answer and check answers below!
What is the central idea behind the Infinite Banking Concept (IBC)?
Why does Nelson Nash emphasize long-range planning in the context of IBC?
Explain the analogy of the grocery store in relation to understanding the Infinite Banking Concept.
According to the text, what is the biggest problem most people face regarding finances?
Why is it important to control the "banking equation" according to the author?
According to Nash, why is dividend-paying life insurance unique?
Explain the concept of "Economic Value Added."
According to the author, what does it mean to "finance" everything you buy?
How does Parkinson's Law relate to personal finance and IBC?
According to the author, who is the biggest thief in the world? Explain.
Quiz Answer Key
The Infinite Banking Concept (IBC) is about controlling the “Banking Function” by using dividend-paying whole life insurance to finance the things of life, effectively becoming your own banker and capturing the interest that would otherwise be paid to traditional banking institutions. It's about controlling 100% of your financing needs.
R. Nelson Nash stressed long-range planning because IBC is not a get-rich-quick scheme; it is a strategy that requires time to build and mature. Thinking intergenerationally, like a forester, allows for building a legacy and maximizing the benefits of compound interest and policy growth over many years.
The grocery store analogy illustrates the concept of being both a consumer and a seller of the same product (money/capital). It emphasizes the importance of treating your "captive customers" (yourself and your family) fairly and charging them retail prices to maximize the profitability of your "banking system."
The biggest problem people face is the volume of interest they pay to outside banking organizations for things like cars, homes, and other expenses. This interest represents a significant portion of their income that is perpetually lost and enriches external financial institutions.
Controlling the "banking equation" means capturing the flow of money and interest payments within your own system instead of giving it away to external banks. It is about creating a "perpetual tailwind" in your financial life by controlling the financial environment in which you operate.
Dividend-paying life insurance is unique because it offers absolute control over the investment function of the company as it relates to the policy owner's policy. The owner has first access to the money and can borrow 100% of their equity (available cash value) in the contract.
Economic Value Added (EVA) refers to the amount of money you have left over after paying taxes that can be spent. The problem is that for the average person in the U.S., a significant portion of that sum goes to pay interest alone, meaning it cannot be used for anything else.
To "finance" everything you buy means that you either pay interest to someone else (like a bank or lender) or you give up the opportunity to earn interest on that money yourself. You must account for opportunity cost.
Parkinson's Law, "work expands to meet the time available," relates to personal finance because expenses tend to rise to meet income. Unless consciously combatted, this tendency can undermine any attempt to build wealth within an IBC system by leading to increased spending and a lack of capital for reinvestment.
According to the author, the biggest thief in the world is the Internal Revenue Service (IRS) because it legally plunders wealth through confiscatory taxation. The author explains that because the government gets all its sustenance from the productive element of society, it is like a parasite living off the productive taxpayers, the host.
Essay Questions
Explain the metaphor of the airplane and the headwind/tailwind in Chapter 4. How does this relate to the Infinite Banking Concept?
Discuss the role of imagination in the Infinite Banking Concept, drawing on examples from the text.
Analyze the human problems, as outlined in Part II of the book, that can hinder the successful implementation of the Infinite Banking Concept.
Compare and contrast creating a traditional bank with creating your own banking system through dividend-paying life insurance, according to Nelson Nash.
Explain how Method E in Chapter 13 implements the Infinite Banking Concept, and why it has the best potential for building wealth.
Glossary of Key Terms
Infinite Banking Concept® (IBC): A financial strategy developed by R. Nelson Nash that uses dividend-paying whole life insurance policies to finance purchases and control the banking function in one's life.
Dividend-Paying Whole Life Insurance: A type of life insurance policy that provides a death benefit and also accumulates cash value that grows tax-deferred. The policy may also pay dividends, which are considered a return of premium and are not typically taxable.
Opportunity Cost: The potential benefit that is forfeited when choosing one alternative over another. In the context of finance, it is the interest one could have earned had they invested their money instead of spending it.
Capitalization: The process of accumulating enough capital (money) within a life insurance policy to fund future expenses or purchases.
Policy Loan: Borrowing money from the life insurance company using the policy's cash value as collateral. The loan accrues interest, but the cash value continues to grow.
Economic Value Added: The after-tax income that remains after subtracting the cost of capital, representing the true economic profit generated by an investment.
Parkinson's Law: The principle that "work expands to meet the time available for its completion," often extended to mean that expenses rise to equal income.
Willie Sutton's Law: The principle that one should focus on where the money is when looking for it; in this context, it refers to the fact that wealth attracts those who want to take it, including through taxation.
The Golden Rule: In the context of finance, refers to the principle that "those who have the gold make the rules," highlighting the power and control that comes with having capital.
The Arrival Syndrome: The state of complacency where one believes they have already learned everything they need to know and stops growing and learning.
Actuary: A professional who assesses and manages financial risks, particularly in the insurance industry, by using statistical models and data analysis.
Multiplier Effect: The phenomenon where an initial injection of money into the economy leads to a larger overall increase in economic activity. Nash posits that this exists in commercial banking, and suggests that it is akin to creating money out of thin air.
Legal Plunder: Frederic Bastiat's term to explain "if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong."
The Constitution of the People: the author refers to the US Constitution as "the Constitution of the people, and for the United States!" He explains that the document belongs to the American people, not to their government.
The Characters in the Play: referring to Shakespeare's quote that "All the world is a stage and the people are the actors thereon," the author uses the phrase to point out that people do not play their proper role in the scheme of things. In context, he suggests that people abdicate their responsibility as it pertains to the banking function in the economy.