Bienvenidos mis ositos, tu siempre eres mis queridos! (Welcome back little bears you are always my dears!)
The original idea that inspired this post came from Nelson Nash’s book Becoming Your Own Banker. The title is a bit misleading because the technique involves buying a specially designed insurance policy. There’s plenty of articles and videos on the Interwebs so I’ll let you research more at your leisure.
Corporate executives and other high net individuals have been using this method to preserve wealth for future generations. They can earn a yield and control their tax liabilities. However the average pleb rarely gets a chance to enjoy these types of techniques because of the costs involved.
I’ll try not to bog you down with the technical jargon but basically a high net worth person can buy a specially designed whole life insurance policy from an insurance agent (for a nice commission of course). These type of policies usually have some type of investment option attached.
The returns are generally modest especially if they come from an older more established insurance company. In addition to paying your “normal” premium you can pay the insurance company extra to fund the investment option. You may need what they call a “paid up additions” rider.
According to some insurance insiders the investment portion of the contract takes a few years to build up.
Now this might be a bit much and you’re probably wondering why anyone would do this. Well this usually enhances the death benefit for heirs and provides a bigger collateral base from which to borrow.
Detractors have noted that for those with modest means this could wind up being an expensive mess. In fact according to the Internal Revenue Service of the Unites States “returns” from whole life insurance are considered a “refund of a deliberate overcharge” – the person is paying the insurance company an interest rate on their own money!
Now, while the mechanics can be complicated and unsavory the idea is quite sound.
The key selling point is that you can take a loan against your policy to use as you please. At the same time the dividends on the investment portion of the contract keeps compounding.
But in the brave new world of DeFi, there must be a better way to do this.
After all, who wants to go back to TradFi or deal with pushy insurance agents?
The good news is that there are crypto versions of “infinite banking”. Platforms like Aave and Anchor let you borrow stable coins from volatile crypto. When you add liquid staking to the mix, I would argue that DeFi Infinite banking is much better than TradFi Infinite banking.
You don’t have to ask permission to use your own money, and you get better interest rates. Sometimes when you find a platform that is running a liquidity mining program you can even get paid to borrow!
When Anchor first came out a lot of DeFi users couldn’t believe their eyes. You could get paid (in ANC tokens) to borrow UST! Then you could re-deposit your UST loan proceeds back into Anchor for more interest!
As of right now at least in the United States borrowing against your crypto holdings does not incur a capital gains tax.
Of course Anchor isn’t the only borrow and lend platform to do this. Geist (an Aave fork on the Fantom network) had such ridiculous rates that their Total Value Locked (TVL) rocketed pack $10 billion! (It has since gone down).
There are now liquid staking options available for certain assets. For example one notable option is LIDO where you can stake ETH, LUNA, and other proof of stake assets. Your first yield will come from actually staking the asset.
The second yield will come from yield farming the claim on your token. For example stETH, bLUNA, etc. I’m sure there are more examples and there will certainly be more use cases to comel
Well there you go guys, I hope you learned something interesting. If you liked this post consider supporting this type of content by signing up to the Loop community with my referral link. If you complete certain tasks you can also earn weekly Looper tokens!
Be sharp, stay hungry let’s get that money!