Latest / Hutch Money Minutes / Infinite Banking Policy Design: Myths, Traps & Truths Revealed

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Infinite Banking Policy Design: Myths, Traps & Truths Revealed · Hutch Money Minutes

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Hey everybody, Hutch here with Banking Truth,
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and today we're gonna take a very debated topic whole life policy design,
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optimal whole life policy design,
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which seems overly complicated,
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and I know people get stuck. I know there's lots of opinions
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out there from different agents,
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and we know what opinions are like when there's lots of them out there.
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So, what we're gonna do today is we're really gonna kind of simplify
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and boil down the most important metrics when it comes to policy design.
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So I thought it'd be great.
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To have members of the Banking Truths team who are on at the front lines designing
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these things, stress testing every different ways.
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We're gonna talk about how we design policies and how we stress test them
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for clients today. So, first let me introduce Ben Vondrak,
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my partner for over 15 years now.
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How are you doing today, Ben? Nice.
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I'm doing well. Happy to be here.
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Sweet. Bryan, Bryan Nelson, ~ no relation to Nelson Nash,
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but Bryan Nelson in Tennessee.
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He's been with us since twenty nineteen.
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How's it going, Bryan?
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Hey guys, yeah, pretty good. Thanks for having me.
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Of course. so let's talk about this.
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I want to first start out that there's a misconception with infinite banking agents
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oftentimes that says, ~ you know,
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the product doesn't matter. It's just the strategy.
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And if you execute the strategy well enough,
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it it doesn't even matter that much about the product,
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right? And it's all about the philosophy.
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And we hear that echo with clients where they're either looking at a policy.
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Or they already have a policy and we're like,
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this thing's a dog. And they're like,
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well, it doesn't even matter because I'm lending to do X,
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Y, and Z, and that's doing so good.
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So therefore it doesn't matter how the policy is doing.
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And I'm pretty sure like it couldn't be farther from the truth.
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What what say you about that, Ben?
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I mean it's so true. Like at the end of the day,
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if you're doing so great with your investments and then the other side
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of the fence with your policy is causing you to lose money,
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it's kind of one foot on the gas and one foot on the brake.
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I mean, they're so focused on optimizing their returns for their investing that
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why wouldn't you wanna optimize the other side with your policy as well?
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I mean, when they're working
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It's
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well in tandem, that's the way to do it.
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That's a great point. And you know,
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I think I think part of the reason why is because people are,
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it's confusing to them, right?
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It it like hogs, RAM, they don't want to deal with it.
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But what they don't realize is if they deal with ethical experts from the beginning,
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we actually do that from the jump.
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Not only that, but we educate them about why we're moving different levers,
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why we're choosing certain companies,
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why we're choosing certain design patterns to optimize it for them.
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So then when they have to revisit it,
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if life changes.
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And we have to make adjustments.
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It does, it's not so taxing on their brain because we've educated them up front.
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~ and Bryan, I know we're gonna talk about like all the different ways
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we do policies, but I know that's like one of your beef with competing agents.
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Like a lot of these agents, they're not even,
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they're showing like one illustration,
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they're just getting people in underwriting,
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showing no illustrations, like,
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yeah, it doesn't even matter. We got you,
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right? Like, how do you feel about that?
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Well, I mean, the way I feel is that what they're they're really good
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at is getting you excited about how it works.
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Like having an asset that compounds and you can borrow against it while
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it keeps compounding. If you die,
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you get that death benefit instead of whatever cash was just sitting in the bank.
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And so they're they're really tugging on people's heartstrings,
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their emotions. And why that bothers me is because they're they're doing that
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and then they're sliding some,
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you know, low-tier company, often poor design.
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Yeah d don't hold back. Well it's trash,
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Yeah. It's garbage. Like I
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right?
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would it's absolute garbage, honestly.
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Yeah. Yeah.
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Like we
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we've seen like so you like, you know,
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if you're in any kind of sales business or whatever,
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like you can compete against your competitor and it's usually pretty close.
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Like oftentimes we're beating these guys by like six figures on cash value.
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Like we're crushing it with the top two companies.
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And so it's not even I don't wanna,
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you know, people think I'm exaggerating right now.
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Like it's absolutely like malpractice in my opinion.
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For sure. And we see it all the time.
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Like essentially, and and what you said about getting people kind of worked
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up into a tizzy, it reminds me like if you've ever done kind of
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any kind of motivational seminars or like you write,
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they get you all like worked up and excited,
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and then you kind of see them getting set up in the back of the room
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to sign people up. And that's kind of like the infinite banking model.
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Like, ~ is is to get people all excited about the concept,
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and people are just done, they're pre-sold,
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and then they just kind of slide in this trash.
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People don't question it because they're so excited about the thing.
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And really it like it is a math problem at the end of the day,
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and it and it is complicated. So let's start to kind of unpack the different levers,
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if you will. Let's unpack the different factors that can really make
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or break your design. Because,
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you know, Ben, like we just got emailed by a client who,
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you know, we found and he was nine years into one of these policies
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and was max borrowing. And meanwhile,
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like something that was like super high-early cash,
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those things tend to peter out on the back end.
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It was starting to converge where he was really circling the drain and
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he only had like a couple revolutions to go.
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And this thing was gonna blow up.
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And he was like, Well, wait, that's not that's not what they told me about,
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right? That's not what I read about in the book.
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And and no shade to Nelson because everything that Nelson said,
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right, is accurate. And he it if really,
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if you look at the book, it is kind of inspirational.
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It reads more like kind of a rant and less like an operator's owner's manual.
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And that was frustrating me when I got started because I like
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I actually called Nelson and talked to him on the phone.
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But like I wasn't getting a lot for policy design and they didn't have
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the training back then. ~ I'm not I still haven't done the training.
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I'm not sure what they're teaching.
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And I know they have good principles,
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but it seems like a lot of the people where we see they're authorized or whatever,
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like they're just kind of doing that model,
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getting people excited, and then just trying to kind of slide in whatever they
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can get away with. And that that is kind of how insurance
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Is shrouded a lot of times. Like there's so many different levers.
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So the first one is the high-early cash thing,
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right? Like, let's just hit this head on because a lot of times,
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even from like our top two companies,
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like it's been this way for the last over a decade.
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Like the top two companies are Mass Mutual,
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Penn Mutual, and Mass Mutual has a policy type called the High-early Cash.
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And a lot of times we'll show clients this.
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Like, if you really, really want this.
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If you want this extra 10 grand in year three,
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right? And we're talking on like $50,000 premiums,
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is that worth giving up $150,000 at year 12 or whatever,
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and 800 grand by year 30? And like most of the time it's not.
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Like if it makes or breaks you in the early years,
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like needing that extra 10 grand,
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probably you're just getting oversold a policy.
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And I think we're one of the only groups that will oftentimes downsell.
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Like everybody's looking to kind of upsell.
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Is to downsell and say, like, look,
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you're not really ready for all of this yet.
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And if you need that much high-early cash,
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it's my trick question which financial product has a high-early cash?
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It's not an insurance product,
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it's cash. It always has 100% high-early cash value.
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And so if you need that, maybe we start with the smaller policy that
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you can grow into. ~
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And and so that one's pretty self-explanatory,
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but that gets into the topic of flexibility,
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right? And I've noticed that a couple of my competitors have put out videos,
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like really detailed videos about flexibility.
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But like honestly, going back to our top two companies,
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~ why don't you tell us about that,
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Ben? Like, like Penn is more flexible than mass,
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but it's not that huge of a difference.
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Talk to us about that a little bit.
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Yeah, I mean at the end of the day,
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you want to do a policy that you can fund sustainably.
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So that means shooting for the top end of the funding limit as early and
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as often as you possibly can.
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just to clarify everybody, when we say top two companies,
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Penn and Mass, Penn really has one product that's very flexible.
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You can design it in a variety of ways.
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Mass has of over five products.
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And so it's not like they're all the top performing.
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Really, only a couple are. So you really have to be careful,
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even if you're with mass or getting a quote from Mass,
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you still want to get a second opinion on it to make sure that they've picked out.
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their highest performing products for cash value.
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And it's not just that, it's what we talked about too.
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How you design it, like what like once you open up the hood,
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right? Just like there's lots of Hondas,
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there's lots of Porsches, right?
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What's under the hood really makes a difference?
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And there's a lot of shrouding that happens at that level.
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~ so Ben, when the other thing that this is a good dovetail to flexibility,
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because I know that is really important to people.
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And like even in Nelson's book,
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like this is one of the things that often causes confusions.
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When when he says,
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Hey, you know, whatever you're gonna pay for that car loan,
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even if it's more than the policy loan,
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you wanna pay back what you were that extra you're gonna pay for the
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car loan and put it into the policy.
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And that sounds great on paper.
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However, people want flexibility.
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If we just look at those top two competitors,
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let's just boil down flexibility for people.
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So talk to us about.
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Yeah, I mean at the end of the day,
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you want a policy that's going to be flexible enough for your situation
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so it's sustainable. You can fund it at those top levels as early and
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as often as possible. So it's not just one time and done,
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like some of our competitors say,
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like throw in this huge amount and then just pay this little amount.
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No, you want to shoot for funding that top end often.
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And so flexibility though, you do have a lot of space to the bottom.
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The idea is you want to design a policy where you can fund to the top as much
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as you can. But all you're really on the hook for is call it 20,
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25% of whatever that top-end number is.
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And yeah, maybe you have to get to the top every three to five years.
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But if you can't do that, you're doing too big of a policy,
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anyways. And
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Right.
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so we would rather see you do a policy that's a little smaller that
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you can actually hit those top tiers and top level.
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And optimize
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it.
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And yeah, you'll optimize it and you'll see a lot more liquidity on
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the money you're putting towards this than
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Yeah, so
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I I talk about the field goal,
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but Ben's right, it's top and bottom.
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So imagine a field goal post, one of those big yellow field goal posts,
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and there's a minimum and a maximum.
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It's better if we could turn it over this way,
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right? Here's the minimum, here's the maximum.
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But as long as you get in there,
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you're gonna get three points.
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And you can't you football teams don't win win win games kicking a bunch
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of field goals. Occasionally they do,
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but to Ben's point, like our rule of thumb is if you can get four out
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of every seven years.
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Max funded or close to it, that thing's gonna be performing close to optimal.
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And obviously, the earlier you do it,
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the better. Those PUAs are gonna be better.
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~ but if you can't do that, you can only do three,
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it's still pretty good. And so life does happen and people do need that flexibility.
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But you should understand what your range is for that maximum and minimum.
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But you're right, Ben. We see a lot of I just call them lumpy premiums,
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whether it's a big dump in, it's some special rider,
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right? Like, this company has a special rider where you can put in.
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So much. It's not. It's just a really,
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really big term rider, right? And you can do that with any company.
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We see that all the time. And all that does,
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guys, is you think you're front loading for you,
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but if you have this one big lumpy premium and you're not backfilling that close
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to that level, you are front loading for your agent,
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right? Because in order to fill that big of a policy or that much of
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a premium in year one, you need a lot more death benefit.
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And only some of that can be
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Term and the rest has to be base.
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And there's usually a ratio depending on these companies.
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And we are going to talk about the 1090s and the 2080s and the 40s,
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60s, and all that fun stuff. But really,
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there's always a ratio. And so if you're buying a bigger,
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I explained it this way the other day.
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It's like sometimes you see a semi-truck going down the road and it's
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got like a flatbed trailer and there's like one pallet on there,
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right?
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But if you like fill that thing up full and it's got a full trailer
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and only one trip, it's full, and on the way back,
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there's like one or two pallets.
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Like, how are you doing with those fuel costs?
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You're kind of adding to the fuel costs.
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And so you don't want to do that.
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And so maybe you want to break up instead of one big trailer,
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break that up over two, three,
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four years. We have videos about this where it shows it does take
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a little while longer to get your money in working for you,
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which I realize is part of the
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Urgency pitch, you hear you got get your money working for you.
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Usually the people saying that they mean you got to get your money working for me.
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And you got to get it in there quicker.
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~ but by doing a smaller policy and spreading that out,
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again, there is a sweet spot between two and four years.
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You can do a smaller policy, and so the whole thing is going to perform better.
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And I kind of understand the urgency,
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like last decade when savings account rates started with a dot.
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But nowadays, when you can get three or four percent,
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like granted, it's not as good as what you can get with a well-seasoned policy,
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it's still exposed to tax, but you're still getting something for that money that's
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not working for you, to where you don't need to have this urgency to have
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all this untested, right? To just see an illustration and go,
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okay, cool, I'm gonna dump in everything with my savings account,
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do 90,000 year one, and then do.
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20,000 every year after or 50,000 year one and then 25s thereafter.
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And we see that, we see that design a lot.
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Any kind of lumpy design like that,
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it's as my kids would say, that's sus.
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Dad, that is sus. So if you see that,
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definitely check this out. And by the way,
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the end game of all this is if you have any questions,
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you can always email me, hutch@bankingtruths.com.
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You can go to our schedule page,
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bankingtruths.com/slash schedule.
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We've actually built a self-service policy x-ray where we've uploaded tons
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of policy data. And essentially AI can look at what you're uploading and it's
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all on your screen, right? Where it looks at what you're uploading
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and it's showing you like, look,
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if you put in those same premiums,
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this is kind of what you should be getting.
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And if it's less, it has graphs,
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it has tables. If it's less, you should probably get a second opinion.
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but anyway, let's move on with other myths.
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~ so we do let's talk about the 10/90 stuff because
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I know like people have like like beat that to a dead horse.
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Like it's so important. And so it's answering the wrong question correctly.
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Bryan, do you want to address the whole 10/90 thing?
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Yeah, yeah. So it it's true that when we design policies,
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we are solving for minimum base.
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So that so that part is true. But you don't have to have exactly a 1090.
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Some companies Well
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Well, you can't always get it,
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right?
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that well, that's what I was gonna say.
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It's like what you want is you want the minimum base per the product.
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So am I am I gonna go out to the market and go,
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what companies have 1090? Give me one of those.
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No, I'm gonna go
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To the top performing products,
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and I'm gonna design those products with a minimum base.
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It might be 1090, it might be 15/85.
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It's in con it doesn't matter.
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It might be twelve eighty eight,
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it might be thirteen. Yeah.
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Yeah, the
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the point is that we're looking at more than just blend.
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We're looking at like there's the dividend,
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there's the the ~ strength of the base,
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right? There's the guaranteed rate.
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Some companies are two, some are three.
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And so at the end of the day, we're looking at long-term cash value.
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We're not looking at in something inside the policy.
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obviously we want a design for efficiency,
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but we don't get hung up on having a ten ninety instead of a 12/88.
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It doesn't matter at the end of the day.
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You want minimum base per the top product.
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It's it's very well put. So I think I I've said it in my video.
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We have a video about this. It's not like people are trying to tell
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you it's the quantity of ingredients that matter more.
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And what I say is it's the quality of ingredients.
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To Bryan's point, yes, most of our clients want to do the minimum solve
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for the minimum base and the maximum term rider that allows them to
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put in the maximum PUAs. And sometimes we can get to a 1090.
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It's usually for very, very young people.
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But as you get older, as the rating changes,
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sometimes the best we could do is a 1288,
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a 1387, but it still outperforms the only company that does a true 1090.
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And there's another company that's not even a true mutual company,
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a mutual holding company that gets to like 1189 and has high-early cash value.
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But you look in those later years and it's a dog.
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~ and to Bryan's point, there's lots of other factors.
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Like people want just simplified ratios to latch onto,
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like,
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1090, good. High dividend rate,
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good, right? And it's because this stuff's so confusing.
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But the way Bryan told you exactly how to do it,
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you do apples to apples comparison.
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Let's look at money's in money in,
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dollars in this policy, cash value death benefit out,
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loans out, but just equalize the ins and outs,
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equalize the cash flows and look at the performance.
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That is absolutely the way to do it because it's not just the quantity
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of those ratios, it's the quality.
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Most people don't realize this,
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but paid up additions are like,
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I don't want base. I want paid up additions.
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Here's a little secret, people.
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Paid up additions are really just miniature little whole life policies that
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are paid up in one shot. Certain carriers actually sell something called
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a single premium whole life policy.
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If you buy it, it's a MEC, which isn't always a bad thing.
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I'm not recommending you do it.
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But if you get a single, like standalone single premium whole life,
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it MECs. The
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Okay.
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reason why PUAs don't is because they're stacked onto a regular policy.
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And the reasons why sometimes you can disproportionately stack it
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is because you have a term rider,
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because the IRS needs to see a lot of total death benefit.
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They don't care whether it's base or term.
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They they determine how much PUAs by how much total death benefit is there.
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But to go and
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Look for the ratio of exactly 10/90 or 11/89.
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That's better than a 12/88. But the quality of the base
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is trash or underperforming, which means the quality of the PUAs is underperforming.
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Just because you got more of them doesn't mean it's good.
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And you guys have done this at restaurants,
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right? Like you go to a place and you're like,
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Cool, I'm getting steak or carne asada.
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Yeah, it's almost like dog food grade.
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But you're getting steak. Like you want to go to the higher quality,
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right? Even if the proportions of steak or the amount of steak you're getting isn't
18:50
as good. ~ that's probably all we need to say on that,
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unless you guys have anything else.
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I I think that's good and I think what Bryan hit on is it.
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You want a blended policy, but you want the best result possible.
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So whatever way you get there,
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that's what you should focus on.
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Not which one has the highest blend,
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it's which one produces the most for you.
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And you know what? Come to think of it,
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this does tie back to flexibility.
19:14
Like Mass Mutual's flagship product is their 10 pay.
19:18
So we like the lowest you can get on that is like a 2080 because a 10 pay naturally,
19:24
like you're putting in a lifetime worth of premium.
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Like with the PUA, you're putting a lifetime's worth of premium into
19:30
one single little mini premium.
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A 10 pay policy, that's what they're doing,
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is they're they're putting in a present value of all the future premiums into
19:37
the first 10 years.
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So you can't even get it close to 10.
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You have to do like a 2080. Sometimes it's a 2278.
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I think a couple of times we've seen like 1981,
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but it doesn't matter. The quality of that base is so rich and robust that it's
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almost like there's a lot of PUAs in there.
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So does it matter that the base ratio is less?
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No, it comes down to what Ben's saying.
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And that also ties into flexibility.
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You wouldn't do that if flexibility is concerning for you,
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right? Because it's like, wow,
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if I have a bad year.
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I have to pay almost double what I may have to pay a flexible policy.
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And so I, you know, I don't necessarily want to do that.
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And let's close the loop on this PUA flexibility because I,
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like I said, there's a couple videos.
20:21
It's like this, people, like because there was some misinformation in the video.
20:25
Mass, you must fund every three years,
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not two. You have to fund every three years.
20:33
You have to do your maximum.
20:35
Every three years. And if you don't,
20:37
it's use it or lose it. Also with mass,
20:40
you have you can't limp in and kind of ramp up.
20:44
You have to come in strong. Whatever you want your max PUA to be,
20:47
you have to do that year one. And so if you need to kind of limp in and ramp up,
20:52
the opposite of a dump in, or if you ~ you are worried,
20:57
like you don't know if you all that cash flow is going to come in over
21:00
the next 12 months, either you need a smaller mass policy.
21:04
Or you need to go with the flexible policy,
21:06
which would be Penn, and the next most flexible would be Guardian.
21:09
Good company. It just we just can't get it to perform well enough.
21:12
I know like I love Guardian. Ben and I met at Guardian ~ two decades ago,
21:19
right? but at any rate.
21:21
Your
21:22
first whole life policies and mine were guardian.
21:24
That's right.
21:25
That's right. Still got them. ~ but at any rate,
21:29
what's I've heard they're actually coming out with a new product.
21:32
And like, that's the other thing is their PUA load is 10% in all years.
21:36
So even if you do 1090, right,
21:39
you can do a two true 10/90 there.
21:41
If you have to pay all those extra PUA loads,
21:43
like nobody told you about that,
21:45
right? Versus like Penn is 10% for the PUA load in year one,
21:49
then for all other years it's six.
21:51
So sometimes people like to limp in.
21:54
Or ramp up into Penn, although we can show them like you're better
21:56
off front loading than not. ~ and masses PUA load for the 10-pay is seven
22:01
and a half. It's so you're splitting the difference,
22:03
right? ~ and if you get the high-early cash or you get like an L100,
22:08
whatever, something more flexible,
22:10
it is back to 10%. So those don't perform as well as the true 10 pay.
22:15
~
22:17
Let's let's just address mutual versus mutual holding companies because obviously
22:21
Mass and Penn. Mass is the 800-pound gorilla,
22:25
big mutual company, ~ very highly rated.
22:30
~ Penn is the second oldest mutual company,
22:34
smaller but fastest growing. And some people,
22:36
you know, say, like, well, wait a second,
22:38
I I like really big, and big is awesome.
22:40
but a Penn wholesaler actually told me this,
22:43
and it makes sense that.
22:45
You know, with the smaller company,
22:46
it's almost like small cap stocks.
22:48
It's kind of easier to get lift when they make good investments.
22:51
And that's really what Penn's done consistently for over the last two decades.
22:56
Is when they make really good investments,
22:58
they're able to provide more lift across a smaller policy holder base.
23:02
And by the way, they're not that small.
23:04
Like they're they're as big as like ~ they're a little bit bigger than eBay
23:08
and I believe Southwest Airlines.
23:09
Mass Mutual is like the size of Apple,
23:11
right?
23:12
Some of these mutual holding companies,
23:14
you look at them, they're like Lululemon,
23:15
right? Like, like not not a not a bad company,
23:19
right? But not that big, like a lot smaller.
23:21
And so the main thing though isn't so much the size,
23:25
right? Or even the ratings, because everybody can say,
23:28
like, all these companies are very highly rated.
23:30
Until they're not, like Ohio National wasn't.
23:32
And they were the biggest mutual holding company of last decade.
23:36
And and if you would ask me last decade,
23:40
Hey, what's the chances that they demutualize,
23:43
have distressed ~ situations and kind of screw over their policy holders
23:49
to get bailed out? Like I would have said it's less than a 1% chance,
23:52
but it happened. And one of the concerns was of ours is that they weren't
23:57
a true mutual company. That Ohio National was actually like they were
24:02
a stock company. And when you bought a policy,
24:05
the company that issued your paper and
24:07
Collected your premiums and paid your dividend was a stock company that they already
24:11
pre-spun off because they had thought about demutualization and you were part owner
24:16
in the mutual holding company.
24:17
So those policyholders did get a buyout.
24:20
They got a cash buyout versus the big demutualizations that happened,
24:24
like a big wave of them around the late 1900s and early 2000s.
24:30
~ those were went public, IPO.
24:33
And so those policyholders, before I met Ben at Guardian,
24:36
I worked at Prudential.
24:37
Those policyholders got stock,
24:39
and that stock did pretty well.
24:40
So it was like they kept their equity component in the company,
24:43
which is one of the great things about buying whole life,
24:45
is you actually have an equity component in one of the most solvent financial
24:51
companies in America, regardless of which of the true mutuals you get.
24:55
And so keeping that equity component is huge.
24:58
And that's what happened with Ohio National.
25:00
They didn't get the equity component.
25:02
They got a cash buyout, and then they got lackluster policies versus
25:05
the old PRU policies.
25:07
Yes, those whole life policies got watered down,
25:09
but they made up for it with this equity component that also paid dividends along
25:13
with this with this policy. So nobody wants their company to demutualize,
25:17
but if they do, you want them to do it the right way.
25:20
And so like Pru, MetLife, John Hancock,
25:22
they all demutualized, but they were massive.
25:24
They were like mass mutual size.
25:26
They were huge, right? ~ and so another concern about a mutual holding company
25:32
is since it has this stock company component,
25:34
if for whatever reason they have to get absorbed.
25:37
Like Penn Mutual could get absorbed by Guardian,
25:40
by Mass Mutual, by New York Life,
25:42
because they're a true mutual.
25:44
I'm not saying they're going to.
25:45
I'm just saying theoretically they could.
25:46
But a mutual holding company that has a stock component,
25:49
they cannot. Because it's a stock company.
25:53
They cannot take on this stock company.
25:55
They would actually have to have the distress company or the acquired company
25:59
go kind of re-mutualize before demutualizing,
26:03
which is crazy. And so that's why.
26:06
The exit strategy we saw was one of the reasons why it was less than favorable.
26:10
And so it'd be one thing if like clients got some big benefit from one
26:15
of the mutual holding companies that are still standing out there.
26:18
Like, but the like there's not nothing there.
26:21
The only thing there that you occasionally see is slightly higher cash value year
26:26
one, like what with what we talked about at the beginning of the the call,
26:29
is that often results in like exponentially less cash value later on.
26:35
And so people might say, again,
26:37
well, I don't care. I just need max cash value to go do my real estate,
26:41
to go do my private lending, to go do whatever.
26:43
Sure. Or you could just do a smaller,
26:46
better performing policy and have it grow into it.
26:48
And so have it so it can receive the spoils of that activity then and just
26:52
use some of the cash. We would get paid less,
26:55
but that's okay. We make it up in volume.
26:57
That's been that's been our attitude and that's been our stance since
27:01
the beginning of starting banking truths when Ben and I started is.
27:04
Let's not play games. Let's not beat around the bush.
27:07
Let's not try and bake in extra fat here and there.
27:09
Let's just show the best, most commoditized,
27:13
commoditized thing that the client wants,
27:16
what they're trying to solve for.
27:17
And usually that's cash value.
27:18
And it's great. We've had that stance for a decade and a half now.
27:23
that's when we started banking Truths,
27:26
and we haven't changed our story.
27:27
And AI might change it up for all of us here soon.
27:31
But if you're gonna start a policy now,
27:32
you still need to go through humans.
27:34
and so what I would say is definitely get a second opinion,
27:39
definitely take a look. I I want to hit a couple things really quick,
27:42
direct versus non-direct recognition,
27:44
because my gosh, the the the the the stuff we hear about,
27:48
it's almost like people argue about politics.
27:50
and then also just kind of what people can expect when we do show,
27:54
when we do design things for people.
27:56
What do you got on direct recognition,
27:58
bro?
27:59
Yeah, you know, I want to close the loop on your last topic.
28:02
And it's all about like risk reward,
28:04
right? To put it in terms of like what people are familiar with.
28:06
You're taking more risk with the mutual holding,
28:10
but it's less reward. It's not like a small cap stock where it's like,
28:13
but I might make more. No. These things
28:15
Mm.
28:16
are underperforming and they're not high quality mutuals.
28:19
So it's that's where it's we're scratching our head.
28:21
Like, why? Why would you do it?
28:23
So well
28:23
And we know the answer. Why why are most people getting mutual
28:26
holding companies?
28:26
And so that
28:26
it actually leads me well yeah,
28:27
it's the agent is pushing these products,
28:29
Because that's the only thing they're being shown.
28:29
but it leads me in fact.
28:31
And they're be getting sold
28:32
like we've talked about, like this wonderful,
28:33
heartwarming story, the frothy emotional appeal,
28:37
right? And then that's the only thing they're
28:38
Well yeah.
28:38
being shown and they're biting hook,
28:40
line, and sinker unbeknownst to them.
28:41
Yeah. Well a couple of things
28:42
~
28:43
are happening. Number one, they sometimes don't even remember what company they
28:46
applied to. When I when I ask they say,
28:48
Well, the guy just said I have to get approved before he'll show me any numbers.
28:51
And I'm like, Well, which company?
28:52
I don't I don't remember. Like they don't even know the company because they've
28:55
bought into the concept. They haven't seen the numbers.
28:57
So that's one red flag. Both of the a lot of the
28:59
Charming personalities.
29:00
Sometimes there's some really charming personalities there on TikTok.
29:04
Yeah. Go
29:04
Exactly. Yeah.
29:05
on.
29:05
But also these companies are non direct.
29:07
And so it's like, hey, why would you ever want your dividend to be to be different?
29:11
Right? Like if you go direct, they're gonna punish you when you borrow.
29:15
You're gonna get less dividends.
29:16
That's a half truth. You may get less dividends,
29:19
but if the loan rate is higher than the dividend rate,
29:23
you can act you can get more dividends.
29:25
And so you will get more dividends.
29:26
You will you will get more. It's in the contract.
29:29
Right. So they're they're kind of telling you a half truth.
29:32
~ and what happens with non direct is when they raise the loan rate,
29:37
you're actually getting punished because you're you're not getting
29:40
the increased dividend. So they're not telling you the whole the whole truth.
29:44
I mean, we have a whole video on it so we can get into the weeds here,
29:46
Yeah, but that but that's actually
29:47
but I mean
29:47
happening now. Like one of the most popular non direct recognition companies,
29:51
which if you look at their balance sheet,
29:53
they have like more than double the amount of policy loans than
29:56
the other true mutual carriers because they're it they're really pushing infinite
30:00
banking, really pushing policy loans,
30:02
and their loan rate is substantially higher than everybody else's.
30:07
And so the clients, I don't I'm wondering what the agents,
30:11
if they go back and tell the clients,
30:12
like, hey.
30:13
By the way, you may want to pay down some of this loan because it's it's
30:16
not working for you. It's literally working against you.
30:19
It's literally working against you now.
30:21
So we need to pay
30:21
Well
30:22
down some of these loans.
30:23
and what's happening is they're not disclosing the loan rate.
30:26
Now I I can't make a blanket statement that agents aren't ever doing it,
30:30
But you've heard that from
30:30
but I can just
30:30
clients. You ask them what the loan rate is and they don't know,
30:33
right?
30:33
So all yes, all I can speak is from personal conversations.
30:37
When I ask clients like, Okay,
30:39
you're looking at this policy,
30:40
w what's the loan rate? They they have no idea.
30:43
They don't know. They
30:43
And and so
30:44
heard, like, hey, borrowing against it.
30:45
I'm gonna get this magic arbitrage,
30:46
like always and forever, right?
30:48
Not realizing that the game changed when interest rates raised,
30:51
and all of a sudden the loan rate that used to be five became seven,
30:54
and now it's come back down in the sixes,
30:56
right? And clients are just getting hammered.
30:58
They don't realize it. And that's why,
31:00
like, the client that talked to Ben and I that had this policy for
31:03
a decade didn't realize, like,
31:04
bro, this thing's almost dead,
31:06
right? Like, you're gonna have to do something.
31:08
And he's like, Well, wait, I the story I was told,
31:11
and so.
31:12
If you have big policies and big policy loans,
31:14
you should take a look at it right now because it might be you might be like
31:19
on a plane on the way to Hawaii.
31:22
You just left LAX, you got enough gas to get to Vegas,
31:26
right? And you're out over Catalina thinking you're gonna get to Hawaii
31:30
and you're not. But once you get too far,
31:32
you're dead. You don't even know it yet.
31:34
Like you can't get back and you can't get there.
31:37
Right. And so like it's
31:38
It's time to get that second opinion if you didn't to realize what
31:43
I have isn't going to do what I want.
31:45
~ and just going back to the direct recognition,
31:49
the other thing about mutual holding companies is the most competitive line
31:53
of credit companies, you people won't realize,
31:55
but just like a HELOC, a home equity line of credit,
31:57
you can get a cash value line of credit.
31:59
Now, the most competitive ones,
32:01
they only accept the true mutuals,
32:02
right? They're not even accepting the mutual holding companies,
32:05
which is why you don't hear about that very often,
32:07
or you hear like,
32:08
Nelson Nash had to get off the banking system.
32:10
That's all fine and good. And I wish we could have.
32:13
But let's face it, you have to pay your premium from a bank
32:17
to an insurance company's bank.
32:19
And if you want a loan, they have to take it from their bank and send
32:21
it to your bank. So that didn't happen,
32:23
right? They're not going to accept Bitcoin.
32:25
They're not going to accept small unmarked bills.
32:27
They're not going to send you a briefcase when you take a policy loan.
32:30
So we didn't get off the banking system.
32:31
So what we need to do is cut out banks when they're not good.
32:35
They're not good savings vehicles.
32:37
And use banks for what they're really good for,
32:39
which is lending vehicles. And so even when,
32:41
like I love direct recognition,
32:43
every one of my policies is direct recognition,
32:46
even my mass, a lot of people don't realize,
32:47
but with mass, you can choose direct or non-direct at the onset.
32:51
I chose direct on purpose. And people said I was crazy,
32:55
but I'd rather always control my cost to borrow if I can get my alpha
32:58
on the outside. And there was a period of math with mass in the
33:01
80s where interest rate spike,
33:04
kind of like what's what's been happening now,
33:05
where
33:06
Prevailing interest rates spiked above dividend rates.
33:09
And if I had non-direct or I have non-direct,
33:11
I'm not going to get my dividend pulled up versus my direct recognition policies,
33:15
that will happen. But what's interesting is for the last three years,
33:19
since interest rates have gone up,
33:21
we've always been able to find our clients lower cash value line of credit rates.
33:26
A lot of times they're promotional rates,
33:27
but there's so many of these cash value line of credit companies competing now.
33:32
That we can actually do that. We can help shop around and move it and
33:35
get them a year promotional rate.
33:36
It may not happen forever, but we like to find the lowest loan rates
33:41
and then use the safety of the direct recognition as a backstop.
33:45
Ben, talk to us about design.
33:48
So client comes to you. I we like to call it like say we have a client named Jack,
33:53
a tale of four Jack.
33:55
Jacks, a tale of three jacks, whatever that looks like.
33:58
We like to show a range, the same policy with the range,
34:00
going back to what we were talking about with the flexibility.
34:03
Talk to them about what we do here at Banking Truths.
34:05
It's more work for us, but what do we do?
34:09
It's like Bryan talked about. We we run into clients who've been
34:12
sp talking to another agent and they're like,
34:14
no, I I'm in underwriting, I'm approved for the policy.
34:17
Like, what company? I don't know.
34:19
well what show me an illustration.
34:21
~ no, I haven't gotten to see that yet.
34:23
No, they say once I'm approved.
34:25
I'm like, whoa. So what we want to do is we want everyone to
34:30
be confident and comfortable in the policy they're buying.
34:33
So to do that.
34:35
We want to walk them through the ifs,
34:37
ands, or buts around their policy design,
34:39
why it's structured the way they are.
34:40
And how how do you do that?
34:41
So what we do is we design the policy around the cash flows and
34:46
the word problem that they're presenting to us.
34:48
And then we show them what can happen if things change.
34:51
Because life happens. We might have our plan to put an X amount
34:54
of dollars every year for the next 20 years.
34:56
And that might end, and we might not be able to do that.
35:00
So we show them flexibility where maybe they start funding at this level.
35:04
And they gotta scale back to here.
35:06
And we show them what the policy looks like if that happens.
35:09
Or
35:09
Mm-hmm.
35:09
maybe they have a real estate job and some years they're making tons of money,
35:14
and other years the market's not too good and they aren't making much.
35:17
And we show them how much flexibility they have in those paid up additions,
35:21
like we've talked about here on this call.
35:22
well.
35:23
So so it's kind
35:23
of like moving the goalposts, like like with that flexibility and getting
35:27
to know them and the potential of like really good times and really bad times,
35:30
we kind of move those goalposts and show them like,
35:33
hey, this is kind of your strike zone.
35:35
And then we
35:35
We did.
35:36
let them choose. So essentially we show them fully max funded,
35:39
fully optimal. If everything goes great,
35:42
versus hey, if everything just you get this policy and then your whole economic
35:47
world goes to hell in a handbasket.
35:49
This is kind of what you're on the hook for to keep it going.
35:52
We we even have a name for it.
35:53
What do we call that?
35:54
Yeah.
35:55
We call it Armageddon. So we have full max efficiency,
35:59
right? For as many years as you possibly can before the policy just goes like,
36:03
it's it. The IRS just says you can't put any more in this thing,
36:05
right? And then we have Armageddon,
36:09
which is just like the day after you get the policy,
36:12
like just everything goes to hell.
36:13
Like and you have to ramp this thing down.
36:15
It's actually pretty good. Like you just kind of ramp down and pay like
36:18
one max premium.
36:19
Usually a half max premium, then just the minimum for five years.
36:22
And then we do an RPU. It looks good,
36:24
right? Like it
36:25
Yeah. I mean it's
36:26
not not what you're shooting for,
36:27
but it's not a bad asset to own it up.
36:28
But it still works.
36:29
It's just like what I say all the time put in more,
36:31
get more, put in less, get less.
36:33
But we can optimize around anything as long as we're kind of within the strike zone.
36:37
It's kind of like the football teams,
36:38
how they have to move it with the hash.
36:39
That's what we do on the design front.
36:41
And what's interesting is most people focus 99% on that.
36:46
Like, what if, what if, what if,
36:48
what if, what if everything goes terrible?
36:50
And it's because it's this is new and it's foreign to them and they're scared.
36:53
And I get that. They don't spend enough time over here.
36:56
What if things go right? But Bryan,
36:57
We have a different one we do call limp in or ramp up,
37:01
right? And they're two kind of different things.
37:03
Like what if things go great? It's like,
37:04
it's kind of like what they say in Jaws,
37:06
like we're gonna need a bigger boat,
37:08
right? Like what if things go great?
37:09
Is this a big enough policy? Talk to us about that.
37:13
Yeah, exactly. So like what we said earlier in the in the podcast is we
37:16
we want to shoot for max funding,
37:18
right? So if you can't do four of the first three or four of the first seven years,
37:22
it it might be too big of a policy.
37:24
But occasionally people say, Yeah,
37:26
but I'm gonna sell this house in like a year,
37:28
or I know I'm gonna get this raise,
37:29
or or my wife's going back to work.
37:31
We had some kids, but she's going back to her teaching job.
37:34
We got an extra 50k of salary.
37:35
Like, where am I gonna put that?
37:36
So when you have some com a decent amount of confidence in your cash flows,
37:41
what we'll often do is like.
37:43
~ a policy that can hold say 60k,
37:46
but you start it with 40 for a couple of years,
37:48
maybe. And then as you're building those cash flows or as you're liquidating assets,
37:53
then you maybe get to 50 for a year,
37:55
and then you finally get to 60,
37:56
and then you keep funding at that 60k.
37:59
And what we find is you're not giving up of that much efficiency,
38:02
~ even if your plan doesn't work out.
38:04
So let's say you want to do you know 40k and ramp to 60.
38:08
And you never get to the sixty 'cause your wife said,
38:11
Forget it, I'm not going back to teaching.
38:12
I wanna just be with my own kids,
38:14
right? Or whatever happens.
38:15
You you
38:15
you don't even get to the 50. Like when we run a 40,
38:18
when we run a 60k that can fit 60 and you just do straight 40s,
38:22
like again, you started this thing and then you just never do it.
38:25
We're finding that like at year 20,
38:28
you're missing like one and a half to two and a half percent of your total cash
38:31
value. Not one to two and a half percent a year compounded.
38:34
Like it's like if you could have got to 250,000,
38:38
like the other one will have like two percent less than that,
38:41
right? Like it's it's very small,
38:43
correct?
38:44
Yeah, exactly. So what what we found is it's not even that bad,
38:47
right? So you you plan for the best,
38:49
but if it ends up, you know, not being exactly what you had hoped for,
38:52
you're not necessarily like in in bad shape.
38:55
You still have really highly efficient policy.
38:57
And just to put a bow around the Nelson Nash thing,
39:00
that is the only way if you want to put in more,
39:03
or you want to take say you were going to get an eight percent loan
39:06
and the policy loan's only five and a half,
39:08
but you want to pay eight percent.
39:09
That's the only way you can do it is if you build up a bigger policy.
39:12
Now, there's points of diminishing returns,
39:15
and I think your example is is kind of where we found the line.
39:18
Like you you could do one and a half X bigger policy,
39:21
and it doesn't really hurt it that badly.
39:23
So certainly if you did like
39:25
You know, less than that, like 50 into 60,
39:27
it's even better. But if you get too far away from that,
39:30
we find that the drag of that extra term rather,
39:33
the drag of that extra base does kind of drag upon it.
39:36
But again, this is the kind of work that we do with our clients before they paid
39:40
any premium. And this is it's uncommon.
39:43
What we hear from clients who are talking to other competitors is that you know,
39:47
we do a lot of work to earn our keep.
39:49
I mean, let's face it, we're we're getting paid at this point to run illustrations,
39:52
right? And share our knowledge about.
39:54
looking at so many of these darn things.
39:57
Guys, unless we have anything else,
39:58
I think we can go ahead wrap. Anything else from you,
40:01
Ben?
40:03
I
40:03
I think biggest thing is if you're gonna jump into this space,
40:07
it's a great space to be in, but just know what you're getting into.
40:10
Look at what you're doing and make a good educated decision like you
40:14
do for every other asset you buy in your life.
40:16
Yeah, absolutely. And and so when you're dealing with an insurance salesman,
40:21
an insurance agent, make sure there's a very good education component to it,
40:25
but also that it's not just words,
40:27
right? Like I love words, right?
40:29
I love writing, but it's backed by math.
40:31
And you're looking at the math.
40:33
And even though, like, some agents will say,
40:35
illustrations won't ever come true,
40:37
none of them come true exactly.
40:38
It's true, but it's the only way to show a baseline and deviation,
40:42
almost like science, like control group and experimental group.
40:45
And so
40:46
We do geek out on that stuff, which is why we don't mind walking clients through
40:50
that and pairing the education with the grounding of that math.
40:53
Bryan, anything else from you?
40:56
No, I think we I think we tied it all together pretty well.
40:58
~
40:58
Yeah, me too.
41:00
yeah.
41:00
So, guys, ~ going back to your options,
41:03
~ if you have policies, get a second opinion,
41:08
please. Whether you do it manually,
41:10
humanly with us, go to bankingtruths.com/slash schedule.
41:14
You'll be with one of these guys and probably Matt.
41:16
And a lot of times they pull me in.
41:18
~ the we're one of the only groups where the founders like actually directly
41:21
involved in the cases and case design,
41:24
whether I'm on every call or not.
41:25
~ and then also
41:28
You can go to, you can just email me like hutch@bankingtruths.com.
41:32
~ or you can
41:34
go to
41:34
~ BankingTruths.com/Xray or BankingTruths.com/Self
41:43
because we've now made it a self-serve machine.
41:45
You can go just on there and start to look.
41:48
Because if you if you have never seen a policy and you're hearing this concept,
41:51
but you want to see some numbers,
41:53
but you don't really want to talk to a human yet.
41:55
This is just a way to see, like,
41:56
hey, are these numbers even the ballpark?
41:58
Like you can upload an illustration,
42:00
but it also says, like, I don't have an illustration.
42:02
You just kind of describe your cash flow,
42:04
age, health, and it just kind of mod like,
42:06
hey, this is kind of in the ballpark of of what you can expect.
42:09
So
42:10
Anyway, hope this helps everybody.
42:12
~ we're trying to put out more of this podcast style content so you
42:17
can listen while you're at the gym or doing dishes or driving or whatever.
42:20
~ hope you enjoyed this. ~ we may put some visuals to it down the road,
42:24
but anyway, we will catch you next time.
42:27
See you everybody.
42:29
Take it easy.