The Infinite Banking Concept

Eric Van Haaften Permanent Life Insurance

You may have heard of the “Infinite Banking Concept” but are unsure what it is or how it works.

The infinite banking strategy utilizes cash value life insurance as a component of a diversified investment portfolio.

Because cash value life insurance is a liquid asset, it offers a convenient way to fund major expenses that can come up during life’s journey.

Infinite banking has many advantages and a few weaknesses, which we will cover in this enlightening article.

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What is the Infinite Banking Concept?
What are the IBC insurance pros and cons?
How to buy cash value life insurance coverage?

What is Infinite Banking?

The infinite banking concept was coined in the early 2000s by an insurance agent named R. Nelson Nash in his book “Becoming Your Own Banker.”

However, this popular concept has been around for many years with other names, such as:

7702 life insurance
Family Banking Concept
Bank On Yourself
Perpetual Wealth Strategy
Perpetual Wealth System
Circle of Wealth

The basic idea behind infinite banking is to use your assets for significant purchases instead of getting a loan from a bank.

You do that by purchasing universal or whole life insurance policies offering cash value accounts to preserve your money.

The cash values function as forced savings account within your policy which accumulate tax-deferred over time.

Life insurance savings plans can be a fantastic way to save for long-term financial objectives.

The Infinite Banking concept requires payments above the premiums to keep the policy in force (overfunded) to accumulate excess cash values tax-free.

You can eventually withdraw or borrow accumulated cash values after paying premiums on your policy for several years.

When you borrow from the policy, your cash value is utilized as collateral on the loan instead of other investments.

Policy loan rates are lower than bank loans because the insurance company understands that it can easily take the collateral if you do not make payments.

Taking a loan against your policy does not interrupt the compounding interest inside your policy, which is an essential difference from completing a withdrawal.

Because loans are liquid, they can help with major personal expenses such as car purchases, medical bills, unemployment income, home repairs, and retirement income.

This banking concept can also be ideal for younger wealthy business owners or real estate investors looking to expand their businesses.

Plus, you will not need to go through the traditional approval process of getting a loan from a financial institution.

How does your cash value work?

Whole Life Insurance – Whole life is popular for infinite banking because the cash values, premiums, and death benefits are guaranteed, while dividends can fluctuate.
Universal Life Insurance – Universal life policies are not frequently used for IBC because they offer lower fluctuating interest rates.
Variable Universal Life – VUL is riskier because the interest paid in a variable life policy is based upon the performance of the mutual fund sub-accounts inside the policy.
Indexed Universal Life – IUL policies are safer because the interest rates are only linked to the performance of an underlying financial index such as the S&P 500 Index.

Each type of life insurance has trade-offs and should be selected with your unique risk threshold, much like conventional investments.

Policies that generate better cash values have increased performance risk, as the returns could be better or worse than initially projected.

Infinite Banker Buyer Profile

Investing in life insurance works for those who want to minimize losses from their stock market and mutual fund investments.

Certain people are better suited to become their own bankers because this strategy requires strict discipline and must be executed for a long time to see beneficial results.

High Earnings or Net Worth – The infinite banking system is perfect for high-income earners that can allocate up to 10% of their income towards a policy.
Years Until Retirement – The infinite banking system takes time to reach its peak efficiency. So, most Infinite Banking clients are generally between 25- 50 years old.
Already Maxing Out Retirement Plans – Before considering the infinite banking system, you should be maxing out your 401(k)s and IRAs because employers often will match your contribution to a specific limit.

Infinite Banking Pros & Cons

In some circumstances, the infinite banking system can offer additional versatility, but investing in cash-value life insurance is not justified for everyone.

Wealthier people need advanced strategies like asset protection, tax protection, sheltering reserves from college aid, and estate planning.

Let’s take a closer look at Infinite Banking’s pros and cons!

Advantages of Infinite Banking

The infinite banking concept is not a get-rich-quick scheme but a slow-growing strategy to increase your assets and protect your family.

According to Nelson Nash, becoming your own banker requires discipline and is best suited for goal-oriented people. Here are some of the advantages of infinite banking life insurance:

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Non-Correlated Asset

A non-correlated asset is an investment not associated with the stock market.

You do not have to stress about losing money as the market fluctuates up and down because the cash value of whole life and universal life insurance are non-correlated assets.

You can become your own banker using a variable or an indexed universal life insurance policy. But these correlated types of policies are riskier because they are associated with the stock market.

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Tax-Free Growth

Infinite banking offers a much higher return than other secure investments, such as bonds, money markets, and certificates of deposit.

When you overfund permanent life insurance, the extra contributions accumulate in a cash-value account.

Your insurance policy grows tax-deferred, and you will not have to pay taxes on those funds while they are accumulating. The more you overfund your cash values, the faster your life insurance asset grows.

Mutual insurance companies’ dividend-paying policies further accelerate your cash value growth by adding paid-up additions.

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Tax-Free Loans

Owning a cash value policy is similar to having an additional bank account.

When it’s time to repay the loan, you will pay it back to yourself instead of a financial institution.

When you borrow money against your life insurance policy, you keep earning interest and dividends on the total amount.

If you die with an outstanding policy loan, your beneficiaries will receive the total death benefit minus the amount you owe on your loan.

Many older policyholders strategically take out loans against their policy, knowing that the loan balance will eventually be deducted from the death benefit when they pass away.

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More Liquidity

With an overfunded cash value insurance policy, you can increase your cash flow and have greater access to liquid assets.

You can use your cash values at any age for an emergency, an investment opportunity, or income for early retirement.

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Buying Real Estate

Leveraging the cash value of an over-funded policy allows real estate investors to position their money in two spots at once.

You will earn a higher rate of return when you leverage your policy because the cash value accumulates interest and never actually exits the policy.

So, to the degree that your real estate return surpasses the interest cost on the policy loan, you build value on top of the return on the cash value.

This allows savvy real estate investors to earn a higher combined interest rate than they would have if they used their funds to invest straight into a purchase.

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Shelter for Financial Aid

Parents do not need to report their life insurance policy’s cash value when applying for college tuition financial aid.

The infinite banking strategy also works well for parents planning to borrow money against their policy to help with their children’s tuition.

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Divorce Protection

Your ex-spouse’s attorney may not push to classify your cash value policy as a “marital asset” when dividing it up in divorce proceedings.

A permanent life insurance policy grows slowly in the early years before the cash value catches up with the premiums you have paid.

You can also argue that the policy helps your ex-spouse and your children because they are listed as beneficiaries.

Furthermore, some courts order the higher-earning ex-spouse to go out and buy divorce life insurance.

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The Death Benefit

Most people buy permanent life insurance to leave an inheritance for their spouse and children.

Life insurance offers a guaranteed tax-free death benefit that provides a safety net for your beneficiaries.

Many policies also provide living benefit riders that allow policyholders to access their death benefits before death if they become terminally ill.

Disadvantages of Infinite Banking

There are some drawbacks to becoming your own banker with life insurance. Here are some of the cons of the infinite banking concept to consider when deciding if it’s suitable for you:

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Qualifying for Coverage

Life insurance companies usually require a health exam to qualify for a new policy.

Qualifying for infinite banking policy will depend on your health, age, and other factors that do not typically affect banking.

Depending on your medical history, you may not qualify for a permanent life insurance policy.

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Expensive Premium for Coverage Needs

If you do not need permanent life insurance when you retire, you should buy a term insurance policy and avoid permanent coverage.

The higher cost can be challenging to maintain long-term and is usually only beneficial for high-income and high-net-worth investors.

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Long Term Investment

Buying a term life policy and investing the money you save from not buying permanent coverage is better for older people with a short investment time horizon.

Permanent life insurance offers a safe investment alternative that grows slowly at 4-6 %. However, building a substantial cash value in your life insurance policy can take many years.

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Contribution Limited by MEC Rules

The premium amount that can be contributed towards your policy is limited to the Modified Endowment Contract (MEC) rules.

A MEC refers to the maximum amount of money you can contribute to a policy based on your chosen death benefit.

Policy loans remain tax-free if the policy never becomes classified as a MEC and stays in force until you pass away.

Once your policy transforms into a MEC, cash contributions, and cash gains on that account become taxable income.

If you wish to avoid a MEC status, ensure your payments are spread over several years with a limited pay life policy.

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Opportunity Cost of Other Investments

Stocks, bonds, mutual funds, and real estate can offer riskier but better rates of return than a life insurance policy.

Before buying a policy, you should evaluate other investment opportunities that could make you more money in a shorter amount of time.

Buying A Cash Value Policy

Affordable Life USA can match you with the best insurance company for accumulating significant tax-deferred savings in your policy’s cash value account.

An infinite banking policy serves a different purpose than conventional life insurance and is customizable to fit your needs and budget.

You will invest a set amount of money every year, most of which you will recoup in tax-free income, with the remaining death benefit going to your beneficiary.

We work with the nation’s best insurance companies specializing in infinite banking policies and can customize the best policy for your budget and investment goals.

We can provide you with a cash value chart showing you the future projections on any policy you consider.

Call our office or fill out the Infinite Banking Calculator form for a free customized illustration. If you have any other questions, we are always happy to help!