How to Fund Your Business Without Debt | Interview with Robert Murphy

We first met Dr. Murphy at the Mises Institute in Auburn, Alabama, in the summer of 2022. We were deeply engaged in studying Austrian Economics, and since then, we have specifically explored how it applies to finance and entrepreneurship.

Part 1:

Hello, Dr. Murphy. We're the founders of the Founders Project. We're interviewing starting founders, industry experts, and sharing the insights. We invited you today to take a break from fighting with MMT-ers on Twitter and discuss Austrian Economics in the context of entrepreneurship and startups. And the main reason was your work on the whole life insurance and the infinite banking concept. Because nowadays, the startup founders struggle with financing their ventures. 

Many founders refuse to go to the traditional, let's say the venture capital route. And some of them are trying to self-fund, bootstrap, or find money elsewhere, maybe even using their credit cards. 

So we thought that whole life policy could be a viable financing option for founders and for small business owners and for solopreneurs. So could we talk about the implications of whole life policy in general? What does it mean? Because many people are not familiar with the whole life insurance. They mostly know about the term life insurance, the classical one. 

So good setup and yeah, first is the question. I’ll explain that distinction, then you just guide me as to how you want the conversation to go. So right, the fundamental distinction is between term life and whole life and the term policy, you pay your premiums, and then there's a certain term for which you have death benefit coverage. 

And if somebody - if the insured dies in that time horizon, then the beneficiaries get paid to check from the insurance company. But if not, that ends and there's no further obligation on the part of the insurance company. 

Whereas with the whole life policy, as the name suggests, it's enforced for your whole life. So as long as the contractual premium payments are made, at some point, we just don't know when, a payment is going to be made to the beneficiaries, because again, that never expires. 

And one of the critical features of a whole life policy is that as time passes, especially if you're making premium payments with each payment, what's called the cash surrender value goes up. 

And that's an inbuilt contractual guarantee that says at any point along the way, if the insured is still alive and the policyholder wants to just get out of the contract, they can surrender it back to the carrier and get a spot payment. 

So an analogy people make is that it's like the difference between renting an apartment versus buying a house with a mortgage. Either way your monthly outflows of cash provide shelter services, but with the apartment, that's all you're getting. 

And then once your lease ends and you move out of the apartment, you have nothing to show for all you've been paying for was the flow of shelter services. And that's sort of like a term insurance policy where the premium payment is not getting you some other financial asset, it's just providing you with the flow of death benefit coverage in case you happen to die prematurely. 

And then, you know, once you leave, that's it, you have no equity in anything. Whereas with a whole life with a home each mortgage payment, you're not only getting the flow of shelter services, but you're gaining equity in the house. 

And so you're building up this financial asset. So it's sort of like a double function there of your payments. And that's kind of like the whole life policy that again, the premium payments you're making, not only provide death benefit coverage in that realm, but it's also building up this money that you can borrow against that. 

The last thing I’ll mention here is that if you have a whole life policy and the cash value rises over time, not only do you have the right to just surrender the policy and get paid that spot payment, but you can go to the carrier and borrow money with the cash surrender value serving as the collateral. So they have to give it to you. It's guaranteed and they don't run your credit. They don't ask questions because they themselves are guaranteeing the collateral. 

So that's why it's a very effective way to manage cash flows. And so there's a whole school of thought, a whole movement centered in the United States. And then it's also taken root in Canada for insurance professionals who know how to design these specific policies with that goal in mind. 

And so they serve as excellent vehicles for cash management besides providing death benefit coverage in case you die. 

And let's say you're borrowing against the assets that the company insurers are building on your behalf, what's the typical interest rate? How does it correlate to the, let's say to the interest rate in general?

Yeah, so typically, In my experience, from what I know, it's contractually specified. So you know ahead of time, what policy they will use to determine the rate going forward. 

It's not just they can just tell you what it is. Like it's, but they'll use like a benchmark, plus some spread. So in recent years, it's been like 5% or 5.5%, something like that, at least with the policies I'm familiar with. 

You don’t have to qualify, just basically ask for the loan and you're going to get it, right?

Right, so yeah, maybe it might help if I just spend a minute on this point. Because it's a critical point. There was an economist, Gary North, one time, who was skeptical of this approach. And his critique was, he said, 'Yeah, basically what they're doing, they're saying you build up an asset and then when you need money, instead of liquidating the asset, you just borrow against it. And that way you still maintain your asset, that's still growing. And then, but you get your cash, you know, your financing needs are met.' And he said, 'Yeah, there's nothing crazy with that suggestion; that makes sense.'

But Gary North said, 'There's no reason you need to use a WLI policy as an asset—you could just use a house.' He said that 'You have a house that's, let's say, it's worth $300,000, and there's no debt. If your daughter's getting married and you need $20,000, just go to the bank and say, "Hey, I want to borrow against my house."'

So he's right, you could do that. But the critical difference between the two scenarios is that if you go to a regular bank, for one thing, they can say no, they're not obligated to give you any money at all.

And then, if they are going to give it to you, they're probably going to run your credit score. They're going to see what your sources of income are. They're going to have a very specific payback schedule and say, 'You're going to pay back the loan over three years at this month,' that they're done with it.

And if you fall behind on that schedule, ultimately, their recourse is to kick you out of the house and sell it, pay themselves back, and then give you whatever's left over.

Whereas with the whole life policy, when you go to the carrier, they have to give you the loan right away. And they don't ask you any questions; they don't care what it's for, they don't run your credit score, they don't care what your income is. And the reason for those two completely different experiences is the nature of the collateral.

So again, the bank, ultimately, if you don't pay them back, they have to kick you out of your house and sell your house. That's a very laborious process. And in the interim, the real estate market could have crashed.

So, depending on how big the loan was and what the loan-to-value ratio was, it's possible it's underwater. Whereas with the whole life policy, its cash value marches upward over time. So, it can't go down in value.

And again, they themselves are guaranteed. So, they know they're getting paid back. It's either when you surrender the policy or when the insured dies; either way, it's just a subtraction problem. They just, you know, if you borrow $20,000 and it's rolling over at 5%, they know they're getting paid back.

So, even if you never make a payment on it, and it just, you know, that balance just keeps rolling at 5% a year. Because again, at some point, you're either going to surrender the policy or the person dies.

And then, either way, whatever they owe, they just subtract, you know, they pay themselves back. So, they're totally, from the insurance company's point of view, a policy loan on its own policy is the safest asset imaginable.

It's even safer than treasuries. Because the person literally can't default. It's impossible. So, that's why they're so, you know, lenient on the front end, and they don't run your credit or anything.

And it's, and so that's why this guy Nelson Nash, who invented the concept of Infinite Banking, picked whole life policies as the vehicle, or the chassis, to build this system on because he thought there are just these properties that are very convenient.

Would you say that this concept of being your own banker is getting more and more traction throughout the years? Because you've been trying to popularize the concept for many, many years and many people are still skeptical of the whole idea of whole life policy and borrowing against it. 

Yeah, definitely. It went from, it was sort of similar to the term 'Austrian Economics' that when I first went to grad school, like a lot of people didn't even know what it was.

And then, if they did find out, they would say, 'Oh yeah, that's some weird little thing.' And, you know, they don't talk about it. And then, it started, I think probably because Ron Paul was running for president in 2008, it got really popular.

And it got to the point where a lot of people in the financial sector would throw around, you know, Mises and Hayek and stuff. Like, they didn't really even know what they were talking about, but they just wanted to appeal to the demographic who liked Austrian Economics.

And I see a similar thing with Infinite Banking that in the beginning, people didn't even know what it was, and then, if they did start finding out, they would say, 'Oh yeah, that's a goofy thing that doesn't work' or 'That's silly.' And then, it's sort of got so popular within a certain group of people who are skeptical of Wall Street and central banks, and things like that tend to be people who are intrigued by Infinite Banking. And so, a lot of people, then to cater to them, started using the term, or they would name things with similar wording. I won't name it specifically just because I don't want to isolate, but there are lots of copycat groups that were doing the same basic thing, but they would call it with a slightly different name to differentiate themselves, but it was the same idea. So, to answer your question, yes, and if you even look at like, you know, a Google search history, people typing in 'Infinite Banking,' you know, that has really just zoomed upward in the last couple of years.

That's what we've observed recently. There are more articles than ever on even banking concept trying to sell you something. The reason we're talking about this concept is because well, we have many founders and the startup guys, friends, who had no access to venture capital industry?  So they had to max out their credit cards to finance basically their ventures or find another alternative way of ways of funding and I know you're familiar with the venture capital industry in the startup world But now there's a downturn in the (venture) funding So many founders struggle to raise capital now And we thought that it could be a viable still it's a lot It's a let's say it's a long-term decision, right? Because your cash value is growing Across the years. It's not usually in the early years. It's It's values basically nothing. But in the more you hold it the more benefits you gain across the years. So let's say you're starting at one year 20 The 30-40 you could get some you could finance your small projects or ventures or even start and we were trying to to see if it makes sense instead of relying on the venture capital, which is susceptible to the change in interest rates. You know, we've had this bubble of startups and in the easy money era. Many ridiculous startups have been financed and now they're blowing up and The industry itself is blowing up. 

So You're trying to figure out if it makes sense for a startup founder to start Investing in this type of thing to be able to fund his adventures in the future, especially in their early 20s. 

Yes, I think you guys are right, and just to elaborate on that—it's true, a standard design of a whole life policy in the early years the cash buildup is very slow. However, I would say that there are ways you can design it such that the cash accumulation is quicker than that sort of baseline scenario. And that's partly why you need to go to people, if you're going to get one of these policies, that know how to design it properly because somebody who hasn't been trained in it might not be out of deception or meant like they just might not know that there's a way to do these things. If you just go to somebody, a regular life insurance salesperson, who might say they can do that for you, they might not know, you know, some of these nuances. But anyway, there's a way to specifically design them appropriately.

So that the cash buildup is quicker than what some of your viewers might think if they have an idea, 'Oh, I heard like the rate of return on a whole life policy was 2%'—there are ways to make it better the further you get in the policy. So that's one thing. But yes, in general, you're right. It's not magic, right? So if you start out and you have no money, it's not that you can say, 'Oh, let me open up a whole life policy and all of a sudden I'll have $500,000'—that doesn't work. But I would say that people right now who have maybe medium-term goals or at some point want to start a company, that if you open up one of these policies and that's kind of you're running your cash through this thing, that might be a preferable savings vehicle.

I'm not sure for all other countries, but here in the United States, and I know this is similar in Canada, what the financial experts or gurus will tell people to do is, 'Oh, you should take your excess saving and go put it into what are called tax-qualified plans, like IRAs or 401(k)s', things like that. Well, there are all these tax advantages, but the problem is once you put your money in there, you can't touch it without a big penalty until you're at least 59 and a half years old. And so, in contrast, these whole life policies, if that's a way that you're sort of storing your wealth, then that's instantly accessible. There's not some penalty for early withdrawal. So I would say that that element, yes, for people who think that they may want to start a company down the road, if you switched over and got one of these policies, and that's what you started using as sort of the bedrock of your financial plan, that one of the huge advantages is that it's a source of liquidity that you can tap whenever you want to.

Or maybe for those people who are, they want to start multiple companies, and they don't want to depend on the state of the venture capital industry. So (when ) there's a dark tone, you still want to have an option to finance a venture. And also, you're not giving up on equity.

Those are great points. Right, and there are some famous anecdotes of founders who were turned down by conventional, you know, lending institutions and turned to their own policy. Walt Disney, I think, is the most famous one that apparently, originally when he wanted to get going, he couldn't get outside people to lend him money and so he borrowed against his own insurance policy to get off the ground.

So yes, there's that element and for a given company too. So this is another thing that's sort of like in the mixture of what we're saying. There are lots of companies now that rely on like bank lines of credit in order for their seasonal business operations, but they're profitable.

And what they do in a typical year is they make some net profit and then they go invest it in other kinds of vehicles, whatever they're putting it into—real estate or the stock market or long-term bonds.

And then with their business, though, they say, 'Oh yeah, I have this bank line of credit, and when my cash flow is low, I borrow against that. And then when things are good, I pay back the loan.' But they're vulnerable there, that if there's a credit crunch, then they could be turned off.

And so that's what we're saying. If you're in a situation like that, over time, as my co-author, Carlos Lara, would put it, you can wean yourself from your reliance on the conventional banks if, instead of putting your surplus funds into these other vehicles that don't have anything intrinsically to do with your business.

If you're building up one of these whole life policies or a system of policies, then over time, so you slowly, it's not an all or nothing thing, but over time, then in periods when you normally would access your bank line of credit, instead, you can borrow against your policy and start self-financing and doing it that way.

We know that you're working for a company that helps with getting this even banking concept popularized. It's called Infineo, right?

Yeah. So, again, my start with Infinite Banking originally was as an academic economist. I was teaching in school, and then I ended up in the financial sector. And then, again, I met this guy, Carlos Lara, who introduced me to Nelson Nash's work, and we formed what was called the Nelson Nash Institute. There, we would train insurance professionals in how to design these products the right way, you know, for rapid cash accumulation, things like that.

And then one of the graduates of our training program was this guy, Cole Snell, who, get my timeline right, I think in early '21, reached out to me and said, 'Hey, Bob, I'm founding this company called Infineo that we're taking whole life insurance, using infinite banking and we're marrying it with blockchain technology.' Since I, as an economist, had written on economics of cryptocurrencies and things, I knew how blockchain worked and I thought, 'Oh wow, this is a really interesting idea.' And so, yeah, that's what we do at Infineo, and I ended up joining the Infineo team.

So, what we're trying to do is several different things that are all kind of related together in terms of the grand scheme. But yeah, taking these whole life policies and putting them on a blockchain and associating a digital token with them so that now investors around the world who want exposure to this asset class can do it that way.

Because right now, it's actually pretty difficult if you're not in the US or Canada, if you wanted to take out a whole life policy, particularly the ones that are designed, you know, for these types of purposes, right?

Because what happened is, as more and more people started doing infinite banking, the US-based and Canadian carriers started listening to the agents in this niche and they would come up with new product types, you know, specifically designed for this kind of client in mind.

And so, again, they're very specialized products that are not available around the world. And if you're going to take out a whole life insurance policy on yourself, you have to be in the US or you have to have a business interest in the US to be insurable and blah, blah, blah. So that was one of the main reasons that Cole went down this path was to say, 'Okay, yes, we love Infinite Banking, but how do we bring its benefits to people around the world?' And so this is one of the things we're doing, taking these life insurance policies and putting them on the blockchain.

And so now, you could do something like, if there's some institutional money manager right now who maybe has a lot of fixed income, we can go to him and say, 'Oh, wouldn't you want some tokens that are basically claims, fractional claims on this big pool of whole life policies that we've acquired?' And so it's like a claim on the aggregate cash. That's what you're doing, right? You're making a lot of cash value. So, making security up in the year. And so it has the similar properties as if you directly owned a bunch of those policies. But it also has nice features too, where we can acquire the policies in the secondary market, after they've gotten through the hump of those early years of poor returns. And so now, it's like, we're just taking the best of what Whole Life can do and making that available to people.

Because now they can jump right in, and also, like with the traditional policy, when you take it out, you're on the hook for the premium payments for a long time. And so, that's not like a bond. With a bond, you can just say, 'Oh, here's $1,000, and I have this bond, and it's going to do something for me.' Whereas it's hard with an actual real-life policy. You couldn't just take up a policy and just pay $1,000 to see how it goes. Like, it's, you know, it's lumpier. Whereas you can if what's going on as Infineo is managing a pool of policies and issues digital tokens that are claims on it. Then, you know, the institutional manager can just say, 'Oh, yeah, I'll reduce my holding of treasuries, and I'll buy some of these digital tokens that point to this pool of policies,' and they could just make that one-time investment and see how they feel about it. And that, you know, as opposed to now, they're not contractually on the hook for making premium payments. So, anyway, well, like I said, we're capturing a lot of the cash management benefits of owning these things while avoiding a lot of the cumbersome details that I think are why you don't see a lot of institutional money managers using this as an asset class right now because there are a lot of real-world frictions that we're overcoming at Infineo.

Would you say that if you take the US and Canada who are the main clients for the Whole Life Insurance? Are those small business owners, finance professionals, or  just regular people? Who is actually buying the WLI with the goal to lend against it in the future?

So, one thing I want to be clear about is that historically and traditionally, a lot of people did use their WLI as a savings vehicle, right? So, this isn't some newfangled thing. It actually was very popular, and I think what happened in the United States was in the 1970s when Richard Nixon, you know, took the dollar off gold fully, and you saw price inflation rising. In that period, the people who were sitting on whole life policies that had pretty modest rates of appreciation—it looked like they were getting killed by inflation. You know, and so, I don't want to be locked into this thing. I want to get into the stock market, or I at least want to get into, you know, bonds that are relatively recently issued and they have a good yield. You can see references, like in Mises's work. He just matter-of-factly will say, like, the average household would save, like with savings accounts, like, you know, actually in the bank, what was called a savings account, like that was different from a checking account.

And he said life insurance was the thing that, you know, some people would, and like in the movie, the Christmas movie, 'It's a Wonderful Life.' In the beginning of that movie, there's a bank run where, you know, people are coming in, and it's the main character there. He's like, 'Well, no, I gave your money to Mary, you know,' and he's trying to calm down the bank run. And so, he needs money. And what he does is he goes to the local rich guy who's like the villain in the film, and he actually takes out his life insurance policy.

And he says, 'Well, I got this, you know, will you give me some money against this thing?' So, I'm just saying it used to be that, you know, people knew, 'Oh yeah, my life insurance is a store of wealth,' and that's what regular households used to use, you know, historically in the United States. So, nowadays, that still is a method, that regular people, like, you need life insurance. Some people still do like whole life, but it has gotten a lot of bad publicity. There are a lot of experts who will tell people, 'Oh, whole life is a bad investment.'

So, it's sort of now like a certain type of person who's willing to do things that's against conventional wisdom. But, yes, to answer your question, for people who specifically want to not just have it because, 'Oh, yeah, I need life insurance. So, I'll buy this kind of policy because I want it to be in effect forever. I don't want it to expire when I'm 65 or something.' Because that's the thing with term policies. That like, let's say you're 25 and you take out a 30-year term policy, once you turn 56 and that one expires, if you now still want life insurance, the rates are really expensive, and if your medical condition has changed, you might literally be uninsurable. So, that's the issue or that's one of the issues. But, yes, to answer your question, I don't off the top of my head know the exact distribution in terms of sales and who owns what. And also, there's a thing too where if you're a small business owner doing this, you're going to have a much bigger policy than, you know, just a salaried employee who's just doing it primarily for the death benefit.

So, if we're saying, like, in terms of premium payment, then yeah, small business owners, my guess would be the predominant ones. But also, too, there's this thing called bank-owned life insurance, or BOLI is the acronym, and that refers to like big investment banks and others that they will take out policies on their own employees and just hold them as assets, and so a lot of those policies are what's called universal life, but some of them are, you know, standard whole life policies as well. So again, this isn't just some, I don't want to give the impression that this is just something that, you know, this weird fringe group does, like this is a pretty standard thing. And somehow, you know, the marketing against it has managed to convince people that it's this weird thing when no, that's what people used to do all the time, and even to this day, big banks have so much of this, like hundreds of billions of dollars' worth of this asset, that there's a whole classification called BOLI, Bank-Owned Life Insurance.

Yeah, I've also seen this trend, especially on Twitter, that people consider that, you know, the main customer segment of whole life insurance is the type of people who just contrarian for the sake of contrarianism. Just against everything and against the conventional wisdom and all aspects of life.

When you borrow against your policy, is the money still compounded during the loan?

 So, yeah, your asset, your cash value, whatever, that still grows, and then there's just a lien against the policy.

You're borrowing money that has a contractual interest rate, and if you don't service that loan, the principal grows at interest, and that's just like a lien against your policy.

There's a subtlety. Some companies have what's called direct recognition, where part of what makes your policy grow is the dividend payments that you get each year. And so, for some companies, when the books are settled from the previous period, and they know how much they're going to distribute as dividend payments, they might give a lower amount to customers who have a big loan against their policy. Okay, but not every company does that. Again, the distinction is called direct versus indirect recognition. So, that's the only set, but even there, those policies still grow in cash value. It's just, if you have a big loan, it might not grow as quickly as otherwise would have because your dividend payment could be lower. If it's that type of a company.

Speaking about AI in the context of startups again, how do you think AI will shape the future of monetary and fiscal policies in the US. What would change from today?

Okay, great. Yeah, so I will answer that, but just to mention, so the other thing that we're doing at Infineo—originally, what was shown to me and why I joined—is we were going to take whole life insurance and merge it with blockchain. But then, we also now incorporate AI, and we're not just saying that as a buzzword. Like, we just hired somebody who's got a PhD in machine learning, and we're really working, among other things, to have interactive things with our website where you can be asking questions of an AI system that can help navigate and whatever, and then our internal operations. We're also using AI to optimize. In general, I'm very bullish on the prospect for real economic growth around the world as these AI systems keep improving.

So, even right now, like with ChatGPT-4, I think most people do not fully appreciate the capabilities of it. It still has certain limitations, but if you can just figure out how to effectively employ it in your business.

I think a lot of businesses could really enhance their productivity, perhaps by reviewing their operations and seeing which of our personnel, if they really got fluent in using these systems, could help them boost their productivity.

It's not going to be true for every job, but there's a lot of jobs where if you show the person, 'This is how you could use GPT-4 to really, so you could get a lot more done every day when you go to work.' I think there are huge gains to be made there.

So, I guess, in terms of what impact would all that have on monetary and fiscal policy, I think it will help governments and central banks get out of the huge hole they've dug for themselves.

That right now, like if things were just normal, things look pretty bleak in terms of like unfunded liabilities and just look at all these huge debt loads that various governments are carrying, and I think they're going to get, like the US, for example, I think is quickly getting into an untenable position where, like right now, the interest on the debt is over a trillion dollars a year. And just official government debt, and that's not even talking about unfunded liability like social security and pensions and things like that that the US government owes. And so, left to its own devices, that's a slow-motion train wreck, but I do think if all of a sudden the growth in US productivity quadruples, then that could extend the runway.

That could mean that oh, the crisis point gets pushed a lot further back in terms of the underlying fundamentals just because now humanity is just so much more productive than it otherwise would have been without these innovations from AI.

I don't think that's going to be a long-term solution because I think what's going to happen is you're just going to realize, 'Oh, now we have this much more to play with; let's go, let's start more wars, or let's, you know, go waste more money because now we have more to waste.’

But I am just saying that it's this interplay because I'm very pessimistic about what the Federal Reserve has done in recent years, and so I think there's going to be a big crash. But at the same time, I'm telling everybody you don't realize how amazing this AI is, and over the next five years, I think we're going to see an actual improvement in living standards from this stuff. And so, it's hard to recognize, you know what I mean? Like, it seems like I'm saying two different things.

So, I'm a short-term pessimist, but medium-term, I think this AI stuff is going to really bring a lot of innovations that even a lot of the AI proponents aren't fully appreciating. Because most people just think about it in one little category.

With that, you know, I mean, I was just talking about ChatGPT, but there's also, you know, self-driving cars, like how big of a deal is it going to be when, you know, 18-wheelers just have, you know, self-driving vehicles, so you don't need truckers anymore?

And so, like, goods are just constantly moving. There are fewer accidents, you know, because the driver doesn't need to sleep, you know, so that's going to lower transportation costs, things like that.

So the boost in productivity might save us from the negative effects of the central banks, right?

At least it will soften that. So given what the mistakes they made in the past, if going forward, the central banks and the governments adopted good policies, I think we would be fine.

We might have a bad crash in 2024. So, but I think it would be fine long-run. But like I said, unfortunately, I think they're going to just extract even more, so even though total output is going to be higher, they might still going to siphon off more and more. So, it doesn't solve the underlying problem if you don't think governments and central banks are right now very helpful to the economy, but yes, AI, I think, is going to make humans a lot more productive, even like 10 years from now than a lot of people think.

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