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Infinite Banking Concept
A look at Infinite Banking, Becoming Your Own Banker, and cash value life insurance.
When trying to understand the Infinite Banking Concept* things can often get confusing to the point of giving up. Borrow money here, pay yourself back here, become the banker, and it goes on.
And, although these are valuable ideas, it can sometimes feel like dragging your feet through the mud.
What people want to know is: where is my money going and how does the underlying investment function?
So, we are going to tackle the essential core of the Infinite Banking Concept and how the underlying product, cash value life insurance, helps us improve on these three investment essential: growing money safely and competitively, reducing taxes, and having access to money.
But first let me go through a very, very quick explanation of the book “Becoming Your Own Banker,” the book that started all of this.
Nelson Nash’s “Becoming Your Own Banker – The Infinite Banking Concept”
This book is definitely worth reading (get your copy here). It focuses on being the banker yourself in your own financial life. Instead of putting money into an investment that you can’t control, the idea here is to put money into a life insurance policy. Then, when you need money for major expenses, you borrow it out at the life insurance company interest rate and pay yourself back at a higher interest rate to increase growth.
Already this may sound confusing.
The reality is this: “Becoming Your Own Banker” is a great concept and something everyone should study, especially if you are a business owner, real estate investor, etc.
But we can go on and on about borrowing and paying yourself back.
However, this isn’t solving the real problems individuals face.
Here are the two biggest major factors in almost everyone faces in their financial plan: Not saving enough money and losing money in the market.
Where many people ask: “How should I buy my car?” We ask: “Which car should I buy? How can I save more money?”
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Where many people ask: “How can I earn more in my investments?” We ask: “How can I stop losing money in the market, pay less taxes, and still grow my wealth?”
By saving more money and stopping the holes in our financial portfolio we can have a much greater impact on our financial future compared to any other strategy.
And this is where high cash value whole life insurance comes into play–the underlying investment for the Infinite Banking Concept.
The Benefits of High Cash Value Whole Life Insurance
Even with R. Nelson Nash in the book “Becoming Your Own Banker,” whole life insurance wasn’t the goal.
The reason we focus so much on whole life insurance is because it fits so perfectly into what we are trying to accomplish.
Nelson Nash saw this too.
If there was a better place to put our money that would accomplish these same goals we would change the products we use tomorrow.
The reality is, as of right now, high cash value whole life insurance is the only investment that meets our three essential investment criteria.
That is: growing our money safely and competitively, lowering taxes, and having complete access to our money.
So, let’s look at exactly what high cash value life insurance is and why it fits these three criteria. We also want to be critical, so, after we go through the benefits, let’s look at the downsides and where this product restricts us.
#1 – Growing Money Safely and Competitively
Admittedly, our first criteria can be broken down into two different pieces. Even though high cash value life insurance accomplishes both of these—growth and safety—in the same way, we must look them individually.
Our number one rule is don’t lose money.
Without getting too deep into market research, etc. let’s just say losing money has a much greater impact on your financial portfolio than growth does.
This is what we call average vs. actual returns.
The reality is this.
If we have $100,000 in our investment account and we earn 50%.
We have earned $50,000.
And then we lose 50% on our money (now $150,000).
That means $75,000 in losses.
We end up with $75,000.
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You can have the losses first or last it won’t matter. The fact is, when it comes to your investments, losing money has a much greater negative impact on your investments than growth ever will.
And to make matters worse, the “average” return on your investment is 0%.
So, we have an average growth of 0% but we lost 25% of our money.
This is the illusion of Wall-Street investing.
So, the lesson here is don’t lose money.
Whole life insurance and the Infinite Banking Concept solve this.
Whole life insurance has a guaranteed minimum growth. This means that, even if the company paid nothing in dividends, you would still have growth.
(And by the way, the companies we use have paid dividends for over 100 years—through the great depression and multiple recessions—which adds to the safety factor.)
So, when it comes to safety, whole life insurance meets our criteria for safe growth. But keeping money safe doesn’t sound flashy. People are more concerned about what they will earn.
The point of investing is to grow your money. Simple whole life insurance, as you probably know, isn’t a great place to grow money.
This is where the “high cash value” in high cash value whole life insurance comes in.
By structuring a whole life insurance policy differently, we can, in essence, load the policy up with cash.
Thus making it an investment–what we call an Infinite Banking policy.
By doing this we give the life insurance policy a higher cash value as well as increase the dividends we earn per dollar.
This is how we structure the policy to earn competitive growth.
A Mass Mutual study on historical policies showed that, from 1981-2008, a 10-pay policy on a 50 year old grew at 6.52%.
When accounting for taxes saved, which we will do shortly, that growth becomes even more competitive.
And this policy wasn’t even a “high cash value” policy—it was just a standard 10-pay whole life insurance policy.
Through proper structuring, this policy could have likely earned even more.
This is what we mean by competitive growth. Sure, there is always a possibility that we can earn more in the stock market. However, there is also a possibility, and substantially more so, that ourselves, or our advisors, will often have losing years in the stock market.
Talking about funds trying to beat the market index, Warren Buffet said this:
“The bundle of hedge funds had compound annual returns of 2.2 percent in the nine years through 2020, compared with 7.1 percent for the index fund.”
The pros can’t beat the market, that’s how hard it is.
High cash value life insurance offers us competitive growth without the risk of market loss.
#2 – Lowering Taxes
When it comes to growing, and spending, money, taxes can have a major impact.
Not only is this a major impact on our financial portfolio when our money is growing, this can have an even greater impact when we retire.
Taxes and Growth
There are two ways to tax the growth on your money. Immediately—when you earn it—and deferred—when you take it out of your deferred account.
With life insurance we pay taxes on our money before we invest it, and then—if we plan correctly—we pay no taxes on the growth.
The question becomes: “Is deferring taxes better than paying taxes now.”
The reality is, deferring taxes is a roll of the dice.
Deferring is just postponing. So, there are some things we have to take into account.
The first is, retirement, which we will cover in just a second. But when we retire how much tax will we have to pay?
The second is tax rates, and this is where things become unclear.
Are taxes going to go up or down in the future?
Will tax brackets change in the future?
What tax bracket will I be in when I retire?
These are all very good questions, and probably hard to answer. However, the general opinion of almost everyone is that taxes will not go down.
This means, you will be lucky if taxes do not change from now until you retire.
There is a risk that taxes could go up before you retire. If this happens then you lose money because of that risk.
Sure, in a 401k situation there is a match we have to take into account. Saving up to the match can make sense for many individuals. However, beyond the match may not be a benefit.
If taxes go up, or tax brackets change, you may end up paying more tax than you expected.
By paying taxes now we eliminate these risks.
Taxes and Retirement
The second part of taxation is when you retire.
We have interviewed multiple accountants on this subject and the reality is this: almost no one is in a lower tax bracket when they retire than when they were working.
This means that, no matter what we originally thought about retirement, most people are retiring and paying more taxes than they originally planned.
Here are a few reasons.
- Children – After the kids grow up those deductions go away. Many of the deductions you had while you were working are no longer available to you. This means, more taxes.
- Home Mortgage – Similar to deductions for children, many are paying less, if any, home mortgage interest. This means even fewer tax deductions.
- Still making money – Many individuals assume when they retire they will stop making money. However, in today’s economy many individuals find they are still working in some fashion—this means more income and higher tax brackets.
Deferring taxes isn’t always a bad idea, however, know what you are getting yourself into. Cash value life insurance offers us a way to pay taxes now and then never pay on the growth.
And, as icing on the cake, when we use our life insurance cash value as income for retirement, we do not actually take it as income. This means that we reduce our actual retirement income which can reduce our taxes on earnings, taxes on social security, and potentially help reduce our tax bracket in a much more valuable way.
The last form of taxation comes when we die. With whole life insurance, and Infinite Banking, we get the benefit of having our money, in the form of life insurance death benefit, transferred to our heirs income tax free.
This is what we mean by deferring taxes indefinitely. With whole life insurance our money grows tax-deferred. However, when we die our life insurance death benefit (which has our cash value included in it) transfers income tax free.
This means that as long as our life insurance policy, or Infinite Banking policy, is not cancelled we will never pay income tax on any of the earnings in our account–ever.
We leave a legacy for our family in a safe and effective way.
#3 – Having Access to Our Money
The last investment characteristic we need is liquidity. Whether it’s for emergencies or opportunities, liquidity gives us control over our money when we want it—no matter what we want it for.
With 401k’s and IRA’s we are forced to lock our money away where we cannot access it. This can be a huge problem.
And because of this problem we are forced to have a side fund, like an emergency savings fund, that earns little to no interest.
These problems go hand in hand.
Government Sponsored Plans
401k’s and IRA’s are among the government sponsored plans where our money is locked away.
Here is a quick story.
When the 2008 crash happened one of my clients had decided to save money into his life insurance policy instead of in his 401k. Of course this was after careful study and understanding of what he was doing.
When the 2008 housing market came tumbling down, my client, had capital available in his policy that he could access anytime.
The housing crash was a horrible thing and many people suffered. However, he was able to take advantage of this situation responsibly and he purchased a few homes at rock bottom prices.
He has made a significant amount of money off of those investments.
You don’t have to be an investor. However, having liquidity, or access to your money, gives you the opportunity to do what you want when you want.
If my client had put his money in an IRA or 401k he may not have had the same options.
This same principle plays into emergency savings in an Infinite Banking policy. If your emergency savings is locked into an IRA or 401k you may not be able to access that money.
On the other hand, if that money is in a bank account or money market account it will probably earn less that 1%.
Life insurance offers us a way to marry the two ideas. We can place our emergency savings somewhere safe and accessible, while still having the growth potential of an investment vehicle.
This makes life insurance a very smart place to put our emergency savings fund.
The point is, having access to your money is a massive benefit that gives you the options to do what you want today, while also giving you the freedom for whatever may come your way tomorrow.
The Downside of High Cash Value Life Insurance
No investment product is perfect.
Although the benefits of high cash value life insurance and Infinite Banking massively outweigh the downsides, there are downsides.
These downsides don’t make life insurance unusable, they do, however, force us to be more planned in our approach.
#1 MEC – The MEC, or modified endowment contract, is a regulation that tells us how much money we can put into a life insurance policy. Because of this, we must buy death benefit. Although death benefit, especially in retirement, is a must have, buying it up-front can take our money longer to grow. This means that some of our money, although it will be recouped later, goes towards death benefit costs that we may or may not need immediately.
#2 Five Year “Sweet Spot” – Because of the MEC and the death benefit, life insurance takes a few years to catch up to itself. This does not drastically impact long-term growth. However, because some of our money is going to base death benefit, it can take a few years for us to see the actual returns on our money. This forces life insurance to be a much more long-term strategy instead of something we can buy and sell as we please.
#3 – Dollar Limitations – Although we can put as much money into life insurance as we want, each life insurance policy will have a dollar amount specified when we start it. This means that, if we decide to invest $1,000 dollars a month into a life insurance policy, our maximum amount we can put into our policy is $1,000. To make matters even a little more complicated, our limit, in this case $1,000 dollars, is also our most efficient dollar amount. So, by maxing out our life insurance policy we will get the most benefit possible. Especially in the first five years.
There is No One Size Fits All
What R. Nelson Nash started was a unique new perspective on whole life insurance, which he called the Infinite Banking Concept in his book “Becoming Your Own Banker,” and how to maximize the safety, tax advantages, and liquidity that can be found inside of this investment vehicle.
Whether you call it Infinite Banking or by another name there are many different methods for doing the same thing.
What we do want to emphasize is that Infinite Banking and other life insurance investments that work do not involve or utilize universal life insurance in any way. Universal life insurance is much different than whole life insurance and there are some fundamental flaws that make universal life not only risky, but very expensive.
Infinite Banking and whole life insurance offer a very strong and practical option for investing. However, in the end it will greatly depend on your own personal situation, risk tolerance levels, and financial goals.
There is no one size fits all with investing.
Every investment has its downsides. Where one may see a safe investment that has competitive gain another may see a weak investment that doesn’t offer any risk.
Each individual is different. Find the right investment for you and stick to a long-term plan.
From Wikipedia, the free encyclopedia
In finance, moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a three-fold classification: if the derivative would have positive intrinsic value if it were to expire today, it is said to be in the money; if it would be worth less if expiring at the current price it is said to be out of the money, and if the current price and strike price are equal, it is said to be at the money. There are two slightly different definitions, according to whether one uses the current price (spot) or future price (forward), specified as “at the money spot” or “at the money forward”, etc.
This rough classification can be quantified by various definitions to express the moneyness as a number, measuring how far the asset is in the money or out of the money with respect to the strike вЂ“ or conversely how far a strike is in or out of the money with respect to the spot (or forward) price of the asset. This quantified notion of moneyness is most importantly used in defining the relative volatility surface: the implied volatility in terms of moneyness, rather than absolute price. The most basic of these measures is simple moneyness, which is the ratio of spot (or forward) to strike, or the reciprocal, depending on convention. A particularly important measure of moneyness is the likelihood that the derivative will expire in the money, in the risk-neutral measure. It can be measured in percentage probability of expiring in the money, which is the forward value of a binary call option with the given strike, and is equal to the auxiliary N(d2) term in the BlackвЂ“Scholes formula. This can also be measured in standard deviations, measuring how far above or below the strike price the current price is, in terms of volatility; this quantity is given by d2. (Standard deviations refer to the price fluctuations of the underlying instrument, not of the option itself.) Another measure closely related to moneyness is the Delta of a call or put option. There are other proxies for moneyness, with convention depending on market. 
Suppose the current stock price of IBM is $100. A call or put option with a strike of $100 is at-the-money. A call with a strike of $80 is in-the-money (100 − 80 = 20 > 0). A put option with a strike at $80 is out-of-the-money (80 − 100 = −20 
Intrinsic value and time value
The intrinsic value (or “monetary value”) of an option is its value assuming it were exercised immediately. Thus if the current (spot) price of the underlying security (or commodity etc.) is above the agreed (strike) price, a call has positive intrinsic value (and is called “in the money”), while a put has zero intrinsic value (and is “out of the money”).
The time value of an option is the total value of the option, less the intrinsic value. It partly arises from the uncertainty of future price movements of the underlying. A component of the time value also arises from the unwinding of the discount rate between now and the expiry date. In the case of a European option, the option cannot be exercised before the expiry date, so it is possible for the time value to be negative; for an American option if the time value is ever negative, you exercise it (ignoring special circumstances such as the security going ex dividend): this yields a boundary condition.
At the money
An option is at the money (ATM) if the strike price is the same as the current spot price of the underlying security. An at-the-money option has no intrinsic value, only time value. 
For example, with an “at the money” call stock option, the current share price and strike price are the same. Exercising the option will not earn the seller a profit, but any move upward in stock price will give the option value.
Since an option will rarely be exactly at the money, except for when it is written (when one may buy or sell an ATM option), one may speak informally of an option being near the money or close to the money.  Similarly, given standardized options (at a fixed set of strikes, say every $1), one can speak of which one is nearest the money; “near the money” may narrowly refer specifically to the nearest the money strike. Conversely, one may speak informally of an option being far from the money.
In the money
An in the money (ITM) option has positive intrinsic value as well as time value. A call option is in the money when the strike price is below the spot price. A put option is in the money when the strike price is above the spot price.
With an “in the money” call stock option, the current share price is greater than the strike price so exercising the option will give the owner of that option a profit. That will be equal to the market price of the share, minus the option strike price, times the number of shares granted by the option (minus any commission).
Out of the money
An out of the money (OTM) option has no intrinsic value. A call option is out of the money when the strike price is above the spot price of the underlying security. A put option is out of the money when the strike price is below the spot price.
With an “out of the money” call stock option, the current share price is less than the strike price so there is no reason to exercise the option. The owner can sell the option, or wait and hope the price changes.
Spot versus forward
Assets can have a forward price (a price for delivery in future) as well as a spot price. One can also talk about moneyness with respect to the forward price: thus one talks about ATMF, “ATM Forward”, and so forth. For instance, if the spot price for USD/JPY is 120, and the forward price one year hence is 110, then a call struck at 110 is ATMF but not ATM.
Buying an ITM option is effectively lending money in the amount of the intrinsic value. Further, an ITM call can be replicated by entering a forward and buying an OTM put (and conversely). Consequently, ATM and OTM options are the main traded ones.
Intuitively speaking, moneyness and time to expiry form a two-dimensional coordinate system for valuing options (either in currency (dollar) value or in implied volatility), and changing from spot (or forward, or strike) to moneyness is a change of variables. Thus a moneyness function is a function M with input the spot price (or forward, or strike) and output a real number, which is called the moneyness. The condition of being a change of variables is that this function is monotone (either increasing for all inputs, or decreasing for all inputs), and the function can depend on the other parameters of the BlackвЂ“Scholes model, notably time to expiry, interest rates, and implied volatility (concretely the ATM implied volatility), yielding a function:
M ( S , K , τ , r , σ ) ,
where S is the spot price of the underlying, K is the strike price, П„ is the time to expiry, r is the risk-free rate, and Пѓ is the implied volatility. The forward price F can be computed from the spot price S and the risk-free rate r. All of these are observables except for the implied volatility, which can computed from the observable price using the BlackвЂ“Scholes formula.
In order for this function to reflect moneyness вЂ“ i.e., for moneyness to increase as spot and strike move relative to each other вЂ“ it must be monotone in both spot S and in strike K (equivalently forward F, which is monotone in S), with at least one of these strictly monotone, and have opposite direction: either increasing in S and decreasing in K (call moneyness) or decreasing in S and increasing in K (put moneyness). Somewhat different formalizations are possible.  Further axioms may also be added to define a “valid” moneyness.
This definition is abstract and notationally heavy; in practice relatively simple and concrete moneyness functions are used, and arguments to the function are suppressed for clarity.
When quantifying moneyness, it is computed as a single number with respect to spot (or forward) and strike, without specifying a reference option. There are thus two conventions, depending on direction: call moneyness, where moneyness increases if spot increases relative to strike, and put moneyness, where moneyness increases if spot decreases relative to strike. These can be switched by changing sign, possibly with a shift or scale factor (e.g., the probability that a put with strike K expires ITM is one minus the probability that a call with strike K expires ITM, as these are complementary events). Switching spot and strike also switches these conventions, and spot and strike are often complementary in formulas for moneyness, but need not be. Which convention is used depends on the purpose. The sequel uses call moneyness вЂ“ as spot increases, moneyness increases вЂ“ and is the same direction as using call Delta as moneyness.
While moneyness is a function of both spot and strike, usually one of these is fixed, and the other varies. Given a specific option, the strike is fixed, and different spots yield the moneyness of that option at different market prices; this is useful in option pricing and understanding the BlackвЂ“Scholes formula. Conversely, given market data at a given point in time, the spot is fixed at the current market price, while different options have different strikes, and hence different moneyness; this is useful in constructing an implied volatility surface, or more simply plotting a volatility smile. 
This section outlines moneyness measures from simple but less useful to more complex but more useful.  Simpler measures of moneyness can be computed immediately from observable market data without any theoretical assumptions, while more complex measures use the implied volatility, and thus the BlackвЂ“Scholes model.
The simplest (put) moneyness is fixed-strike moneyness,  where M=K, and the simplest call moneyness is fixed-spot moneyness, where M=S. These are also known as absolute moneyness, and correspond to not changing coordinates, instead using the raw prices as measures of moneyness; the corresponding volatility surface, with coordinates K and T (tenor) is the absolute volatility surface. The simplest non-trivial moneyness is the ratio of these, either S/K or its reciprocal K/S, which is known as the (spot) simple moneyness,  with analogous forward simple moneyness. Conventionally the fixed quantity is in the denominator, while the variable quantity is in the numerator, so S/K for a single option and varying spots, and K/S for different options at a given spot, such as when constructing a volatility surface. A volatility surface using coordinates a non-trivial moneyness M and time to expiry П„ is called the relative volatility surface (with respect to the moneyness M).
While the spot is often used by traders, the forward is preferred in theory, as it has better properties,   thus F/K will be used in the sequel. In practice, for low interest rates and short tenors, spot versus forward makes little difference. 
The above measures are independent of time, but for a given simple moneyness, options near expiry and far for expiry behave differently, as options far from expiry have more time for the underlying to change. Accordingly, one may incorporate time to maturity П„ into moneyness. Since dispersion of Brownian motion is proportional to the square root of time, one may divide the log simple moneyness by this factor, yielding:  ln ( F / K ) / τ . <\displaystyle \ln \left(F/K\right)<\Big /> <\sqrt <\tau )).>This effectively normalizes for time to expiry вЂ“ with this measure of moneyness, volatility smiles are largely independent of time to expiry. 
This measure does not account for the volatility Пѓ of the underlying asset. Unlike previous inputs, volatility is not directly observable from market data, but must instead be computed in some model, primarily using ATM implied volatility in the BlackвЂ“Scholes model. Dispersion is proportional to volatility, so standardizing by volatility yields: 
This is known as the standardized moneyness (forward), and measures moneyness in standard deviation units.
In words, the standardized moneyness is the number of standard deviations the current forward price is above the strike price. Thus the moneyness is zero when the forward price of the underlying equals the strike price, when the option is at-the-money-forward. Standardized moneyness is measured in standard deviations from this point, with a positive value meaning an in-the-money call option and a negative value meaning an out-of-the-money call option (with signs reversed for a put option).
BlackвЂ“Scholes formula auxiliary variables
The standardized moneyness is closely related to the auxiliary variables in the BlackвЂ“Scholes formula, namely the terms d+ = d1 and d− = d2, which are defined as:
The standardized moneyness is the average of these:
and they are ordered as:
As these are all in units of standard deviations, it makes sense to convert these to percentages, by evaluating the standard normal cumulative distribution function N for these values. The interpretation of these quantities is somewhat subtle, and consists of changing to a risk-neutral measure with specific choice of numГ©raire. In brief, these are interpreted (for a call option) as:
- N(d−) is the (Future Value) price of a binary call option, or the risk-neutral likelihood that the option will expire ITM, with numГ©raire cash (the risk-free asset);
- N(m) is the percentage corresponding to standardized moneyness;
- N(d+) is the Delta, or the risk-neutral likelihood that the option will expire ITM, with numГ©raire asset.
These have the same ordering, as N is monotonic (since it is a CDF):
Of these, N(d−) is the (risk-neutral) “likelihood of expiring in the money”, and thus the theoretically correct percent moneyness, with d− the correct moneyness. The percent moneyness is the implied probability that the derivative will expire in the money, in the risk-neutral measure. Thus a moneyness of 0 yields a 50% probability of expiring ITM, while a moneyness of 1 yields an approximately 84% probability of expiring ITM.
This corresponds to the asset following geometric Brownian motion with drift r, the risk-free rate, and diffusion Пѓ, the implied volatility. Drift is the mean, with the corresponding median (50th percentile) being r−Пѓ 2 /2, which is the reason for the correction factor. Note that this is the implied probability, not the real-world probability.
The other quantities вЂ“ (percent) standardized moneyness and Delta вЂ“ are not identical to the actual percent moneyness, but in many practical cases these are quite close (unless volatility is high or time to expiry is long), and Delta is commonly used by traders as a measure of (percent) moneyness.  Delta is more than moneyness, with the (percent) standardized moneyness in between. Thus a 25 Delta call option has less than 25% moneyness, usually slightly less, and a 50 Delta “ATM” call option has less than 50% moneyness; these discrepancies can be observed in prices of binary options and vertical spreads. Note that for puts, Delta is negative, and thus negative Delta is used вЂ“ more uniformly, absolute value of Delta is used for call/put moneyness.
The meaning of the factor of (Пѓ 2 /2)П„ is relatively subtle. For d− and m this corresponds to the difference between the median and mean (respectively) of geometric Brownian motion (the log-normal distribution), and is the same correction factor in ItЕЌ’s lemma for geometric Brownian motion. The interpretation of d+, as used in Delta, is subtler, and can be interpreted most elegantly as change of numГ©raire. In more elementary terms, the probability that the option expires in the money and the value of the underlying at exercise are not independent вЂ“ the higher the price of the underlying, the more likely it is to expire in the money and the higher the value at exercise, hence why Delta is higher than moneyness.
A derivative relating its strike price to the price of a given asset. It refers to the intrinsic value of an option at present. There are three common forms of moneyness: in the money, out of the money, and at the money When an investor is “in the money,” they stand to acquire gains by exercising the option. When an investor is “out of the money,” they stand to endure profit losses. When an investor is “at the money,” they stand to break even though the option is exercised.
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