Study Guide: The Infinite Banking Concept with R. Nelson Nash
Quiz Questions
Answer each question and check answers below!
1. What personal financial crisis in the late 1970s and early 1980s led Nelson Nash to re-evaluate his financial strategy?
2. According to Nash, what is the fundamental flaw in how most real estate books discuss the subject?
3. Explain Nelson Nash's concept of "financial noise" and provide one example he gives.
4. How does Nash defend the use of the term "banking" in the "Infinite Banking Concept" against critics who say it's not a bank?
5. What are the three schools of economic thought Nash mentions, and which one does he fully endorse?
6. Using Nash's analogy, how is the average American "living off a heart-lung machine" in a financial sense?
7. What does Nash identify as the primary role of actuaries in the life insurance business, and what is the lifespan they now use for their calculations?
8. Describe the hierarchy Nash establishes for how a mutual life insurance company lends money from its pool of capital.
9. How did Nelson Nash use a policy loan to take advantage of a timberland investment opportunity in 1974?
10. What is the "five factor" Nash describes, and how does he use it to argue against the common perception of inflation?
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Answer Key
1. Nelson Nash was caught with a half-million-dollar debt at 23% interest when prime rates soared to 21.5% in 1980-81. Additionally, a business partner on a real estate project went bankrupt, forcing Nash to cover his partner's $300,000 share. This crisis revealed to him that he was paying far more to banks than he was paying into his life insurance policies, a situation he realized was backward.
2. Nash states that real estate books are not actually about real estate; they are about leverage. They advocate borrowing money to buy property, paying interest for a time, and then selling, which he argues is a wonderful strategy only as long as economic conditions are favorable, as they were not for him in the early 1980s.
3. "Financial noise" is the constant stream of misinformation, myths, and downright nonsense that surrounds people and distorts their understanding of financial truth. An example he provides is an article about Walmart stockholders "losing money" during a stock drop, when in reality, they hadn't lost anything they never had unless they sold at a loss after buying at the peak.
4. Nash argues that "banking" is a concept and a modifier, not a claim that the system is a bank. He provides multiple examples of the word's common usage outside of financial institutions, such as an airplane "banking" to turn, "snow banks," "blood banks," and "food banks," to demonstrate that the term is not exclusive to commercial banks.
5. The three schools of economic thought are Keynesian (John Maynard Keynes), the Chicago School (Milton Friedman), and the Austrian School. Nash is a devoted follower of the Austrian School of economics, citing Leonard E. Reid as his mentor and Ludwig von Mises as a hero of the school.
6. Nash demonstrates that 34.5% of the average 29-year-old's after-tax income is spent on interest for cars, housing, and other financed items. He equates this constant drain of capital to the banking system to a person needing a heart-lung machine 34.5% of the time, functioning only marginally and inefficiently.
7. Actuaries are the "engineers" of the life insurance business who deal with a large, selected pool of lives to accurately predict mortality rates. They can determine how many people in that pool will die at any given time, though not specifically who. The lifespan they currently use for calculations is 121 years.
8. The hierarchy, from lowest to highest priority for access to the pool of capital, is 3) Joint ventures (like shopping centers), 2) Conventional mortgages, and 1) Policy loans to policyholders. Policy loans are at the top because they are guaranteed, carry no risk, and have minimal administrative cost.
9. A fellow pilot offered to sell Nash 100 acres of timberland and offered to finance it. Eighteen months later, the pilot needed cash and offered to discount the remaining debt if paid in a lump sum. Nash went to State Farm, took out a $3,500 policy loan in under 45 minutes, and paid off the seller, acquiring the property for less than $38 an acre.
10. The "five factor" is Nash's rule of thumb for understanding the devaluation of the dollar since the early 1960s, noting it now takes five dollars to buy what one dollar did then. He uses it to show that the prices of many goods (like chicken or cars) have actually decreased in real terms, and that the perception of everything being more expensive is "noise."
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Glossary of Key Terms
Term
Definition
Austrian School of Economics
An economic school of thought that Nash fully endorses. He identifies Leonard E. Reid as his mentor and Ludwig von Mises as a key figure. This school, he implies, understands the true nature of money and banking, unlike Keynesian or Chicago School economics.
Banking (as a concept)
As defined by Nash, banking is a process or a modifier, not a specific institution. It describes the flow and control of money. He compares it to an airplane banking, a blood bank, or a food bank to illustrate that the term has broad application beyond commercial lending institutions.
Becoming Your Own Banker
The title of Nelson Nash's first book and a core tenet of his philosophy. It is the solution to the problem of financing everything through external banking organizations by instead creating and controlling your own pool of capital through a dividend-paying whole life insurance policy.
Contingency Fund
A fund created by a mutual insurance company from a portion of the overcharged premium (the difference between what was collected and what was needed to cover costs). This fund, referred to as "jic" (just in case), is used to stabilize dividend payments during periods of poor performance, such as a business turnaround.
Dividend (in a mutual life insurance company)
A return of the over-payment on a premium, not a share of profit. Because it is a return of capital, it is not taxable income. These dividends can be taken as cash, used to reduce premiums, or, most powerfully, used to buy paid-up additional insurance.
Financial Noise
The constant stream of myths, lies, misinformation, and "downright stupidity" prevalent in the financial world that prevents people from seeing the truth. Nash argues one must develop a "financial noise cancelling headset" through knowledge to make clear decisions.
Five Factor
Nash's heuristic for comparing modern prices to those of the early 1960s to account for the devaluation of the US dollar. He states that it takes five dollars today to purchase what one dollar could in that era, and that when this is factored in, many goods have actually become cheaper.
Heart-Lung Machine (Analogy)
An analogy for the financial state of the average American. Nash calculates that 34.5% of the average person's income goes to interest payments, meaning their financial life is being sustained by an inefficient external system (banks) for a significant portion of the time, much like a patient whose heart is temporarily replaced by a machine.
Infinite Banking Concept (IBC)
An idea or a process, not a product, for how to conduct one's financial life. It is based on the premise that an individual's need for finance over their lifetime is infinite, and that by creating a "warehouse of wealth" in a dividend-paying whole life insurance policy, one can become their own banker to meet these needs.
Leverage
The practice of using borrowed capital to purchase assets, which Nash argues is the true subject of nearly all real estate books. He warns that it is a wonderful tool only so long as economic conditions are favorable and can be disastrous when interest rates rise unexpectedly.
Paid-Up Additional Insurance
Additional death benefit purchased using the policy's annual dividends. This action compounds the policy's cash value and death benefit on a tax-free basis and at no additional out-of-pocket cost.
Policy Loan
A loan taken from a mutual insurance company using the policy's cash value as collateral. Nash identifies this as the safest loan the company can make and gives the policyholder top priority in accessing the company's pool of capital. It allows the policyholder to access liquidity without paperwork, questions, or begging.