Infinite Banking and the Church
As powerful as the Infinite Banking Concept is for individuals, it has a particular power for the Church.
The particular power for the Church (or any non-profit organization) lies in the Modified Endowment Contract rules.
For the individual, if a policy becomes a MEC – that is to say cash value increases too quickly relative to the death benefit such that it violates the IRS 7-pay test – loans against the policy become taxable as income.
But Churches do not pay income tax, so they do not have to be concerned about any policies they have for IBC being or becoming MECs. This allows for greater flexibility in policy design. This can allow churches to use Single Pay policies, or policies with a large Single Premium PUA in the first year.
This does not mean they can violate Nelson’s first rule – Think Long Range. It just means that the church has more flexibility.
By practicing the Infinite Banking Concept, the Church can better fulfill its duty to provide for its shepherd – the pastor – while simultaneously planning for future and being prepared for the income volatility many churches experience.
Remember, the asset used to establish the Church’s banking system is a Whole Life Insurance policy. Every life insurance contract has 3 parties – the Owner, the Insured, and the Beneficiary.
The church is the owner of the policy. As the owner it is responsible for paying premiums and has the ability to take policy loans and repay them, all through tithes and offerings.
The Pastor is the insured – the person whose death would trigger the payment of the death benefit to the beneficiary. The church can also insure others – more on this later.
The beneficiary is determined by the owner. The owner can also change the beneficiary. This would be the Church itself, recouping more than the premiums paid, or the pastor as part of his compensation from the congregation, or a combination of both.
With out any changes in income or cash flow, a church practicing the Infinite Banking Concept can provide death benefit protection for their pastor simply by changing where they store their money.
Moving their liquid assets from a savings account, that provides no death benefit, to a life insurance policy that does. The church can then designate the pastor’s family as the beneficiary in whole, or in part – for example, everything above the premium paid by the church. In this example the church would receive all of the money it paid in premium back and the pastor’s survivors would receive everything else.
When establishing a policy for a Church, the insurability limits are a little different than for an individual. The death benefit is limited to approximately 10 times the salary of the pastor. A pastor being paid $30,000 a year would be limited to approximately a $300,000 face value.
In practicing Infinite Banking, one policy is rarely…if ever…enough. Initially one policy may be enough, but in time, the church will likely have capital accumulating in someone else’s bank. Unless the pastor’s salary has increased they need another person in whom they have insurable interest.
At this point the church can look to insure its other paid employees if they have any. If not, they can also look to insure their tithing members. With tithing members, face value is determined by the amount donated, generally considering a 3-year average. As with the first policy, the beneficiary would be the church or the pastor.
If the insured tithing member leaves – nothing changes. The policy is still owned by the church. The beneficiary remains the church. And the church can still continue accumulating capital within the policy.
Similarly, if the pastor leaves, the church continues to own the policy and continues to accumulate capital in the policy. Unless their agreement with the pastor says otherwise, the church becomes the full beneficiary. The new pastor would then have a policy taken out as part of his benefits package.
This banking system can be further used to bless the pastor. He will have expenses in his life that he must finance. For example, he may have to replace a vehicle. Instead of financing it with a bank, he could finance it with the church at the same terms he would get with the bank. He will pay off the vehicle faster, and remaining payments are still remitted to the church as a 501(c)3 charitable contribution.
The pastor pays the same personal expenses he would have paid anyway but the Church he is shepherding benefits from increased capital even as it provides for him.
Aside from the monthly operating expenses, churches have other expenses. Repairing or replacing equipment, building expansions or updates such as re-flooring or exterior paint, or purchasing a vehicle. With its own banking system, the church does not need to go to another bank for financing nor does it need to deplete from its own savings accounts and break compounding interest.
IBC can also enable a church to be more generous. As an elder of my church, applying this to my family’s finances, I have already experienced an example in which I wish we could have applied IBC. But our church had not yet implemented this at the time.
With out going into the details, a pastor, who was joining our denomination, was going through a rough financial period outside of his control. It was severe enough where the possibility of losing their home was real. He reached out to the churches of the denomination for help. Our Church provided $3,000 to help. As a small church there was room to give a little more, but that was the amount the elders decided on to start. His need was met and we did not have to give more.
That is $3,000 gone, never to earn interest and do work for the Church again. We’re not just thinking about our life span, but the life of the church. Over the next 50 years, how many times might we have used those same dollars for different purposes? In that time, that $3,000 might have earned $10,000-$30,000 for the church in interest and continuing to compound for the life of the Church. If we had been able to take a policy loan and finance the gift and pay it off from future surplus, the church would have retained that growth contributing to financial stability and independence of the church.
Semper Reformanda
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