How to Use Infinite Banking to Invest in Real Estate in 2024
Key Takeaways:
- Infinite banking can be a powerful financial tool to build wealth.
- Real estate investing can benefit from a leverage-able, liquid, and loss-protected asset.
- Infinite banking can achieve leverage by utilizing the policy's cash value.
- The money inside an infinite-banking style policy is highly liquid.
- Life Insurance is a safe harbor for your money.
What is Infinite Banking?
Infinite Banking is a financial strategy that utilizes an overfunded whole life insurance policy as a personal banking system.
By using a specially designed, dividend-paying, overfuned whole life insurance policy with a high-tier mutual insurance company, you can shelter your assets in a tax-free growth environment where your money will experience uninterrupted compound growth for the rest of your life and potentially for generations to come.
At Better Wealth, we call whole life insurance The And Asset.
The Infinite Banking Concept® was invented by Nelson Nash in his book "Becoming Your Own Banker.” A former forestry consultant from North Carolina and a firm believer in the Austrian school of economics, Nelson Nash advocated for free markets, individual liberty, and limited central bank intervention.
What if you could control your money, take back the banking function in your life, recapture the interest you otherwise would pay others, and instead pay it back to yourself? Private banks use your hard-earned dollars to make more money for themselves. Why not recapture that ability by allowing your money to work for you in two places at once?
Here are several key components of Infinite Banking:
Whole Life Insurance Policy
A life insurance policy is structured to make the living benefits as powerful as the death benefit. The cash value component grows over time and can be accessed through policy loans or withdrawals, tax-free. The death benefit grows as premiums and dividends are paid into the policy and will be distributed to the beneficiaries upon the insured's death.
Cash Value Accumulation
As you pay premiums, the cash value of the policy increases. This cash value can be borrowed against, giving you access to funds without going through traditional banks. A healthy internal rate of return inside the cash value of a properly overfunded whole-life policy can run from 3.5 to 5.0%, depending on the dividend rates of the carrier.
Policy Loans
You can control your money and use it at the same time by borrowing against the cash value of your policy. These loans typically have a finance charge of around 5% to 6% and could be more advantageous depending on market conditions than other options. These are “unstructured” policy loans, meaning you have no specific timeframe to satisfy the loan. Because the lender (the insurance company) also guarantees the collateral (your cash value and death benefit), if you pass away with a loan balance, your death benefit pays off the loan, and the remainder is paid to your beneficiaries.
Repayment and Growth
While repaying the loan, the cash value continues to grow. This can create a compounding effect, increasing the cash value of your policy over time. The concept of paying interest back to yourself can be misleading; we will go into that in more detail in another blog. For now, understand that the insurance company does charge interest, and when paid back, that interest is paid back to the insurance company.
Tax Advantages
The cash value growth in a whole life policy is tax-deferred, and policy loans are not considered taxable income as long as your policy is properly structured. The cash value can be accessed tax-free through policy loans or withdraws. The death benefit is paid out income tax-free to your beneficiaries upon your death.
Control and Flexibility
Infinite Banking provides guaranteed control and flexibility, as there is no set time period within which you must satisfy any loans. The insurance company is contractually obligated to fulfill any loan requests on available cash value. The policy structure itself also gives policy owners a degree of flexibility year to year when it comes to paying premium.
Infinite Banking Benefits & Risks
Potential Benefits
- Asset Growth/Leverage: The policy's cash value can continue to grow even while loans are outstanding.
- Tax Advantages: Tax-deferred growth, tax-free policy loans and withdraws, and income tax-free death benefit payout to beneficiaries.
- Protection & Privacy: Each state affords different levels of protection to the money inside a life insurance policy.
- Loss-Protected: Due to the non-volatile nature of life insurance, the cash value inside your policy is contractually obligated to grow every year.
- Control Over Finances: You have control over your borrowing and repayment terms.
- Flexibility: A properly structured whole-life policy will include base premiums and PUAs (paid-up additions). Both buy death benefit, but PUAs do not require additional underwriting and create a large degree of immediate cash value after each payment. PUAs are optional – as long as the basic policy charges are paid, the policy will retain the option to have more PUAs paid overtime. The exact mechanics vary from company to company.
- Legacy Planning: Whole life insurance provides a death benefit that can be tied into an estate plan for your heirs.
- Track Record: Many companies that can be used have been around for almost two centuries, and specialize in whole life insurance. These companies are among the most well-capitalized institutions on the planet.
Potential Risks
- Cost of Premiums: Whole life insurance premiums are higher than term life insurance for the same amount of coverage.
- Complexity: The strategy can be complex and requires a good understanding of whole life insurance policies and their features.
- Commitment: It requires a long-term commitment to paying premiums and managing the policy effectively over time. Side note: policies structured properly can often become self-sustaining in under ten years, requiring no more premium from you.
Infinite Banking can be a powerful tool for those who understand its mechanics and are disciplined in managing their policies. However, it's crucial to work with a knowledgeable financial professional to design a policy that fits your needs and is aligned with your ability to fund it.
Using Infinite Banking to Start Your Real Estate Portfolio
What is Real Estate Investing?
Real estate investing involves purchasing, managing, and selling real estate properties to earn a profit. It can be a lucrative way to build wealth, but it also requires careful planning, research, and management. One popular method to invest in real estate is BRRRR - this combines the concept of property flipping and long-term buy-and-hold rentals.
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It's a real estate investment strategy that involves purchasing properties, renovating them to increase their value, renting them out to generate income, refinancing to pull out the increased equity, and then repeating the process with additional properties. Here's a breakdown of each step:
Steps in the BRRRR Strategy
- Buy: Purchase a distressed or undervalued property with the potential for improvement. Investors typically look for properties that can be bought well below market value.
- Renovate: Renovate the property to increase its market value and rental potential. This can involve cosmetic updates, structural repairs, and improvements to make the property more appealing to tenants.
- Rent: After rehab, rent out the property to tenants. The rental income should cover the property's expenses, including future mortgage payments, insurance, taxes, and maintenance, ideally with some leftover profit.
- Refinance: Once the property is rented and stabilized, refinance the property to pull out the increased equity created by the renovations. This involves taking out a new mortgage based on the updated appraised value of the property, allowing the investor to recoup the initial investment and potentially some profit.
- Repeat: Use the cash from the refinance to purchase another property and repeat the process. This allows for scaling up the investment portfolio using the same initial capital.
This blog will explore three functions of using the And Asset (i.e., infinite banking) to invest in your real estate portfolio:
- Leverage
- Liquidity
- Loss-Protected
How to Use Infinite Banking to Achieve Leverage
What is Leverage?
If physical leverage involves maximizing mechanical advantage, most real estate investors would agree that financial leverage is one of the most powerful tools in an investor's toolbelt.
Controlling a $100k asset for $20k by leveraging OPM (i.e., other people's money) is a pretty sweet deal – especially if you are earning positive cash flow and someone else is managing your tenants for you. Leverage allows investors to increase the number of transactions they can perform with the same amount of money. If you have $100k cash in the right markets, you can buy 3 to 5 quality, cash-flowing rental properties.
Another way to buy property is through cash, using no leverage, and instead spending all your money. In this scenario, how many jobs is each dollar doing for you? One.
With the $100k mentioned above, you could buy one rental in the same market we mentioned, instead of 3 to 5. Granted, that rental would cash flow higher because you wouldn't have a mortgage. Still, when vacancies, repairs, market volatility, or other unknowns strike, they will impact your $100k investment more because your money is sitting in one property and not 3 to 5. By moving your money from wherever it was sitting into a piece of real estate, you are trapping your dollars in equity jail, which is hard to access unless you pay a bank for more leverage or sell the property.
As you can see, using leverage correctly can mean spending the same amount to buy more rentals while decreasing your overall risk. Buying in cash places all of your eggs into one basket, where any one thing can affect the efficiency and performance of that one basket.
How Does Using Infinite Banking Help You Achieve Leverage?
By using your dollars in two places simultaneously, you can leverage the power of continuously compounding your money & using it, too!
Your money has to be stored somewhere—in a sock drawer, under the mattress, in home equity, in the banks, or in a specially designed, dividend-paying, overfunded, cash-value whole life insurance contract (the And Asset).
The And Asset is a specially designed overfunded whole life insurance policy with a mutual insurance carrier. These policies are designed to accelerate the growth of your cash value inside the policy. When that growth happens, it is never lost. If you use this vehicle to grow your assets, your money will never lose value and is guaranteed to grow yearly.
Basically, think of using your And Asset like a HELOC (home equity line of credit).
Heloc vs. And Asset
How a HELOC works:
- Once enough equity is built up in your home, you can approach a bank to get access to your trapped equity by using a line of credit.
- This line of credit is using your equity as collateral.
- Use your line of credit like you would use a checkbook.
- When you write a check from your HELOC account to invest or do home improvements, you will start paying interest on the principal balance you just created. That interest is due in monthly payments, most often.
- Interest accrues daily, based on an annual percentage rate (often variable), and the unpaid balance to the line of credit.
- Interest payments are due monthly
- Repay your balance and interest to refill your line of credit. Rinse, Repeat.
The Drawbacks to a HELOC
Do you own and control the terms of a HELOC?
❌ No, the bank does.
Is the value of your property securing the HELOC guaranteed to increase?
❌ Nope.
Do you get to create your own payback schedule for the HELOC?
❌ Absolutely not… try convincing a bank of that one.
Will your HELOC be around until you live to be a ripe old age?
❌ Not likely - most HELOCs have five to fifteen-year terms. Once it's gone, you have to reapply for a new one, and they will only give it to you if you still have sufficient equity and you have been a nice little boy/girl and still fit their client profile for a new loan.
Will your HELOC be there when you need it?
❌ It depends - Your available credit is based on equity, which can change over time, if your equity drops too low, your account can be frozen, reduced, or called due in a short period
Benefits of The And Asset
✅ You own and control the asset, so you don't have to apply to a bank to get approved for a line of credit.
✅ Borrow directly from the life insurance company and use your policy cash value as collateral. Send an email or make a phone call, then wait for it to hit your account.
✅ Your cash value is guaranteed to grow even when you use it as collateral for a loan.
✅ There is no payback schedule. You create one that works for you. (if you have ever done property flipping or used the BRRRR method, you can begin to understand how powerful not having a repayment schedule can be)
✅ Repay your balance and interest to refill your available cash value. Rinse, Repeat.
How Can You Leverage The And Asset for Real Estate?
- Buy your next rental with a mortgage, using The And Asset for your down payment:
- Begin the loan pre-approval process
- Pull policy statements to show cash value in your life insurance and send to the mortgage company.
- Send an offer to the seller.
- If accepted, you schedule the close, subject to financing.
- Request a loan from the carrier against your cash value in the amount needed for closing (plus some reserves to keep the bank happy).
- Close on the property.
- Collect rent profits and use those funds to repay your policy by repaying the loan or paying into Paid Up Additions (PUAs).
- Buy your next rental or flip with cash, using the And Asset for the entire purchase price:
- Borrow cash, leveraging your life insurance policy.
- Pay cash, close in 10 days, and pay under market value for the home.
- Rent or sell the home and move profits back into your policy.
- OR, combine the two:
- Borrow cash, leveraging your life insurance policy.
- Pay cash, close in 10 days, and pay under market value for the home.
- Rent the home and move profits back into your policy.
- Hold for 6-12 months and do a cash-out refinance, pulling all of that equity and appreciation back out and moving back into your policy.
- Rinse and Repeat!
How to Use Infinite Banking to Capture Liquidity
What is Liquidity?
Liquidity measures how available your assets are for you to use. Generally, you must sacrifice long-term performance to achieve a highly liquid asset. But not with overfunded whole life insurance.
Owning real estate outright is fairly illiquid since your cash is locked up in equity jail. To access that cash, you would need to ask for permission (30 to 45 days process to refinance), or you would have to sell the property.
You can have all the equity in the world, have a net worth of millions of dollars on paper, but if you can’t access that equity, then you can’t use it—plain and simple. As real estate investors, we need our capital to be liquid. How many people have lost deals because they couldn’t come up with the cash quicker than the next person?
Your cash value is inside your life insurance policy. And it’s liquid. When you need a loan, all you must do is go online, click a few buttons (for loans under 50k in most cases), and the cash appears in your checking account in a short period. Larger loans often require a signed form or verbal confirmation with the carrier yourself or via your broker, but the timeframes involved don’t change.
There is no loan application to fill out, no credit checks, and no employment history needed. You just say, “I want $50k,” and so long as you have that much in available net cash value inside the policy, you get it. Every carrier is different, but on average, you can access between 90% and 98% of your cash value via a loan at any time.
Like a line of credit, every dollar you pay back towards your loan's principal becomes another dollar you can borrow again.
What do You Mean by Capture Liquidity?
Whether you have outstanding loans or not, your entire cash value is earning contractually guaranteed growth (and non-guaranteed dividends) that you can access tax-free for your entire lifetime. The secret sauce of using mutual insurance carriers is that they also pay a non-guaranteed dividend, tax-free, back to your policy every year as they are profitable.
Now, technically speaking, cash value life insurance growth is tax-deferred. However, you can access the growth tax-free by utilizing cash-value loans described above. Like any loan you get from a bank, insurance loans are not taxable if the policy is structured correctly.
By paying premiums into life insurance, you are allocating those dollars for a future use, capturing that liquidity in a highly tax and growth efficient environment for the rest of your life!
Not only are you enjoying guaranteed growth, but because it’s life insurance, you are also building a guaranteed death benefit. Many people misunderstand the death benefit portion in a cash-value whole life insurance policy. The permenant and guaranteed death benefit rises every single year that you make your premium payment.
That’s right; the income-tax-free death benefit that is paid to your beneficiaries after you die continues to increase every year you remain alive.
Key Liquidity Takeaways
✅Your cash value creates a line of credit for you that is liquid and accessible.
✅Your annual premium payment does not increase and may even decrease over time.
✅Your policy can pay its own premiums after a period of time as the growth outpaces the premium costs.
✅The death benefit to be paid to your beneficiaries grows yearly. In other words, the longer you live, the more money is paid out to your beneficiaries when you die. Guaranteed. Income-tax free.
How is this Loss-Protected?
What good is leverage and liquidity if you’re still having to worry about volatility and the risk of losing your capital to the whims of the market? And how much capital are you losing to inflation when it’s sitting in your bank account, earning 0.1% while inflation rises at 3% or more?
Your money has to reside somewhere. And there is no shortage of places where it can reside. So why not discover the safest place for your money to reside?
I often hear advisors proudly say that the S&P 500 has averaged 10% returns for the last 100 years. That is actually a pretty cool statement, but is is also incredibly misleading. If I earn 50% on 100K, my new balance is 150k. If I lose 50% on that balance, my new balance is 75k. My average growth was 0% but I actually lost 25k…Averages can lie, track records, cannot.
These mutual insurance companies can provide excellent harbors for your wealth, providing financial stability and dividends every year for over a century, and for some, its close to two centuries. As a safe haven, these companies are the gold standard.
Whole life insurance policies are a fantastic loss-protected asset. It’s a private, unilateral contract with some of the largest, oldest, and most stable finance companies in the U.S. where your funds are contractually obligated to grow every year. The track records and financial stability ratings alone breed a high degree of confidence in this asset lass, but beyond that, cash value life insurance is bestowed with creditor, predator, and lawsuit protections at the state level.
Life Insurance Creditor, Predator, and Lawsuit Protections
In most states, the cash value inside your life insurance contract is protected from creditors, predators, and lawsuits. In some states, it is also protected from bankruptcy. This might be one reason so many wealthy families have put huge sums of money towards these contracts - if you are in real estate long enough, the question isn’t “Will you be sued?” it’s “When will you be sued?”
When Theory Meets Practice: Real World Example
At BetterWealth, one of our wealth coaches, Alden Armstrong, has a real world example of how he used the principles of infinite banking to help him invest in real estate:
“Over the summer in 2020, I found a 2013 manufactured home that was built by Champion specifically for FEMA disaster relief, on Facebook Marketplace. It was in good condition and listed for $22,000. FEMA had never used this particular home, and the current owner had bought it at a government auction in 2016 when FEMA remembered that it was in storage and then sold it to recoup the years of losses it had since accrued. The then-current owner bought it for $17,000, stuck it in a field in the middle of Southern Colorado (east of Pueblo), and forgot about it.
Because of my access to quick capital from the cash value of my life insurance policy, I was able to beat every other interested party. I showed up, negotiated, and closed the deal below the asking price for a total cash price of $13,000.
That same week, I moved it to a bigger city to increase its value. Five months later, I sold it for $27,000. The best part about this is the total interest I paid to access the loan was $224.43. So my profit was $13,775.57, and I only paid interest after I made a profit.
Meanwhile, because I leveraged my cash value and borrowed the insurance company's money for a policy loan - no money ever left my cash value. My $13,000 was still in the policy earning approximately $200 in growth over that period of time, which was later reflected by the dividend paid at the end of the year. So, the net cost of this transaction was about $24.43 – the difference between the internal growth and the interest paid to finance the loan.
Because I controlled the line of credit through my life insurance policy, I also controlled the access and repayment terms of the loan, so I could make an investment that might have been otherwise impossible if I had qualified for a loan from a bank first.”
FAQ’s
What is Infinite Banking?
Infinite Banking is the concept of using your dollars in more than one place at one time. It involves leverage, liquidity, and loss protection, giving you the unparalleled advantage of control and uninterrupted compound interest. It involves structuring life insurance policies so the living benefits (i.e., cash value) are as powerful as the death benefit. By borrowing against the policy's cash value, you can recapture the expense of borrowing money from other institutions, becoming your own bank in the process.
Since the money never leaves your policy's cash value when you borrow against it, you can leverage other people’s money (in the form of a policy loan from the insurance carrier) into an income-producing activity, investment, or some other method of growing your assets.
This also works in reverse. You can leverage your policy’s cash value and purchase liabilities as well (cars, personal homes, etc.). When you do this, you can recapture te expense of paying a bank for use of their money! Instead, you are in the driver seat and can pay your policy loan back on your schedule, often decreasing your overall interest and reaching a paid off car or house much sooner.
Infinite banking uses life insurance as one financial tool in your tool belt. Its combination of asset growth, leverage, liquidity, loss-protection, and legacy makes it very powerful.
How to Start Infinite Banking?
You can start an infinite banking-style policy by contacting a knowledgeable insurance agent who can build an infinite-banking-style policy.
At BetterWealth, our agents are trained to build infinite-banking-style policies and are ready to serve you as soon as you allow them. You can schedule a clarity call with us as soon as possible.
Is Infinite Banking Legit?
Yes, yes, it is.
Although some construe infinite banking as a magic pill to fix all your problems, it is not. It is, however, a completely valid approach to establishing your personal banking system and has created hundreds of millions of dollars in cash value for our clients and billions of dollars in death benefit protection for their families.
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