Follow-Up Study Guide: Becoming Your Own Banker®
This study guide is designed to review and reinforce some of the core concepts presented by the analysis given in Part Four of R. Nelson Nash's book, "Becoming Your Own Banker," focusing on the equipment financing illustrations.
Quiz: Short-Answer Questions
Answer the following and check the key below!
What specific type of life insurance policy contract is used for the examples in the book, and what are its key components?
Explain the mechanism of "premium offset" as it is used in the first illustration after year four.
What is the fundamental difference between interest "rate" and interest "volume" as described in the source?
According to Nelson Nash, what are the two businesses everyone should be in, and which is considered more important?
What financial concept is represented by the metaphor "the jelly in the sandwich"?
In Illustration 2, how does the policy owner's behavior of acting as an "honest banker" impact the "cumulative net outlay"?
Why did Nelson Nash structure the initial examples to show no policy activity for the first four years?
What problem did the policyholder encounter at age 65 in the final illustration, and why did it occur?
How did financing equipment through the policy, as shown in the later illustrations, have a directly measurable impact on the annual dividend?
What alternative use for the cash flow from physical damage insurance premiums does Nelson Nash propose?
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Answer Key
The policy contract is a dividend-paying whole life insurance policy. Its key components mentioned are a base premium, a paid-up additions (PUA) rider for flexible premiums, and a structure known as "Life Pay to Age 65" (L65), meaning the policy is fully paid up at age 65.
Premium offset is a feature where the policy's annual dividend is used to pay the required base premium. If the dividend is insufficient, the difference is made up by surrendering a portion of the accumulated paid-up additions, which can cause the death benefit to temporarily decrease.
The interest "rate" is the percentage charged on a declining loan balance. In contrast, interest "volume" refers to the total physical dollars of interest that are paid to a lender over the entire life of a loan, which is the figure Nelson Nash emphasizes for recapture.
Nelson Nash stated that everyone should be in two businesses: the business they do to make a living, and the business of banking. Of the two, he believed the business of banking is the most important.
"The jelly in the sandwich" is a metaphor for the interest charges, or profit, that a third-party lender (like Associates Finance in the example) collects. The Infinite Banking Concept is focused on recapturing this "jelly" by financing through one's own policy.
By acting as an "honest banker," the policy owner makes loan repayments, including the interest he would have paid to a third party, back to his own policy. This increases the "cumulative net outlay," as the recaptured interest is strategically applied as additional premium, which grows the policy's cash value and death benefit far beyond the baseline.
Nelson Nash delayed showing loan activity to illustrate the importance of conquering "Parkinson's Law." He wanted people to understand the power of focusing energy on capitalizing a policy for a period of four to seven years without touching the money, thereby building financial discipline.
The policyholder could no longer act as an "honest banker" because the policy was a "Life Pay to 65." At that age, the contract was fully paid up and the insurance company would no longer accept any premium payments, leaving no room for the recaptured interest payments to go.
Financing through the policy increased the annual dividend because premium and loan repayments are net contributors to the earnings of the life insurance company. By increasing his contribution to the company's money pool, the policy owner (as a co-owner) receives a greater share of the divisible surplus in the form of a larger dividend.
Instead of paying a third-party Property and Casualty company for physical damage insurance on equipment, Nash suggests redirecting that cash flow into a new life insurance policy. This allows the business owner to self-insure the equipment while building up another reservoir of capital that they own and control.
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Essay Questions
The following questions are designed to provoke deeper thought and synthesis of the core themes.
Explain the concept of "recapturing financial energy" using the progression of Terry's logging truck financing from Illustration 1 to Illustration 3. Detail how this redirection of cash flow impacts long-term capital accumulation and passive income potential.
Analyze the statement that the "policy owner's behavior is far more critical than the behavior of the life insurance company." Use the numerical differences in cash value, death benefit, and dividends between Illustration 1 and the final illustration to support the analysis.
Describe Nelson Nash's philosophy on the terms "passive income" and "retirement." How does the structure of a dividend-paying whole life policy, when used for financing, create opportunities that align with his viewpoint?
Discuss the critical role of the "Cumulative Net Outlay" column in understanding the Infinite Banking Concept. How does this column visually represent the recapture of interest and the policy owner's increased capitalization of their own banking system?
Explain the broader concept of "becoming your own banker" as a change in thinking, not just a product. How does the source extend this thinking beyond just equipment financing to include family wealth transfer and self-insuring?
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Glossary of Key Terms
Term
Definition from Source Context
Honest Banker
The practice of a policy owner repaying a policy loan with the same discipline, schedule, and interest they would have paid to a third-party bank. This ensures the capital (including would-be interest payments) is recaptured within their own system.
Interest Volume
The total physical dollars of interest paid over the full term of a loan. This is contrasted with the interest rate and is identified as the key amount of "financial energy" to be recaptured.
Jelly in the Sandwich
A metaphor used by Nelson Nash to describe the interest charges and profits that are collected by a third-party finance company. Recapturing this "jelly" is a primary goal of the banking process.
Life Pay to Age 65 (L65)
A specific policy design where the contract is fully funded and considered "paid-up" once the insured reaches age 65. No further premiums can be paid into the policy after this point.
Money Pool
The large pool of capital managed by a life insurance company. Policy owners, through their premiums and loan repayments, contribute to this pool and, as co-owners, share in the net earnings it generates.
Paid-Up Additions (PUA) Rider
A feature of a whole life policy that allows the policy owner to pay flexible premiums above the base amount. These funds purchase small, fully "paid-up" blocks of death benefit, which also have cash value, thereby accelerating the policy's growth.
Parkinson's Law
In this context, a human tendency that Nelson Nash suggests one must conquer by putting money away on a repetitious basis for four to seven years without touching it, thereby building financial discipline and allowing capital to grow.
Passive Income
Money that is received without the recipient having to perform additional active work. This is presented as a desirable goal, distinct from the concept of "retirement," which Nash discouraged.
Premium Offset
A policy feature where annual dividends are used to cover the required base premium. If the dividend is not large enough, the remainder is paid by the insurance company through a partial surrender of the policy's paid-up additions.
Unilateral Binding Contract
A description of the life insurance policy, signifying that once the policy owner pays the premium, the insurance company is the party contractually bound and responsible for administering the policy according to its terms and the owner's directions.
Wealth Mentality
A way of thinking and a process taught to family members that focuses on controlling the banking function in one's life. It emphasizes transferring a process for wealth creation, not just transferring money.