June 21, 2020

JF2119: Infinite Banking & Taxes With Mark Willis


Mark is a returning guest from episode JF1567. He is a Certified Financial Planner and is a #1 Best Selling Author, and in this episode, he will share with you the benefits of infinite banking and paying for your tax bills.

Mark Willis Real Estate Background:

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We will provide you with what you need to know and what you need to do in order to increase your net worth.” – Mark Willis


Joe Fairless: Best Ever listeners, how you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. 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. With us today, Mark Willis. How you doing, Mark?

Mark Willis: Hey, I’m doing great, Joe. How are you?

Joe Fairless: I’m doing great as well and looking forward to our conversation. So first off, Best Ever listeners, Mark’s name probably sounds familiar because you’re a loyal Best Ever listener, and he was interviewed on Episode 1567 titled, Increase Net Worth and Have Your Money Working For You, talking about infinite banking. We’re going to be talking about the same concept, but with a different application, and that is how to use that to help pay for your taxes. A little bit of a refresher on Mark – he’s a certified financial planner, he’s an author and the owner of Lake Growth Financial Services, based in Chicago, Illinois. So first off, Mark, do you want to give a refresher on what infinite banking is, and then we can go into how it can be used to pay for your taxes?

Mark Willis: Sure. So as a certified financial planner, using the infinite banking, or we sometimes referred to it as the “bank on yourself” concept, is not generally taught or even encouraged among the classically trained CFPs out there. It’s buy term, invest the rest in paper assets on Wall Street. So the infinite banking concept is using a high cash value dividend-paying whole life insurance contract that you own the asset, the equity, the money, the cash value and the policy, and use it for all of life’s needs. We’ve talked elsewhere about how to use this for real estate, but today we’re talking about our life’s biggest expense, which is our obligation to the IRS.

So using the policy affords you a couple of things – one, it grows on a guaranteed basis every single year outside of the market; two, you can access that money without taxes due if you design it correctly; three, when you borrow from the polic– see, not all policies do it, but if it’s designed correctly, the policy will continue to grow, even on the capital you borrowed against. To say that another way, you borrow money out of the policy and it continues to grow as if you hadn’t touched a dime of the money. And then four, it is life insurance. So you’re leaving your family more than you could ever save for them, because every dollar you put into the policy is a multiple when you decide to graduate. So that’s it in a nutshell.

Joe Fairless: Yep, and I am a proponent and also I have moved forward with infinite banking as well. So let’s talk about paying for your taxes with bank on yourself or infinite banking. What do you mean by that and how does it work?

Mark Willis: Well, it’s funny. I say, they picked the right acronym, because you put the word ‘the’ and IRS together and you get the word, ‘theIRS’.

Joe Fairless: Never thought about that, yeah.

Mark Willis: It’s all theIRS. The IRS is pretty young, though. It’s only been around since 1913, but it’s fun to– well, fun is a relative word, Joe. But it’s fun to look back over history and see that the country did just fine without an income tax for over 150 years. In fact, they had surpluses. It was started as a temporary tax on the most wealthy people to cover the expenses of the Civil War and then World War I, but it became permanent when the government needed to replace other revenue sources with more permanent taxes on their own citizens. So that’s where the IRS got their start.

Joe Fairless: Thank you for that. I didn’t know that.

Mark Willis: Yeah, it’s interesting, and I’d say, as we look at our current situation, we’re in a very interesting season right now. So the next five, six years, we are all in a lower tax bracket than we will be — unless Congress acts, we’ll be in a lower tax bracket right now than we will be five years from now, and that’s the law. That’s literally the tax code. We all get a tax raise on us at the end of 2025, just five years from now. And most people aren’t aware of that, but I asked folks, “Do you think taxes will be lower or higher in the future?” Almost everybody I talked to, Joe, says, “Yeah, they’re going to be higher.” So the question is – Well, why is it that most of us and our CPAs included are recommending that we put money into tax-deferred vehicles like 401Ks, IRAs, that sort of thing? If we know there’s a day, a month and a year when we know that taxes will be higher, why delay or defer a root canal? The same question.

Joe Fairless: Well, their stance might be time value of money, because if I’m delaying it today and I’m investing it and I’m making a return, today’s dollar’s worth more than tomorrow’s dollar.

Mark Willis: That’s a great point, and I hear it too, but the math works out where it’s literally the exact same money, whether I pay tax on the seed or I pay tax on the harvest. We can get into the math if you want to, but literally, it’s the exact same.

Joe Fairless: Please do, yeah. We’ll get into that math, will you?

Mark Willis: Sure. So let’s say that you put a certain dollar amount into a policy, or let’s say you put a certain dollar amount into a tax-deferred vehicle, one or the other. So a life insurance policy is after-tax, similar to a Roth IRA or something like that, and a tax-deferred vehicle might be like, say, an IRA or a 401k. Let’s say you put in 1000 bucks, and let’s say you’re in a 30% bracket. So a life insurance policy or a Roth IRA will have 700 bucks at the end of the year after tax – 30% off of a thousand is 700 bucks. Let that money grow at the same rate of return, and it’ll be a smaller number after 10 years, 30 years, whatever; and in the meantime, the tax-deferred vehicle, you got to keep all your $1,000 in there growing on a tax-deferred basis. So it’s going to be a bigger number at the end of 10 years, 30 years, whatever it is. With me on everything so far?

Joe Fairless: Yep.

Mark Willis: Now the key is, what happens? How do we get the money out of that tax-deferred vehicle? Well, it’s going to get taxed, and if taxes are the same 30%, you’re going to take your money out of that retirement account and 70%’s gonna be left in your pocket and 30%’s going to the government. Again, it’s all about how much is the tax rate when you put the money in, and you take the money out. Mathematically, if the taxes don’t change, tax-deferred and after-tax dollars are exactly the same on a mathematical basis.

Joe Fairless: And then an outlier for this, I believe, would be a 1031, where if you just 1031 till you die, you’re never gonna pay taxes.

Mark Willis: That’s right. Yeah, and then that lovely step up in basis. Yeah. So the 1031 is a great option for folks that are looking to defer, defer, defer. I would say buy, borrow, die, as others have said. So that’s the strategy if you want to just avoid the tax completely, for sure.

Joe Fairless: Okay, cool. Now going back, we went off a little bit, but I’m glad that we went in that direction for a little while. Now coming back to using this to pay for your taxes – will you continue that thought process?

Mark Willis: Sure. So again, think about how powerful it is to let your money continue to compound even when you’re using it to make big purchases. We could talk about how powerful that is when you buy a car. Let’s keep it simple first, then we’ll talk about real estate, and then we can talk about taxes too.

There’s only a few ways to buy things in life. You can borrow from somebody else, you can finance it, you can pay cash for that car or you can use a policy. So in the first instance, you’re sending interest payments and control over to the bank down the street to buy that car, where they charge you interest and they could repo the car if you don’t pay them on time. If you pay cash for that car, that feels good in the moment, but you’ve lost all the opportunity cost to continue earning compound on that money, had you not bought the car and left it invested instead.

The power of this strategy is, when I borrow from the life insurance cash value, the insurance company sends me the money and I’m paying them back. I’m using my life insurance cash value as collateral, and while I’m paying the loan off, the policy can continues to generate a full dividend, even on the capital I borrowed, meaning no interruption of compounding.

So the eighth wonder of the world is uninterrupted compound growth. So that’s cool when it’s coming in cars and whatever, but let’s talk about what it means when we’re actually paying our taxes. Some people say, “Well, Mark, I don’t really pay a lot in taxes. I did the math.” Let’s say you’re a 35-year old who’s putting away and has to pay $6,000 a year. That’s just your payroll taxes. You’re a W-2, your payroll taxes… Most of us are paying a lot more than that. But if you’re single, earning 50 grand a year and you’re 35 years old, you never got a raise and if taxes never went up, you’d be paying six grand a year, over 35 years. That’s $210,000 to the IRS. But what if you could save that money? If you could earn a return on $6,000 a year for 35 years at 5% interest, that’s over half a million dollars, and that’s only up to age 70. Of course, government still charges you taxes in retirement too, especially on our 401ks and IRAs. So that’s half a million bucks. But what would happen if you move some of that money into a life insurance policy? Literally, warehousing your tax payment in your life insurance all year long, and then borrowing out that cash to pay your taxes as you normally would, and then paying off the loans on those policies and premium payments as you have windfalls in your real estate business. So here’s where things get, I think, pretty interesting.

So let’s imagine for example, a case study. Let’s give him a name. Let’s call him Tommy Taxpayer. Let’s say, good old Tommy’s got a $90,000 a year tax problem, and he knows– he knows the story of that case study I just mentioned, where if you’re paying six grand a year to the IRS, half a million dollars over your lifetime, it’s a heck of a lot more if you owe 90 grand a year to the IRS. I know a lot of clients that take a zero or add a zero to that number. Folks pay big checks to the IRS, whether it’s on April 15 or all year long, just total it all up.

So Tommy Taxpayer has a $90,000 a year tax problem. So what we did in these numbers – I’d be happy to share the numbers with any of your Best Ever listeners that want to see it, but let’s say that he puts away into a life insurance contract that’s designed for cash accumulation. 90 grand a year is as premium. Now, in order to be able to really build the policy well, we have to factor in that there is an insurance cost on any life insurance policy, but he also knew he needed to save for his own retirement eventually as well. So this business owner wanted to save and he didn’t want to use a 401k or an IRA. So to do that, he combines his tax payment of $90,000 with a retirement savings amount of 50 grand a year. That was what he felt like he could save, but wasn’t convinced that a tax-deferred or tax postpone retirement plan like an IRA or 401k was the best place to keep it.

Joe Fairless: So all in $140,000 putting towards this problem.

Mark Willis: There you go.

Joe Fairless: Cool.

Mark Willis: So day one, month one, he has a cash value of $95,000 and a death benefit of $3.3 million. Day one, month one. So he’s got more than enough in that cash value in the first year to pay his tax bill, which is the key; and let’s say that he does that. He puts the money in, retirement money plus tax money, borrows out 90 grand, and let’s say for whatever reason, he never pays off that tax bill, that loan against the life insurance policy. Well, again, if it’s a non-direct recognition company, Joe – and most mutual life insurance companies aren’t non-direct recognition, but if they are, if this was a non-direct recognition company, the policy will continue to pay you interest in dividends on the $95,000 of cash value, even though you’ve only got five grand left in there after you take the loan to pay your tax bill. So let that  sink in for a minute; that is tremendous. That is the eighth wonder of the world, as Einstein says.

Joe Fairless: What does non-direct recognition mean?

Mark Willis: It’s a good question. Talk about deep cuts vocabulary… What it means is, they simply don’t recognize that you’ve taken a loan. Now, there are two kinds of insurance contracts out there – one is direct and one is non-direct. A direct recognition life insurance loan is recognizing that you took the money out, and thereby reduces or penalizes you, reduces your dividend if you borrow against the policy. That to me is a non-starter. I wouldn’t use the direct recognition —

Joe Fairless: Is it a one to one ratio for the reduction and debit?

Mark Willis: Correct. They will reduce your dividend based on whatever’s left or noncollateralized in the policy’s cash value.

Joe Fairless: Okay.

Mark Willis: Whereas a non-direct doesn’t recognize that loan was taken, and it continues the compounding.

Joe Fairless: Why would there be any non-direct companies? Because it doesn’t make sense from a business standpoint to me?

Mark Willis: Well, it’s all about business model. So some insurance companies encourage loans and others think that they could do better investing in bonds and other fixed-income assets. So the insurance company that has a non-direct contract simply is making a statement that they encourage your access to the cash value, and they would allocate their general fund accordingly. Most insurance companies are going to be well reserved with funds and policy loans and term insurance premiums. All those are the profit centers of insurance companies. If it’s a mutual company, Joe, no doubt, you know this – like a mutual life insurance company, you’re getting the profits, the dividends from that portfolio. So it’s just a business decision. Non-direct companies think ” You know what, we’re going to let our policyholders have a benefit when they access the cash value. We’ll use that policy loan as a part of our overall investment returns.”

Joe Fairless: Okay.

Mark Willis: Okay? So back to Mr. Tommy – after 20 years, let’s imagine a world where he never pays that tax bill off. In fact, Joe, let’s say he takes a new $90,000 loan every single year for the next twenty years paying his tax bill; every year for 20 years. So he starts at age 45. So now he is 65 years old, 20 years later, and he’s got a massive policy loan of $2.8 million, because he never paid off that policy loan, and yet, he still has $1.2 million in cash value because the earnings and growth of cash, and a $5.8 million death benefit, even though he never paid off the policy loan… Which I don’t recommend, but it’s technically possible. So if he was to pass away, the death benefit would still be left to his family at $5.8 million, and if he wanted to, he could just spend down the $1.2 million in cash as a retirement income stream; and if we designed it correctly, it would come out income tax-free.

Joe Fairless: But the money that he hadn’t paid back, that would be deducted when he dies, right?

Mark Willis: Yeah, that $5.8 million already accounts for the loan balance.

Joe Fairless: Okay, so eventually the insurance company is getting that money back. They’re taking it out of the death benefit.

Mark Willis: Well said. Exactly right. So they collateralize your death benefit. Some people have compared this to a HELOC in some ways. If your house is worth a million bucks, and let’s say, you’ve got a HELOC for 300 grand on that house, your house is still growing in the neighborhood at a million bucks. It doesn’t matter if there’s a HELOC on it or not, Zillow still thinks it’s worth a million bucks. The same is true with non-direct recognition life insurance. If you have a million dollar cash value and you borrow 300 grand, that policy is still going to earn a dividend and guaranteed cash accumulation of whatever the dividend was on the full $1 million, without the loan notwithstanding. But you’re right. The insurance company knows they’re going to be paid back upon death or beforehand, which is why they’re willing to let us have any repayment schedule we wish… And our good friend Tommy Taxpayer went 20 years without repaying a penny of that loan. Now what I’d recommend again, but it’s totally possible.

Joe Fairless: Why wouldn’t you recommend that? Because it sounds like a pretty good scenario for Tommy.

Mark Willis: Yeah, he still ends up with a decent retirement. If he was to repay that loan, it would lower the loan interest rate. He’d have a lot more at retirement, which I’ll mention in just a minute, than what he’d have if he could pay that loan off every couple of years. But there’s a risk too if you never pay off a loan on these policies and the loan exceeds the cash value, [unintelligible [00:19:21].24] and you might have a taxable event, if there’s gains in the policy.

Joe Fairless: How would the loan exceed the value?

Mark Willis: Yeah. As the loan is earning interest, there’s a loan interest on policy.

Joe Fairless: Okay, so you’re paying an interest rate on the money that you borrow, and that’s what, 5%?

Mark Willis: 5% on a simple interest schedule. So if you never pay the loan off, it would be a straight 5%. If you pay it off– over four years, Joe, I’ve seen policy loans APRs at about 2% if you pay the loan off over, say, a four year period. Yeah, it a good question. So you do [unintelligible [00:19:59].13] or you leave your family less if you never pay off that policy loan. So I do recommend we manage the thing well.

I tell folks, these loans should be paid off over a reasonable period of time, and folks will ask me, “Well, what’s reasonable?” and generally, I’ll say, “It’s really, whatever a regular schedule would be for any other bank down the street.” A car loan? Maybe four years is reasonable to repay a policy loan to pay off a car. For a mortgage, maybe 10, 15, 30 years. Who knows? It’s just whatever is reasonable for the cash flow in your life.

Joe Fairless: I’m glad you walked us through this scenario. What else should we talk about if anything that we haven’t talked about already, as it relates to this situation?

Mark Willis: If I may, let me share one more alternate universe for our good friend Tommy, and then I can talk through what may be better than letting that loan just grow, grow, grow. So imagine now Tommy’s still doing the same $140,000 in contract premium and he’s borrowing the same 90 grand every year, but every five years, his business is profitable enough to send a windfall into his policy. Most business owners I work with, if they have a $90,000 tax problem, they’re making a profit somewhere. So where’s that money gonna live?

I think one of the key things a good financial planner should ask their clients, and we try to do that ourselves is – where do you want your money to live? Your money needs to reside somewhere, and I can’t find many places better than a high cash value dividend-paying whole life policy. But the problem is, for Tommy, he can’t pack more than 140 grand in premium into this policy. That’s the limit that the government set on his particular policy. Now you can have a limit as low as 14 grand or 140 grand or three-quarters of a million. Each policy has their own engineered limit; but we found a way with the policy loan to pack in way larger windfalls. In his case, every five years, he writes a check to his policy and repays his policy loan to wipe out that loan balance, and every five years that happens to work out to 490,000 bucks. That was the loan balance every five years, and he gets a profit every five years in this hypothetical scenario, and he wipes out that policy loan every five years. So he’s limiting the interest that’s charged when he does that. He’s also freeing up a huge bucket of cash that he could use for other real estate investments or anything else, and just to cut to the chase, Joe, at age 65, his death benefit is $8.7 million, and he has a liquid retirement fund, let’s say, or a cash value of $4.1 million. At that point, he stops funding the policy and he just takes that $4.1 million out as another tax-free retirement income stream.

Joe Fairless: When you explain the situation to someone other than me, what are some typical questions that come up?

Mark Willis: What’s the catch? Why haven’t I been told to do this by my CPA? I think one of the things is the CPA is really good at helping you find deductions this year. That’s how they keep their job. Life Insurance is after tax. You’re paying your taxes today on the seed, not the harvest. So they’re not getting your smiles and grins for the big juicy tax deduction this year. When you put premium into life insurance, it’s usually using after-tax dollars.

A lot of folks will say, “Well, Mark, how can I possibly save 140 grand into a life insurance policy?” and I say, “It’s not about Tommy’s numbers, it’s about your numbers. You’re already paying your tax bill somehow, either you’re using cash to pay for it every month, every quarter, every year – a lot of our folks have quarterly payments – couldn’t you be saving that somewhere? Where’s that money saved better than a savings account?” A lot of folks who can’t save at all, I wouldn’t recommend this policy to. You do have to still pack money into the policy. It’s not a magic pill, and don’t look to this policy to become wealthy overnight. If you’re looking for hedge fund-like returns, you’re going to be bored to tears with the internal rate of return of the policy. I think in previous episodes we’ve talked about; it’s low to middle, single digits, 4%, 6%-something present. So it also means you have to think a little different than the average taxpayer, which is a roadblock for some folks as well.

Joe Fairless: How can the Best Ever listeners learn more about you and what you’re doing?

Mark Willis: Yeah, thank you, Joe. If folks want to find out more about this, we’ve done a few podcast episodes on this that dive deeper at Not Your Average Financial Podcast. Or if you want to reach out and connect with me or one of my team members, go to growmorewealth.com.

Joe Fairless: I enjoyed this different thought process about how to apply infinite banking. Thank you for walking through that example, and Mark, thanks for sharing this area of expertise that you have with us. So I hope you have a best ever weekend and talk to you again soon.

Mark Willis: Thanks so much, Joe.

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