JF1783: Infinite Banking?! #SkillSetSunday with Gary Pinkerton
Joe has used himself to test this method of investing/storing cash. He went to Gary and has been working with him for a few months now, it has been a good experience and Joe wanted to share with everyone. So tune in to hear about this strategy you may have never heard of before. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“Almost all of the whole life insurance companies that do this, will put the money in a general fund” – Gary Pinkerton
Gary Pinkerton Real Estate Background:
- Wealth strategist at Paradigm Life
- Has funded over 100 rental units using OPM with private banking since 2011 and has helped his clients do the same
- Former captain on nuclear subs in the Navy
- Based in Jersey Shore, NJ
- Say hi to him at https://paradigmlife.net/ or firstname.lastname@example.org
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.
Here’s a concept that we have touched on on this show, and I mentioned during multiple Follow Along Fridays with Theo a while ago that we would go into it in more detail, but first, I would put myself in the ring and I would do it, that way I had some first-hand experience before talking to someone about it… And I have done it. That is the concept of infinite banking.
It’s a concept that requires a smart person – much smarter than me – to talk about, and talk through. So what we’ve done is I’ve brought on Gary Pinkerton, wealth strategist at Paradigm Life, who I worked with to set up the infinite banking. We’re gonna talk about the concept, and — by the way, disclaimer, I make no money; if you work with Gary or don’t work with Gary, if you do this or you don’t do this – I don’t make any money from it. I’m just sharing a concept that I found interesting enough where I’ve put my money where my mouth is, and figured we might as well share it with you, Best Ever listeners, so you can decide what the heck you wanna do with it.
I was introduced to Gary from an investor of mine with Ashcroft Capital. He invests with us, he’s actually invested in multiple deals, and is someone who I trust implicitly, so that’s how I got to know Gary. First off, Gary, now I’ll stop talking about you and I’ll actually talk to you – how are you doing?
Gary Pinkerton: I’m doing great, it’s a true honor to be on your show. I’m really looking forward to it, Joe.
Joe Fairless: Yeah, I’m looking forward to our conversation as well. And first off, Best Ever listeners, sorry – this is a Skillset Sunday episode; we’re gonna be talking about a specific skill, and the skill is infinite banking – what it is, how to do it, and questions to ask if you’re working with someone to set it up for you.
Gary is a wealth strategist at Paradigm Life. He has funded over 100 rental units using other people’s money with private banking – this infinite banking – since 2011, and has helped his clients do the same. He’s a former captain on a nuclear sub, so he was in the Navy before. He was a captain on nuclear subs; thank you, sir, for what you did for our country. He is based in Jersey Shore, New Jersey.
With that being said, Gary, first – what is infinite banking?
Gary Pinkerton: Sure. It’s a way to use uniquely designed whole life insurance policies to store and grow your wealth. Everyone has a need to store cash somewhere; that’s really a combination of a lot of things. It’s your emergency savings for your family, it’s property reserves, it’s business reserves, and it’s money you’re setting aside and growing for future investments – your upcoming property purchase, or really whatever. I store just about all of my cash that I absolutely need in the future, that I can’t take a risk of it being lost… Even my kids’ college money.
Basically, we’re all storing and growing that money (if we’re prudent) somewhere, and a lot of times it’s just in the same as our checking account. So this is an opportunity to get both a much faster growth – let’s say 4%-5% – tax-free on your money, while still having full access to it… And you get a lot of life insurance protections. So you’re getting both the foundation of your personal financial wealth, meaning life insurance protection of your future income for the family, as well as a better place to store. It’s simply a different place to store your cash. A lot of people talk about it as an investment; it’s really not. It’s just a much more efficient place to store and grow your wealth.
Joe Fairless: Okay, so let’s unpack those statements that you’ve made. 4%-5% tax-free growth, with full access, plus life insurance protection. That is why I chose to do it, but that sounds way too good to be true. So how about let’s dig into each component of that – the percent growth (4%-5%), then the tax-free part, and then the full access part, and then the life insurance. So those four parts.
Gary Pinkerton: Sure, absolutely. You may have to remind me what part we’re on, but… Let’s start off with the growth —
Joe Fairless: Yeah, 4%-5% tax-free growth.
Gary Pinkerton: Sure. So we work with only whole life insurance companies. You can do this with universal to some levels of success if you know what you’re doing. I don’t believe there’s value there in doing it; there’s not a track record. So we go with whole life. It’s a very simple product. Insurance companies are collecting premiums, growing those premiums, and then handing them back to the beneficiary one day.
Well, starting in the 1930’s they give you access to the value of that cash that’s in there. So if you have $100,000 sitting in your policy that’s growing, you can go to them and borrow $100,000 from them. The borrowing and accessing side of it is not the growth. The growth side for whole life insurance is a combination of guaranteed increase. So if you look at the policy illustration that you got, there’s a table in there, and on the left-hand side there’s a column for the guaranteed worst-case growth, even if there’s no profits, if the company is not profitable. But since we work with a mutual insurance company, which is a private company – meaning that there’s no shareholders to distribute profits to every year, so those profits are just handed back out to the owner of the company, which in the case of life insurance are just the policyholders. So you kind of get it back on a pro rata basis, based on how big your cash is that given year.
So you have a guaranteed increase, which – I tell people, big-picture, it changes over your life as you age. Essentially, it’s 2% a year guaranteed after covering all of the costs covering the insurance. So about 2% on the guaranteed side, and another 2%-3% today in profits being handed back. But these profits or dividends are completely dependent upon what the lenders out there in the world can get. Banks right now are lending at 5%-6%. Insurance companies are doing the same thing – they put your money to work in the economy, lending out to major corporations. Right now they’re getting 4%-6% returns, which means that after covering expenses, you’re seeing another 2%-3%.
Summarizing that, a couple of percent guaranteed annually, and then 2%-3% in this zero-interest-rate world we’re in. In the 1980’s the dividend was 8%-10%, if that makes sense.
Joe Fairless: Okay. So when you implement this policy or this strategy, do you have to do anything than buy the policy in order to gain that 4%-5% growth? Do we have to manually manage it and do transactions, or just magically because you’ve purchased a policy it achieves that 4%-5% growth?
Gary Pinkerton: Almost all of the whole life insurance companies that do this – there’s probably 25 mutual companies; I work with ten… Generally, I work with 4-5 of the best, most easily designed companies… But all of them will put the money that is being collected and protected – they put it into a general fund, and they put it to work in the economy. Mainly, they’re lending it out to major corporations for decades at a time. They’re also funding as a debt partner in large real estate developments and commercial buildings… So most of the time there’s nothing for you to do to see that type of return.
There is one company that I work with – and actually, Joe, it’s the one you went with – that they give you the ability, from time to time, if you want to, to tie your profits (the dividends) to the performance of the S&P 500, and you can get a little bit of a boost if you want to actively manage it. I don’t have any clients doing that right now, primarily because we’re all kind of foreseeing a little bit of a correction or a pullback… But bottom line, most of the time it’s on autopilot. You’re simply just carrying out the plan that you’ve put in place, and reaping the benefits and using the cash value from time to time when you want to.
Joe Fairless: Okay, that was the percent growth. What about the tax-free statement you said?
Gary Pinkerton: Sure. Your dividends/profits will grow inside the policy without tax being applied. If you physically withdrew them someday – and some people do – then you would be taxed. But there’s taxation for life insurance – it’s really the only thing out there that enjoys this, and it’s called First-in/First-out taxation. That basically means that if over time you’ve contributed $200,000 in contributions to this, then the first $200,000 you pull out would not be taxed. Beyond that, it would be taxed just like interest you earned in your savings account.
So most people wouldn’t do that; they would maybe withdraw the basis, or the original contributions when they get into retirement and want to do withdrawals… But throughout your life you can borrow against the thing, borrow the insurance company’s money pledging yours as collateral, and access the full value, even that part that is growth/profits, without any taxes being applied. So theoretically, what you do is you borrow against it during your working years, you perhaps withdraw the contributions and borrow against the rest in retirement, and then pass it on, tax-free, as a death benefit.
It’s very similar to real estate, in many aspects. But if you think about a 1031 tax-deferred exchange, that you go from property to property and then eventually it gets a step up in basis at death, that’s what happens with life insurance.
Joe Fairless: The full access part.
Gary Pinkerton: Gaining full access – so if you remember, I was talking about your cash value in the policy is a combination of what you’ve contributed, what the insurance company has boosted by the guaranteed crediting of dollars every year to it, and then the dividends. So for very simple math, let’s say that you’ve contributed $200,000, and you look at your cash value and there’s $300,000. That’s a combination of $50,000 that came from guaranteed increased over the years, and $50,000 that came from the dividends or the profits that got credited. So of that $300,000, $200,000 were your contributions. You can withdraw that to get access to it if you would like, but the full $300,000 you can access by borrowing an equivalent amount of money from the insurance company.
It’s the equivalent of going into a bank, putting $100,000 on deposit, and then going to them and using that as collateral for borrowing money from them. Now, you would never do that at a bank because there’s no advantage to do that. With a life insurance company, because your money is in there growing/compounding without taxes, at equivalent rates of what you’re gonna borrow the money for, it makes a big difference over time.
Joe Fairless: So just for my own clarity, to restate it – I put in $100,000; so with my policy I did $110,000, I think. And I am able to get access to most of it (90-something percent of it) immediately. Let’s call it $95,000. I can borrow that $95,000 and do whatever I want with it. And that initial – $110,000, or whatever I put into it – is still making the 4%-5% growth. So even though I took out 95k, that initial 110k is still making a 4%-5% growth. So there is the difference in doing the bank thing that you said, versus doing this… Not to mention having the benefits of life insurance protection.
Gary Pinkerton: That’s right. I was just doing an example with a client; it’s a pretty common example that single-family investors or people who are investing minimal amounts into larger syndicated deals might do. Say you have $25,000, and for this example it’s a $100,000 house, and your down payment with closing costs is $25,000. So you have a choice – you can either put that into the property, and in 30 years maybe sell it and take it back out, or you could have an insurance company put their money in there, and you just put yours in your policy and allow it to grow and compound there.
So in the house – you have $25,000 sitting in the house; yes, it enables a lot of growth and appreciation, and tax deductions, and the cashflow, but essentially it itself is just kind of parked there. If I could get my next-door neighbor or best friend to put their money into my property instead of me, that would be far better off for me, because I have given up its ability to grow. Whereas the other person who has an identical house, but put their money in their policy, after the 30 years that I used in the example, theirs has grown to $93,000. The $25,000 turned into $93,000. They did have to pay $22,000 to the insurance company in that example for the interest, but they earned well over $70,000. And that’s the power of being able to borrow somebody else’s money and not have the opportunity cost of yours being locked up without earning.
Joe Fairless: And then in terms of paying back that loan, in the example — we’ll go with my example, when I borrowed 95… If I die before I pay it back, then it simply gets deducted on the insurance proceeds my family gets from the life insurance policy, and it’s as simple as that, right?
Gary Pinkerton: That’s correct, yeah. Your insurance amount, your death benefit is always gonna be substantially larger than the cash value. So as a result, you can even max out your cash value and still be comfortable knowing that there’s still a large amount of insurance tax-free, that will pass to your family.
Joe Fairless: The last part that you mentioned initially in our conversation is life insurance protection. We just touched on that, but anything else that you think we should talk about in terms of the life insurance protection?
Gary Pinkerton: From time to time I come across people who are single, they really don’t have anyone that they wanna leave it to, and sometimes they see that as a detraction from using this process, like “I would use it if there wasn’t the life insurance.” However, remember – the performance I talked about, the 4%-5% in this 1%-2% savings account world – the 4%-5% you’re getting here without the impact of taxes is already covering the insurance. So you may today decide you don’t like it or don’t want it, or see it as a detraction, but it’s already factored in. That’s one comment. But that’s a very minor number of people that I ever meet with.
Most people, as they get older and get nostalgic, they will either have grandkids or they will have a little neighbor kid that they’ve mentored, or they have a favorite charity or church that they really have valued receiving benefit from and wanna give back to… So I’ve really actually never, in the end, seen anyone who didn’t have a place that they wanted to give that money to… And it will come out tax-free. There’s wonderful things you can do by owning it, or having the beneficiary be a trust, a family trust, for multi-generational planning, for legacy.
For me, early on, and for a lot of my clients – and I think, Joe, you’d probably agree – it is really comforting knowing that I have personally taken on five or so million dollars of (I call it) good debt; fixed-rate, long-term debt. And my wife was a bit uncomfortable with it when we first started, but she was greatly comforted by the fact that there was early on three million dollars of life insurance – and considerably more now – totally there, just because it was the vehicle in which I’m storing and growing cash from my real estate portfolio.
Joe Fairless: Yeah. So when you pass away, then the debt will be paid out from the life insurance — what is called, a premium…?
Gary Pinkerton: The death benefit, yeah.
Joe Fairless: Thank you. So your debt will be paid off by the death benefit, and then there’ll be more on top of that for her and any other loved ones.
Gary Pinkerton: Right. Or she can walk away from the real estate properties if she wanted, but if she paid off the debts with the — you were saying the amount that I borrowed against. That’s true. But with that level of insurance, she could have easily paid off the properties as well, and have a bunch of cash-flowing, unencumbered properties if she wanted to do that, and it would immediately replace her concern for not having my income coming in anymore.
Joe Fairless: So let’s close this out with a specific example of maybe just a single-family home.
Gary Pinkerton: Sure.
Joe Fairless: Now that we’ve gone through the concept, how have you done this just on one single-family home?
Gary Pinkerton: Sure. So what I do is I go get conventional financing – or just commercial, but so far I’ve used conventional 30-year fixed-rate mortgages, and I will get those at 75% to 80%, depending on the interest rates at the time… Let’s say 80%. So a $100,000 property, 80% loan from a bank, and then I’ve got the 20% down, plus maybe $5,000 in closing costs, so $25,000.
Then I would pre-stage my money in my personal banking system, and then go to the insurance company and borrow their money. I know that, Joe, you’ve gone through this process, but it should be a very quick 2-3 day process where the money shows back up in your personal bank account, whatever traditional bank that you’re doing your banking at… And then you just treat it as cash from there. When you go to the closing table, the lender recognizes that your money in the life insurance is your cash, and they see this money that you’ve borrowed as your cash.
There’s some Fannie Mae guidelines that came out in 2008 that this works just fine. It’s really the only way you can borrow other people’s money to fund a down payment on a property.
So I borrow the $25,000, I close as if it’s cash, and then as I receive cashflow back, I make a personal choice to just send that back and pay down my loan. Because the moment I pay $1,000 back to the insurance company on their loan, it frees up $1,000 of cash in my bank, that I can – again – either withdraw or borrow against again. So pushing my money back in there – it reduces my loan and it causes my cash to be available again for the next one… So really it’s a much higher velocity than I experienced before I started doing it this way.
Joe Fairless: And when you said earlier you would pre-stage your money, what do you mean by that?
Gary Pinkerton: I just meant that — sometimes people will say “Well, I don’t have $25,000 yet in my cash value. Can I still get the loan?” So rather than leaving my money in my checking account to use as cash as a down payment, I contribute it to my life insurance policy. I’ve built the cash value, and now it’s available pre-stage there as money that I can use to go and pledge as collateral to borrow from the insurance company.
Joe Fairless: Got it. So when you identify a property, you make sure that you have the amount that you need to close with the loan as cash value on your life insurance policy, so you can borrow against it, get that cash out and use it for the property.
Gary Pinkerton: Exactly. And as I mentioned at the beginning, I’m storing other money there, so I never go up against my actual cap. I’ve got a ledger – or actually I use Quicken – and I keep track of how much money that’s staged in my policy (cash value) is actually dedicated as family emergency money, as property reserves and as business reserves. So I don’t touch that money; I kind of make it off-limits, and then whatever is available as the remainder is my investment capital.
Joe Fairless: What’s a good rule of thumb, in your opinion, for what that percentage should be with available cash, versus cash that — well, it’s available, but you just don’t wanna touch?
Gary Pinkerton: It’s really not a percentage thing for me, it’s just an actual dollar amount. For me – I’m pretty conservative, so I actually use six months’ worth of my personal after-tax income. And then for properties – I used to use four months principal interest tax and insurance; I’ve reduced that down to two months as I got over ten properties. I just think it’s unreasonable that they’re all gonna have the same problem at once. So I use two months there.
And then for business reserves – it’s highly dependent on what your business is like. I have about $5,000 marketing expenses every month or so, so I kind of hold that back in reserves to have it available.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing, and Paradigm Life, and infinite banking?
Gary Pinkerton: I would love for the Best Ever listeners to go to email@example.com, and then they can also check out Paradigm Life specifically by sending me an email to firstname.lastname@example.org, and there’s a tremendous amount of resources directly at ParadigmLife.net for them.
Joe Fairless: Cool. So the first one that you gave was your email address, right?
Gary Pinkerton: My email address, email@example.com, and the website garypinkerton.com has a lot about me as well.
Joe Fairless: Cool. Well, Gary, thank you for talking about a concept that I have read books on, I have interviewed people, and you explained it very thoroughly and in a straightforward fashion, which is necessary for something in my mind that’s so damn confusing as this… But once I started understanding it, it made a whole lot of sense, so that’s why I did it. Plus, as I mentioned at the beginning of our conversation, you were referred to me from a mutual friend who I great respect, and I know he’s financially savvy and connected. He knows what he’s doing, too.
Thank you for being on the show. I enjoyed getting a refresher for why I did this… [laughter] And looking forward to continuing our friendship. I enjoyed our conversation. Thanks for being on the show, and talk to you again soon.
Gary Pinkerton: Absolutely. Thanks so much, Joe. Best Ever listeners, go get it!Follow Me: