Infinite banking is a strategy that involves the purchase of cash value life insurance, overfunding it, and using it as your primary means of paying for expenses and building wealth.
To really utilize the infinite banking strategy, you need a substantial upfront investment to get the ball rolling. This option isn’t feasible for everyone, but it can be very successful for some.
This guide will examine how infinite banking works, offer examples, and share insights to help you better understand the concept. Armed with this information, you can make informed decisions and choose what’s best for your situation.
- What Is Infinite Banking?
- How Does Infinite Banking Work
- Infinite Banking Pros and Cons
- How to Implement Infinite Banking
- Why Infinite Banking May Not Be Right for You (with alternatives)
What Is Infinite Banking?
Infinite banking is not a product or service offered by a specific institution. It’s a concept promoted as a way you can “be your own bank” to have more control over your money.
Infinite banking is a strategy in which you buy a life insurance policy that accumulates interest-earning cash value and take out loans against it, “borrowing from yourself” as a source of capital. Then eventually pay back the loan and start the cycle all over again.
- Buy a cash value life insurance policy, which you own and control.
- Pay policy premiums, a portion of which builds cash value.
- Cash value earns compounding interest.
- Take a loan out against the policy’s cash value, tax-free.
- Repay loans with interest.
- Cash value accumulates again, and the cycle repeats.
If you use this concept as intended, you’re taking money out of your life insurance policy to purchase everything you’d need for the rest of your life. Cars. Houses. Airplane tickets. Netflix.
So, when you pay back the policy loan, just as you’d have to pay back any mortgage, auto loan, or credit card, you’re paying yourself back.
Nelson Nash popularized this concept in his book Becoming Your Own Banker.
What Is Cash Value Life Insurance?
Cash value life insurance is a type of permanent life insurance that, in addition to providing a death benefit to beneficiaries, accumulates cash value over time. The cash value component works similarly to a savings account.
The two most common types of cash value life insurance are whole life insurance and universal life insurance.
- Whole life insurance grows cash value at a guaranteed interest rate and also through non-guaranteed dividends.
- Universal life insurance grows cash value at a fixed or variable rate, depending on the insurer and policy terms.
The cash value is not added to the death benefit. Cash value is a feature you take advantage of while alive.
When taking out a loan, you can only take out a loan against the cash value total, not the death benefit. You may have a $500,000 whole life insurance policy, but you can’t take out a $500,000 loan. Your cash value total may only be $50,000. You can borrow up to 80-90% of that amount.
Explore other ways you can use life insurance while alive.
How Does Infinite Banking Work?
Infinite banking typically requires a significant upfront investment and ongoing premium payments. Therefore, you must already be financially established to capitalize on the infinite banking strategy.
Example of the Infinite Banking Concept
A 35-year-old male buys a participating whole life insurance policy.
- Death benefit = $1,000,000
- Annual premium = $10,000
Overfunding the policy is essential to implementing infinite banking. He decides to pay an additional $5,000 annually.
- Annual premium = $15,000
Over time, the cash value accumulates, and since he owns a participating whole life policy, it earns dividends (not guaranteed). The cash value grows at a guaranteed minimum interest rate of 4% plus any additional dividends, compounding over time.
After 10 years, the cash value has grown to approximately $150,000. He takes out a tax-free loan of $50,000 to start a business with his brother. The policy loan interest rate is 6%.
He repays the loan over the next 5 years. Going this route, the interest he pays goes back into his policy’s cash value instead of a financial institution.
| Note: The numbers provided in this example are for illustrative purposes only and may not accurately represent the costs, interest rates, and returns for a specific policy or individual. Actual prices, interest rates, returns, and policy features can vary widely depending on the insurance company, underwriting guidelines, and the specific policy chosen. |
See what you’d pay for life insurance
Infinite Banking Pros and Cons
Every financial strategy has its pros and cons. The most suitable approach for you depends on your financial circumstances, objectives, and level of discipline.
Consider these pros and cons before deciding whether to implement the infinite banking strategy.
Pros:
- Control over your finances: You can borrow and repay loans on your terms.
- Tax advantages: Loans taken from the cash value are tax-free, and the cash value grows tax-deferred.
- Private: Loans taken against the cash value are not reported to credit bureaus and don’t impact your credit score. The loan is between you and the insurance company—no third-party involvement, such as a lender.
- Flexibility: You can use the cash value for any purpose, such as starting a business or paying off debts.
- Guaranteed growth: Some life insurance policies offer guaranteed minimum interest rates on the cash value.
- Protection: The policy provides a death benefit to your beneficiaries.
Cons:
- High upfront costs: Cash value life insurance policies have higher premiums than term life insurance.
- Long-term commitment: Building cash value takes time, and it may take years before you can fully utilize the infinite banking strategy.
- Complexity: Understanding and managing cash value life insurance policies and loans can be complex and may require guidance from a financial professional.
- Risk of policy lapse: If you fail to repay loans or maintain premium payments, the policy may lapse, resulting in tax consequences and loss of coverage.
How to Implement Infinite Banking
You work hard for your money. It’s important to not jump headfirst into any new financial strategy without doing your research first.
The first step to implementing the infinite banking concept is to evaluate your current financial status, determine your long-term financial goals and risk tolerance. You should also consider meeting with a financial advisor so you fully understand how your money will be impacted by infinite banking.
Choose Your Life Insurance Policy
Next, you need to choose the best cash value life insurance policy for you. Whole or universal life insurance are common choices when using life insurance as a bank.
A participating whole life insurance policy is the most popular choice for infinite banking.
- Participating whole life offers a guaranteed cash value growth.
- Participating whole life also has the potential to earn dividends which can significantly boost the cash value growth.
Fund Your Life Insurance Policy
The cost of your life insurance policy is determined by several factors, such as the type you buy, how much coverage the policy provides, and your age and health.
The higher the death benefit of the policy, the more expensive the premiums. If your main goal is to use a life insurance policy for infinite banking, the amount you can afford to contribute monthly is more important than the death benefit.
- Determine your monthly budget for a life insurance policy.
- Apply to see which rate class the insurance company assigns you.
- If your rate class raises the premium to an unaffordable level long-term, consider opting for a policy with a lower death benefit.
Example
John, age 35, met with his financial planner and decided he could afford to spend $1,000 monthly to pay for a participating whole life insurance policy.
He applied for a $500,000 20-pay participating whole life insurance policy. Had he qualified for the best rate class, he would pay approximately $1,089 monthly. But John has high blood pressure and is slightly overweight, so he only qualified for Standard.
At the Standard rate class, the $500,000 policy now costs $1,300 per month. John wants to stay at or under his budget of $1,000 and decides to decrease the face amount to $400,000. His premiums cost $975 per month.
Twenty years later, John borrows $20,000 from his life insurance policy at a 6% rate to pay for his daughter’s wedding. He pays the loan back in installments over five years for $23,199.60.
| Note: A 20-pay whole life policy means you’re willing to pay a higher rate to only pay premiums for 20 years versus your lifetime. It also means it accumulates cash value faster than a standard whole life policy. |
Learn more about how life insurance rate classes decide price: Your Guide to Life Insurance Risk Classification
Borrow Against the Cash Value
Regularly review your policy statements to track the growth of your cash value. The cash value should grow at a guaranteed rate, plus any dividends or additional interest, depending on the policy type.
Once the cash value has accumulated enough, you can start taking loans against it. You can use this money however you want to. These loans are tax-free, provided the policy remains inforce and is not a Modified Endowment Contract (MEC).
Remember: You can only borrow against the cash value, not the death benefit.
Learn more about life insurance policy loans: Borrowing From Life Insurance: How It Works & When to Borrow
Repay the Loans
One benefit to permanent life insurance is that you are not required to repay policy loans while alive. However, if you’re using the policy for infinite banking, you will want to pay them back.
The principle of infinite banking is borrowing from yourself, instead of a traditional lender, to pay for things you’d buy anyway. But to successfully run The Bank of [Insert Your Name Here], you must pay yourself back. Once you do, the cycle starts again.
You must pay close attention to the policy loan. As the interest on the loan accumulates, if the balance ever exceeds the cash value, the policy can lapse, and you may be left with only a tax bill.
Why Infinite Banking May Not Be Right for You
Infinite banking is unsuitable for some, particularly those with:
- Limited savings
- Limited cash flow
- Poor financial discipline
Life insurance, at its core, is financial protection for your family. If you have a partner or little ones who depend on you, make sure your life insurance policy first protects their future.
Carefully consider your finances before embracing the infinite banking concept. Funds used to purchase and overfund a cash value life insurance policy could be invested elsewhere, potentially offering higher returns.
Compare the costs between these two $500,000 life insurance policies. Prices shown are monthly rates for healthy, non-smoking males.
| Age at Purchase | 30-Year Term Policy | Participating Whole Life (100-Pay) |
|---|---|---|
30 | $29.99 | $472.41 |
40 | $49.57 | $705.57 |
50 | $124.79 | $1,080.98 |
Using the table above as a reference, the 30-year-old man could buy a $500,000 term life insurance policy that provides 30 years of financial protection for his family. During those 30 years, his rate of $29.99 will never increase. If he dies unexpectedly before age 60, his family receives a check for $500,000.
The 30-year-old could instead purchase a $500,000 whole life insurance policy that lasts his entire life and pays the death benefit no matter when he dies. The problem is that he is paying approximately 1475% more each month.
| Note: A 100-pay whole life policy is a standard whole life insurance policy. Premiums are structured to be level until age 100. The premiums are more affordable since they’re stretched out, but the cash value grows more slowly compared to a limited-pay or single-pay policy. If you die prior to age 100, premium requirements stop. |
Many people can’t afford large permanent policies long-term. Instead, people often buy a cheaper term policy to protect their families. Then with the money they save by skipping the permanent policy option, they prioritize an emergency fund and diversify their investments.
Permanent life insurance can be beneficial in many cases. But for affordable family protection, term life insurance is the best choice for most families.
Alternatives to Infinite Banking
Infinite banking is one option. If it’s not a good fit for you, consider these alternatives:
- Indexed Universal Life (IUL) Insurance: Similar to whole life insurance, IUL is a type of permanent life insurance with a cash value component. However, the interest credited to the cash value is based on the performance of a market index, such as the S&P 500, rather than a guaranteed rate. IUL policies offer more flexibility in premium payments and may provide higher potential returns, but they also come with additional complexity and market-related risks.
- Buy Term and Invest the Difference (BTID): This strategy involves purchasing term life insurance (which is less expensive than whole life insurance) and investing the difference in premiums in other investment vehicles, such as stocks, bonds, or mutual funds. This approach offers more flexibility and control over your investments but lacks the guaranteed growth and tax advantages of whole life insurance used in infinite banking.
- 401(k), IRA, and other tax-advantaged retirement accounts: These accounts are designed to help individuals save for retirement and offer various tax benefits, such as tax-deductible contributions, tax-deferred growth, or tax-free withdrawals. They provide a range of investment options but do not offer the insurance component or policy loan features of infinite banking.
- Taxable investment accounts: A taxable brokerage account allows you to invest in a wide range of assets, such as stocks, bonds, and mutual funds. This approach offers flexibility and the potential for capital appreciation but lacks the tax advantages and insurance component of infinite banking.
- Health Savings Accounts (HSAs): HSAs are tax-advantaged accounts for individuals with high-deductible health plans (HDHPs). Contributions, growth, and qualified withdrawals for medical expenses are all tax-free. While primarily designed for healthcare costs, HSAs can also be supplemental retirement savings vehicles. Still, they do not offer the insurance benefits or policy loan features of infinite banking.
| Infinite Banking | IUL | BTID | Retirement Accounts | Investment Accounts | HSAs | |
|---|---|---|---|---|---|---|
| Primary Function | Wealth accumulation | Wealth accumulation | Insurance & investments | Retirement savings | Wealth accumulation | Healthcare & retirement |
| Interest Earnings | Guaranteed, may include dividends | Based on market index | Based on chosen investments | Based on chosen investments | Based on chosen investments | Based on chosen investments |
| Tax Advantages | Tax-free policy loans and potential tax-free growth | Tax-free policy loans and potential tax-free growth | Taxable investment growth | Various tax benefits | None | Triple tax-free for qualified medical expenses |
| Insurance Component | Yes (death benefit) | Yes (death benefit) | Yes (term life) | None | None | None |
| Borrowing Features | Policy loans against cash value | Policy loans against cash value | None | Loans allowed in some cases | Margin loans | None |
| Access to Funds | Through policy loans | Through policy loans | Investment accounts | Restricted, penalties for early withdrawal | Easy access | Qualified medical expenses, retirement after age 65 |
| Initial Costs | Higher (premiums, fees) | Higher (premiums, fees) | Lower (term life premiums) | Varies depending on the account | Low or none | Low or none |
| Investment Flexibility | Limited | Limited | High | Moderate, based on available options | High | Moderate, based on available options |
Contact Quotacy’s Team to Find Your Best Policy
If you’re in the market for a life insurance policy, Quotacy can help. As an independent broker, we work for you, not the insurance companies.
When you apply, we can shop around to over 25 of the nation’s top insurers to find the best policy for your unique situation. This means that even if you have medical issues or lifestyle quirks, e.g., a history of DUI or bankruptcy, chances are that we can still find you coverage.
Most of our clients are looking for life insurance primarily to protect their loved ones. This is when term life insurance comes in. However, we also offer permanent life insurance products like whole life and universal life insurance. Let us know how we can help you.
Getting started is easy. Get anonymous term life insurance quotes instantly. You can see quotes from multiple life insurance companies and learn their policy features before applying online.
If you’re interested in whole life insurance, start here: Guide to Whole Life Insurance.
With decades of experience, Quotacy plays matchmaker with all the various carriers we work with to find you the ideal coverage at the best possible price. Our agents don’t work on commission, so you can buy confidently, knowing you’re getting the best policy for your unique situation.
Disclaimer: The information provided in this article about infinite banking is for educational and informational purposes only and should not be considered financial advice. Before making any investment decisions or implementing changes to your money management strategies, it is crucial to consult with a qualified financial advisor who can provide personalized guidance tailored to your unique circumstances.
Note: Life insurance quotes used in this article are accurate as of May 15, 2023. These are only estimates and your life insurance costs may be higher or lower.
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