Infinite Banking: Become Your Own Banker
“Infinite Banking,” a financial strategy coined by R. Nelson Nash in his book "Becoming Your Own Banker," enables people to leverage whole life insurance policies as a personal banking system.
By tapping into the cash value of specifically designed policies, people can achieve greater financial control, avoid traditional banking fees, and create a self-sustaining cycle of wealth generation.
In this article, we’ll explore the principles behind infinite banking, its benefits, potential drawbacks, and commonly asked questions to understand this concept comprehensively.
The Concept of Infinite Banking
Whole life insurance is a type of permanent life insurance that provides death benefit coverage for the insured's entire life and includes a cash value component, differentiating it from term life insurance, which only covers a specific period and has no cash value component.
The cash value component of a whole life policy makes infinite banking possible. Over time, as you pay premiums, a heavy portion of that premium creates cash value, which grows tax-deferred. This cash value can be accessed through policy loans or withdrawals, effectively allowing you to "borrow" against the money and use it tax-free.
Functionally, infinite banking creates a private banking system that operates independently of traditional financial institutions. You might feel like John Wayne– “There’s a new sheriff in town.”
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How Infinite Banking Works
Step 1: Purchasing a Whole Life Insurance Policy
Choosing a whole-life policy from a mutual, dividend-paying, financially stable insurance company is essential. Dividends increase the policy's cash value and make this whole system work. We encourage people to work with companies that have paid policy owners dividends for over one hundred years.
Step 2: Building Cash Value
Over time, as you pay premiums, your policy's cash value grows. This growth can be accelerated by using Paid-Up Additions (PUAs), which are additional contributions that increase your policy's death benefit and cash value. The more cash value you accumulate, the more funds you have available for borrowing.
Step 3: Borrowing Against Your Policy
Once the policy's cash value is created, you can borrow against it. These loans do not require credit checks or lengthy approval processes, as the loan's collateral is the insurance policy itself.
Typically, you can borrow against 90% to 98% of the money inside your cash value. When you do, an equivalent amount of money gets collateralized inside the cash value, and you receive your loan directly from the general fund of the insurance carrier.
Step 4: Repaying the Loan
Unlike traditional loans, repayment terms are flexible. You can choose to repay on your own schedule or even not at all. You can pay down principal and interest, just interest, or neither of these. If you don't repay the loan, the outstanding amount will be deducted from the death benefit when the insured passes away, and the difference will be paid out to the beneficiaries.
This can be a tempting time to be a dishonest banker, borrowing from your policy and choosing not to repay the interest or principal. If you are going to practice infinite banking, R Nelson Nash said you must repay the loans you take from the policy and be an honest banker.
Step 5: Recycling the Money
When you take a loan from your policy, you can use the money to finance your needs (e.g., buying a car, funding a business, or paying off debt) or buy assets that pay you income (e.g., rental properties, businesses, or structured settlements).
Where infinite banking advocates get overzealous is when they claim you “pay interest to yourself.” That’s not entirely true because when you borrow against your cash value, the loan comes from the general fund of the insurance carrier. So, any interest paid goes back into the general fund rather than showing up inside your cash value.
However, since all policy owners are part owners of the mutual carrier, they get a share of the profits made inside the general fund. You may indirectly share in the interest profits you paid into the general fund, but it does not show up directly in your cash value. A more accurate way to understand how “paying interest to yourself” works is this:
If you’re an honest banker, and you can borrow from your bank (i.e., your life insurance policy) at 5% while the other banks (e.g., Chase, Ally, etc.) are lending at 8%, you should be honest and pay your policy back at a higher percentage. In this example, your policy requires 5% interest; you are choosing to pay 8% interest, and the extra 3% can be considered “extra” payments going back into your policy. So, in a way, you just paid “yourself” back.
When it comes to infinite banking, the insurance space is rife with creative ways to sound unique and sexy. Beware of half-truths and bad math!
Benefits of Infinite Banking
Infinite banking offers several potential benefits that make it an attractive strategy for those seeking financial independence and control:
- Control Over Your Finances: One of the primary appeals of infinite banking is the level of control it provides. You’re no longer dependent on banks or financial institutions for loans, which can reduce your exposure to external economic fluctuations.
- Tax Advantages: The cash value in a whole life policy grows tax-deferred, meaning you don't pay taxes on the growth until you withdraw it. But the key is never to withdraw more than you’ve put in. Instead, you can use loans to access your cash, which makes your access tax-free. The death benefit proceeds will also be paid income-tax-free to your heirs.
- Wealth Generation: By continuously recycling money through your policy, you can create a self-sustaining cycle of wealth generation. The compounding effect of reinvesting dividends and PUAs can significantly increase your policy's cash value and death benefit throughout your life or the lives of your family members if you also own policies on them.
- Consistent Growth: Whole life policies offer guaranteed cash value growth, providing financial security. But, much of the cash value growth is attributed to dividend proceeds, which aren’t guaranteed. However, the companies we work with haven’t missed a dividend payment to policy owners in over a hundred years (some haven’t missed any in over 175 years!).
- Protection from Creditors: In many states, the cash value in a whole life insurance policy is protected from creditors, predators, lawsuits, and bankruptcy, providing an additional layer of financial security.
- Legacy Planning: The death benefit from a whole-life policy can provide an income tax-free inheritance to your beneficiaries, helping to ensure your family's financial future. For those of higher net worth, unless your policy is structured and held in an irrevocable trust, your death benefit proceeds may be subject to estate tax.
- The “And” Factor: Whole life insurance can be just one tool in your financial tool belt. Few other financial products combine so many benefits in one package: High-grade bond like returns, death benefit, tax advantages, income stability, volatility buffer, uninterrupted compound growth, AND a private unstructured line of credit all rolled into one.
Case Study: How Infinite Banking Could Help a Business Owner
Consider the case of Joan Burkmen, a small business owner who uses infinite banking to fund her business expansion.
Joan contributes to a whole life insurance policy for several years, building a substantial cash value. When the opportunity arises to expand her business, instead of taking out a traditional loan from a bank, Joan borrows against her policy’s cash value. She uses the funds to purchase new equipment and hire additional staff. The flexible repayment terms allow her to repay the loan on her own schedule without the pressure of monthly payments to a bank.
Over time, the profits from her expanded business enabled her to repay the policy loan. Meanwhile, because her loan came from the insurance company directly, the cash value inside her policy continued to compound uninterruptedly every year. This cycle allows Joan to control her finances, recapture lost interest costs, and continue building her wealth.
Potential Drawbacks and Considerations
While infinite banking offers numerous advantages, it’s not without potential drawbacks and risks. It's essential to carefully consider these before implementing the strategy:
- Cost of Whole Life Insurance: Whole life insurance policies are more expensive than term life policies. The high premiums can be a barrier to entry for some individuals, especially those younger or with limited financial resources.
- Slow Start: Building up the cash value in a whole life policy takes time. You won’t have 1:1 access to your contributed dollars in year one. This means it may take several years to fully utilize all your dollars contributed to your infinite banking policy.
- Interest on Policy Loans: Policy loans accrue simple interest that compounds annually if unpaid, which can add up over time. If not carefully managed, this interest can erode the policy's cash value, reducing the strategy's overall effectiveness.
- Complexity: Infinite banking can be complex to set up and manage. It requires a deep understanding of whole life insurance, cash value growth, and loan management. Mistakes can easily undermine the strategy’s benefits without proper knowledge or guidance.
- Insurer Risk: Infinite banking's success is tied to the financial strength of the insurance company issuing the policy. If the insurer faces financial difficulties or goes bankrupt, the policy's cash value and death benefit could be at risk, so choosing the right company is critical.
Frequently Asked Questions About Infinite Banking
Q: Is Infinite Banking a scam?
A: No, Infinite Banking is not a scam. It is a legitimate financial strategy based on the principles of whole life insurance. However, like any financial strategy, it requires careful planning and an understanding of how it works. Working with a knowledgeable financial advisor is essential to ensure that infinite banking is appropriate for your specific financial situation.
Q: How do I start an Infinite Banking policy?
A: To start an infinite banking policy, you must purchase a whole life insurance policy from a mutual insurance company. Working with an experienced insurance advisor who understands infinite banking and can help you structure the policy to maximize cash value is crucial. You’ll also need to be prepared for the higher premiums associated with whole life insurance than term life insurance. We recommend that if you can save at least $10,000 annually, you are ready to start your banking system.
Q: Can I use Infinite Banking to pay off debt?
A: One common use of infinite banking is to pay off debt. By borrowing against your policy's cash value, you can pay off high-interest debt and repay your policy loan at a lower interest rate. This allows you to save on interest costs (recapture lost interest) and recycle the money through your policy, continuing to build wealth.
Q: What happens if I don’t repay the policy loan?
A: If you don’t repay the policy loan, the outstanding amount will be deducted from the death benefit when you pass away. This reduces the amount your beneficiaries will receive. However, no strict repayment schedules give you flexibility in managing the loan. It’s essential to monitor the loan balance to ensure it doesn’t exceed the cash value, which could cause the policy to lapse. Overall, if you adhere to R. Nelson Nash’s tenet of being an honest banker and paying your loans back, you will be just fine.
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Check Out the Vault
At BetterWealth, we’ve created a vast library of resources centered around infinite banking. We call this the “Vault,” and you can access it now.
If you’ve watched other channels advocating for infinite banking-style policies, you might notice our approach is much more conservative. We don’t preach that infinite banking will solve all your problems or that it’s a cure for financial warts. There’s nothing magical about it–it’s only as strong as your ability to fund, use, and manage it.
Whether you want to know about max cash value, frontloading policies, real estate hacking, IUL vs Whole Life comparison, lifetime rate of return, or more, we’ve got you covered.
