Back to: Bank-Free Banking
I recommend you begin this course by taking 14 minutes to read this first.
This glossary is designed to acquaint you with the jargon of the financial industry because this is its language. Where multiple terms have the same meaning, I point them to the preferred industry term. For example, “agent,” “life insurance agent,” “underwriter,” and “life insurance salesman” are all referred to “provider” although this is the least familiar to the general public.
How to Work This Course
This Bank-Free Banking course uses a hands-on approach to the concepts and workings of MyForeverBank – the bank that attends to your banking needs without skimming funds to build the tallest building in town. I introduce you to the vocabulary of the Infinite Banking Concept (IBC) here and show you how it works in The MyForeverBank Factory.
Infinite Banking (the name used by its most famous advocate, R. Nelson Nash) now has several names: “Be Your Own Banker”, “Cash Flow Banking”, “Bank on Yourself”, “Cash Flow Banking”, and “770 Account” (referring to the IRS provisions for whole life insurance), all of which highlight various characteristics of the method. I first learned of the idea because John Ward, a life insurance salesman in Massachusetts, had read Nash’s book that quoted my writings. Out of curiosity, he looked me up.
I recommend that you begin this course by reading through this glossary, which unfortunately, is a little like eating sawdust. But the good news is that it only takes 14 minutes to consume it and you get a good introduction to the concepts that make the system work. But if you prefer, you can take the tour of the MyForeverBank Factory first. If you are already familiar with financial mechanisms and life insurance, I recommend that.
The Glossary
1035 Exchange – A 1035 Exchange allows the transfer of cash value to a new policy or an annuity.
Agent – See Provider.
Asset – Anything of value owned by a person or institution. In the life insurance context, it is usually cash or the cash value of a policy, but it may be a financial instrument such as an insurance contract or policy.
Bank-Free Banking – A financial investment, money management, and planning system wherein loans, investments, disbursements, interest, and taxes are handled so as to maximize growth, flexibility, control, and efficiency. A method where banking profits realized in the course of financial activities are retained in MyForeverBank. See also MyForeverBank.
Beneficiary – the entity designated to receive the death benefit.
Broker – A person or company that represents more than one insurance company and administers their insurance. See also Underwriter, Carrier.
Capitalize – This is the act of putting money into a business to enable that business to operate its business plan. It may also refer to putting money into an investment to activate it.
Carrier – A company that writes, sells, and administers insurance policies. They are said to “carry” the risk burden of insurance.
Cash Value – That portion of paid-in premiums that are liquid and thus available to the owner in the form of loan collateral or withdrawals. (Cash value often exceeds the total of paid-in premiums after several years.)
Collateral – An asset guaranteed to pass to the loaner if loan payments are inadequate.
Compount Interest – See Interest.
Conversion Options – If your needs change, you can “trade-in” a policy for a new one and keep the cash value intact. Or you may be able to stop paying premiums and convert to reduced “paid up insurance”. The terms are different for different policies. You can also surrender a policy and reapply for a different one. There may be loss of cash value, fees, or other negatives. Some exchanges will be “1035 exchanges”. See 1035 Exchanges at the top of this list.
Death Benefit – Typically, a lump sum paid to the owner of a life insurance policy upon the death of the insured but may be distributed in other ways when previously agreed upon by the owner and the carrier. See Life Insurance policy for more.
Dividend – A payment from the insurance company to the owner of a life insurance policy based on the earnings the company has made using the premiums paid to the company. This is sometimes called a disbursement. The word “dividend” is the established name for these payments but is a misnomer because they are actually refunds of premiums, payments made to purchase or maintain a policy. Thus they are not taxable like ordinary dividends on stocks, for example. See also Passive Income.
Instrument – A document, often a contract, that describes an investment or obligations of relevant parties to one another, or both.
Insured, the insured – the person whose death is cited as the trigger for the payment of the death benefit. See also “Owner”. The insured is always a living person.
Interest – Interest is the cost paid for holding money (even your own money). You can earn or pay interest depending on who is holding the money. If you are holding someone else’s money you pay interest to them. If someone is holding your money, they pay interest to you. If you are holding your own money you are paying interest in the form of opportunity cost (which see).
Life Insurance – A financial device that spreads risks across many revenue sources. There is always a risk that a breadwinner will become incapacitated by death. Life insurance provides a “death benefit” (cash) to replace the stream of income that is lost by that death. An individual could “self-insure” by saving up a large sum of money. But since it is improbable that a entire group of people would die at the same time, that group’s members can each consistently provide small sums to a pool and thus eventually provide death benefits for all members. This is the principle behind life insurance.
Because the individual member typically makes consistent payments over a long period, and because of the terms included in a life insurance policy, a large pool of cash can become a flexible, accessible, controllable, and secure financial resource that is far superior to investments such as savings accounts, stocks, bonds mutual funds, and certificates of deposit (CDs). When viewed from this perspective, life insurance is a superior investment, and the death benefit is just the “frosting on the cake.” Life insurance was named for the reason it was invented but not for the excellent investment instrument it is. It should have been called Personal Capitalization.
Life Insurance Agent – See Provider.
Life Insurance Company – See Carrier.
Life Insurance Policy – See Whole Life Insurance Policy
Life Insurance Salesman – See Provider.
Liquid – The condition of an asset that is easily converted to cash such as a savings account.
MyForeverBank – This is the name I give to a portfolio of life insurance and other investments where these investments are handled according to the principles of Bank-Free Banking. These investments, administered as described, replace the functions of an ordinary bank and maximize the return on investments, put the owner in complete control of his money, and assure maximum growth and flexibility. This bank easily spans generations and can become a family resource forever. See also Bank-Free Banking.
Modified Endowment Contract (MEC) – If a policy contains too much cash, as defined by the IRS, it loses its legal status as insurance and becomes an “investment” and subject to a different set of laws. The Carrier will notify you if a policy is in danger of becoming an MEC.
Opportunity Cost – A gainful opportunity that was open to you but you missed because you chose to do something else or to do nothing with an asset (such as cash or real estate). This somewhat elusive concept is critical to all financial systems because it puts every opportunity on an equal footing. For example: cash in a savings account that earns 2% is actually costing 8% when there is an opportunity to invest the funds at 10%.
Owner – The entity that has paid for a life insurance policy. The owner and the insured may or may not be the same entity. The owner may be an institution or a person. The insured is always a living person. See also “Insured, the insured”.
Passive Income – Income that requires no effort. It just comes in. See Dividend.
Policy – See Life Insurance Policy.
Policy Exchange – See Conversion Options
Policy Loan – In the context of MyForeverBank, policy loans are loans from the carrier with interest paid to the carrier and collateralized by the cash value of the policy. Using cash value as collateral reduces the risk burden of the carrier to almost zero, making interest rates on these loans small. The money borrowed comes from the carrier so it does not impact the policy or its characteristics in any way. See also Withdrawal.
Portfolio – A collection of investments.
Present Value – The current value of a future stream of money (typically income) computed using an appropriate interest percentage. This would be used to compute the selling price of an annuity, for example.
Premium – The payment required by a life insurance policy to keep the contract in force. These payments are typically made monthly but may be quarterly, semiannually or annually, or in a lump sum. These payments are said to “purchase the policy”.
Provider – A person who is licensed to “write” or initiate insurance policies. Legally, they must be licensed by the state in which the purchaser resides. The provider’s task is to evaluate the insured as to risk, including medical evaluation, age, gender, habits, hobbies, vocation
Refund of Premium – See dividend.
Risk – The exposure to financial or other loss. The Carrier carrys the risk, for example, of the insured dying before his premiums cover the death benefit.
Term Life Insurance – A type of life insurance policy typically having the following attributes: death benefit coverage for a fixed period of time, lower premiums (because the insured may not die during the term), fixed premiums, and no cash value.
The Insured – See Insured, the insured.
Underwriter – Another industry title for Provider. See Provider.
Universal Life Insurance – A type of life insurance policy typically having the following attributes: active contract until death of the insured, flexible premiums, cash value grows with interest rates, and adjustable death benefit depending on use of cash value. Indexed Universal Life Insurance has its cash value tied to a stock market index.
Variable Life Insurance – A type of life insurance policy typically having the following attributes: active contract until death, variable premiums depending on performance of carrier’s investments, cash value depends on financial markets, death benefit depends on performance of financial markets.
Whole Life Insurance Policy – A type of life insurance policy typically having the following attributes: fixed amount premiums are paid as long as the insured lives, constantly increasing cash value, dividends (refund of premiums) that represent passive income, and a fixed amount of death benefit payable to the beneficiary named in the policy. In more detail –
A contract between a person or other entity and a Life Insurance company (carrier). The carrier sells its services and its guarantees to the buyer (hereinafter called the owner). The owner is obligated to make payment(s) to the carrier (premiums), and the carrier is obligated to perform certain financial services, including a death benefit upon the death of the insured person (not necessarily the owner). The other financial services include the following: a steadily growing cash value that is available to the owner in the form of policy loans, reduction of the death benefit, or reduction or elimination of premiums, refunds of previously paid premiums (dividends), and withdrawals. Withdrawals reduce the cash value but loans and reduction of the death benefit do not.
Notable flexibilty and accessability features of Whole Life Insurance:
- Because dividends are actually refunds of paid premiums, they are not taxable.
- The insured and the owner may or may not be the same person. See Insured, the Insured.
- The cash value can be used as collateral for loans making the interest rate low and preserving the cash value.
- Cash value loans can be unpaid but reduce the death benefit.
- The carrier guarantees that the cash value will not diminish.
Withdrawal – Reducing the cash value by cashing out all or part of it is called a withdrawal. The word disbursement is sometimes used for a withdrawal but that confuses withdrawals with dividends.
He writes from a background as a family man (raised ten children) with degrees in Physics, Mathematics, and Business. HIs vocation has been mostly Engineering and Financial Business, Accounting and Banking software. He is a Christian, a Philosopher, and an Author writing mainly about rights and government. He lives off-grid most of the year in the tops of the Rocky Mountains.
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