Infinite Banking Explained – How to Become Your Own Bank.
Infinite banking – perhaps you’ve heard before that it’s like “being your own banker” or that it’s often used with whole life insurance.
But what is it, really? Infinite Banking is a concept that allows you to build your own personal bank using the value of a cash-flowing permanent life insurance policy.
In our guide, we’ll address all of the questions you might have regarding the infinite banking concept, including:
- What is it?
- Who is infinite banking for?
- How does infinite banking work?
- What does it have to do with whole life insurance policies?
- What are the pros and cons of infinite banking?
After reading all of this info, you’ll know whether infinite banking is something that you could benefit from or not.
So, let’s begin, shall we?
What Is Infinite Banking?
Infinite banking refers to a strategy that allows you to design a tailored financial plan for yourself, and it’s tied to having a whole life insurance policy.
In essence, infinite banking makes use of the cash value of whole life insurance policies – also known as permanent life insurance – to accumulate wealth in the manner of a tax-free cash value account savings account.
Nelson Nash, a financial expert, and an insurance agent, coined the concept of infinite banking in the early 80s, advocating the values of the Austrian school of economics.
In addition to creating the infinite banking concept, Nash also wrote a book called Becoming Your Own Banker that further explains the idea behind it.
The Main Principles Of Infinite Banking
In short, the infinite banking strategy promotes the following:
An average person can become their own bank to achieve their specific financial goals and potentially create generational wealth.
Nash recognized that a traditional bank loan and high-interest rates could get many people into financial trouble – including himself. So, the infinite banking system emerged as an answer to how individuals can control their bank accounts independently from commercial banks.
If you used the infinite banking strategy, you would essentially never have to borrow money from a bank or credit union again. Instead, you’d borrow from yourself via the so-called “policy loan.”
How Does Infinite Banking Work?
Infinite banking works as a financial tool that allows you to save inside of your permanent life insurance policy instead of storing your money in a bank account.
As such, it’s a perpetual wealth strategy that isn’t correlated to the stock market, high-interest rates, and other disadvantages that come with a traditional bank account or some form of investment.
It allows an average person to become their own personal finance manager and take control of their financial world.
That said, we want to address a common misconception:
Infinite banking is NOT the same as whole life insurance and it’s not a policy type it’s a concept and it uses life insurance as the vehicle.
However, as mentioned before, it’s been proven that whole life insurance policies – also known as a type of permanent life insurance – can be utilized for infinite banking most efficiently because of their cash value.
If you’re interested in how you can do so as your own banker, keep reading – we’ve explained it all below.
How Does A Whole Life Insurance Policy Work In Infinite Banking?
The essence of the infinite banking concept is to use your whole life insurance policy as a means to lend money to yourself and earn certain tax advantages.
By using your policy’s cash value.
Understanding The Cash Value Of Your Whole Life Policy
A whole life insurance policy (commonly referred to as a permanent life insurance policy, although it’s a type of it) has a cash value, and it can easily be explained like this:
Your policy’s cash value is actually your policy’s death benefit that the insurance company makes liquid. In other words, it’s the portion of your whole life insurance that earns interest.
Therefore, the cash value of your whole life policy can be used for policy loans as long as you pay your premiums. The more money you put into your policy each month, the faster you accumulate a greater cash value. You also don’t have to pay taxes for your cash value growth.
In this regard, whole life insurance differs from term life insurance which only serves to pay your loved ones (i.e., beneficiary) a lump sum death benefit.
On the other hand, whole life insurance covers an individual during their entire life and can be used to withdraw or borrow cash.
While you’re at it, check out our guide on how to maximize cash value in your life insurance policy.
Modified Endowment Contract
Bear in mind that a whole life insurance policy can be labeled as a modified endowment contract (MEC) if its cash value exceeds a legal tax limit.
That means that you cannot make tax-free withdrawals anymore and that you’ll have to pay a 10% fee to access its cash value before the age of 59 ½. After that, it still won’t be tax-free – but you won’t have to pay the penalty.
Types Of Whole Life Insurance Policies
Before we explain how you save inside of your whole life insurance policy, you should know there are two kinds of whole life insurance policies:
- Participating whole life insurance, in which a policyholder participates in share profits of an insurance company. Put simply, the insurance company pays out dividends to its shareholders, and this amount usually grows tax-free because it’s treatable as a refund of your premium according to US law. These policies are also known as “dividend-paying whole life insurance.” Also, a policyholder can purchase the so-called “paid-up” additions using dividends. These paid-up additions provide additional insurance coverage.
- Non-participating whole life insurance doesn’t allow you to receive dividend payments from insurance companies, meaning that you don’t participate in their profit.
Hence, infinite banking postulates that if you use a participating insurance policy, your policy’s cash value will also increase every time your insurance company pays dividends.
Your Whole Life Policy Insurance Bank
Taking all the above-mentioned factors into account, your infinite banking whole life insurance “bank” will consist of the following elements that comprise its cash value:
- A portion of the premiums you’ll pay to the insurance company (so, money from you),
- Guaranteed interest rates that you earn,
- Potential dividends that your insurance company will pay.
At the same time, your policy’s cash value grows with tax advantages – and you also get to benefit from a higher rate of return.
Getting A Policy Loan
A policy loan will be available for your permanent life insurance policy in the majority of the cases, especially if there’s a high cash value accumulated.
You can gain access to the cash value for a variety of reasons. The most frequent ones include business owner who wants to grow their business, invest in real estate, or take advantage of similar opportunities. Alternatively, you could use it as an emergency fund in the case of any unexpected expenses.
However, the concept of infinite banking favors policy loans to policy withdrawals:
When you get policy loans, you borrow money from yourself. The loan will be a certain percentage of your cash value.
What’s more, you can get tax-free loans – meaning that the cash value will continue to grow, and the borrowed amount remains to earn interest (and dividends from the insurance company, if any).
On the flip side, if you withdraw an amount of your cash value – without borrowing it – it won’t be tax-free.
Being your own personal finance manager, you can also decide on the payment schedule. If you don’t pay policy loans during your lifetime, it will be taken away from your death benefit, meaning that the beneficiaries will indirectly repay it.
Infinite Banking Concept: Pros And Cons
The general conclusion is that – when executed properly – borrowing against your life insurance policy can prove to be extremely beneficial.
However, you should consider all of the advantages and disadvantages of infinite banking that we’ve outlined below and decide for yourself whether it would suit your particular case.
Advantages Of Infinite Banking
Improved Cash Flow
By improved cash flow, we mean easier access to your cash.
You don’t need to worry about getting the necessary documentation and fulfilling all the bank loan requirements. In fact, your cash flow is derived from a policy loan, independently from traditional lenders.
The only thing you need to do to access your funds is to request a policy loan that we’ve explained above from your insurer.
Peace Of Mind Through Liquidity
Simply because it’s easier to obtain a loan, your whole policy is much more liquid than some other assets (such as 401(k) and IRA qualified plans, real estate, traditional mutual funds, etc.).
Liquidity means that infinite banking through whole life insurance can serve you in emergencies, such as unforeseen expenses, medical bills, repairs, and so on. The cash value loan from your policy can even be used to buy real estate – or as a backup, if you decide to take some time off work.
One of the infinite banking concepts’ advantages is also that whole life policies are non-correlated assets, meaning that they don’t depend on the real estate or stock market.
In that sense, your whole life insurance policy is much more stable than other investment strategies that change rapidly. It will retain its worth – and its cash value will not fluctuate or decrease.
Protection Against Uncertainty
With whole life insurance, you have three things guaranteed:
- The rate of return,
- Your death benefit,
- Premiums that don’t change for the duration of the policy
Ask anyone who knows anything about finances, and they’ll tell you that certainty is invaluable. It’s the only way to set and achieve your financial goals realistically and without any risk attached.
Tax advantages equal more money – and how your whole insurance policy is taxed makes it perfect for infinite banking.
As we mentioned, you can borrow tax-free from your policy, and additionally, the cash value grows through interest and dividends without paying taxes. Also, the death benefit is free of taxes for your beneficiary.
Control Over Your Funds
Even though your insurance company is technically a mediator, you still have more control compared to any other financial strategy.
Practicing infinite banking means that you get to decide when you borrow the money, and you pay premiums into your policy. Also, these loans don’t affect your credit score adversely, which happens with traditional bank loans that are considered a form of credit.
Building Generational Wealth
Infinite banking can also be used to provide wealth to future generations, mainly because of its death benefit part.
Namely, the death benefit is nontaxable, and it’s usually not subject to estate taxes. Even when it is subject to large federal estate taxes, the beneficiary can still achieve tax advantages.
Disadvantages Of Infinite Banking
Whole life insurance, also known as a type of permanent life insurance, might be more challenging to obtain than other kinds of life insurance, such as term policies.
Qualification requirements for life insurance are based on a variety of factors – the most important ones being your age and health. Insurers want to assess the risk they take on by insuring you before they accept to provide coverage.
Therefore, the insurance underwriting process is the main reason why it could be a disadvantage to some people is that you may not qualify for a policy.
At Insurance Geek, we’re partnered with the best insurance companies in the US – and we can find those carriers that are most likely to approve your application for whole life insurance.
Whether you’re young and healthy or want to pursue infinite banking as you’re approaching your retirement – we can connect you with the companies that can maximize your cash growth.
Your premium for whole life insurance can be higher than other insurance products such as term insurance.
However, this is perfectly “justified” – you’re not only paying for your insurance; you also gain “savings” inside your policy that you can use and at the same time earn an interest return and potential dividends.
We can help you find the best options for whole life insurance because we work with the best insurance providers in the country. Also, we know ways to help you obtain the best rate class on your insurance – and thus, lower your premium.
That said, you still need to ensure that this is the right product for you – you should be someone who is focused on long-term benefits and want to save a significant amount of income.
Best Life Insurance Policy Quotes
To get started with infinite banking and enjoy tax-free growth, you’ll need to get a life insurance policy illustration.
Calculating the average cost of your life insurance premiums and qualifying for insurance can seem overwhelming because there are so many things you need to take into account – not to mention insurance lingo terms you’ll need to understand.
We’ve decided to make it easier for you and help you find the life insurance company that’s got what you seek:
You can use our life insurance quote calculator to get free quotes from multiple insurers on our site. Our carriers are top names in the insurance industry that only sell high-quality life insurance products – including Nationwide, Penn Mutual, Allianz, Lafayette, New York Life, Mass Mutual, Savings Bank Life, and more.
All you need to do is fill in our quote form, and we will connect design a policy and illustration for you and send it over by email. The process takes a couple of minutes – at most.
We only use your info for the purpose of generating the quotes for you – you can rest assured that we won’t spam your inbox or make any follow-up calls.
The decision depends entirely on you.
If you wish to continue the shopping process and buy life insurance after you check out the free quotes, we can guide you through it – or assist you if you have any questions.
Can I Get A Discount?
Not on your life insurance plan but…
A variety of discounts are available, and Insurance Geek can help you find one that you’re eligible for right now on all your other lines of business.
Most commonly, our customers save on bundling different kinds of policies with the same carrier – for instance, a permanent life insurance policy and home or auto insurance.
A Word About Life Insurance Coverage
Yes – you need whole life insurance to practice infinite banking. But that doesn’t mean you shouldn’t get acquainted with other types of life insurance policies (don’t worry; there are just two basic ones) and some basic insurance terms so that you can understand what you are getting.
Types Of Life Insurance
Starting with the types of life insurance, there are two basic ones that you can get:
- Term life insurance. As the name suggests, term life insurance is temporary, and the policy usually lasts anywhere from one, 10, 20, to 30 years. This type of policy does not build cash value or allow withdrawals and loans, so it’s not suitable for infinite banking. It only provides the death benefit.
- Permanent life insurance. This type is further divided into whole and universal life insurance. Both types involve the cash value component, policy loans, and withdrawals. Still, a universal policy has flexible premiums, while whole insurance has a guaranteed cash value accumulation and fixed premiums, making it ideal for infinite banking.
Still not sure if you understand everything about the difference between the two?
Check out our term vs. whole life insurance guide – where we’ve covered it in detail.
How Much Will I Pay For Life Insurance?
A lot of factors will affect your premium. These are the most important ones:
- Your location (i.e., the state you reside in),
- Whether you use tobacco,
- The insurance company that you choose (not all insurers will be equally affordable),
- Type of policy you choose,
- Death benefit (the coverage amount that you want to purchase),
When determining your quotes from our carriers, they’ll use these factors to calculate how much you’d pay.
That said, they’ll also want to know other things, the so-called “unknown information” that will determine your premium more precisely. These include factors such as your medical and prescription history, credit score, height, and weight, etc.
Other Things To Consider
If you’re considering using your life policy to get an advantage of the tax benefits that it comes with, you can also consider a Life Insurance Retirement Plan (LIRP).
It’s similar to infinite banking because it uses the cash benefit – but it’s more focused on supplementing your retirement plan.
Annuities are another insurance product to look into if you want to ensure you have guaranteed income for life, as they help you grow your money tax-deferred, offering returns that are as high as 8%.
You also have a couple of options here:
- Fixed annuities that grow with a fixed rate, tax-deferred, and can last for an unlimited amount of time;
- Fixed indexed annuities don’t offer a precisely defined return because it is tied to the performance of the market, but it has a minimum floor that guarantees it won’t lose value if there are significant changes in a market index;
- Variable annuities entirely depend on the performance of the market and are, therefore, riskier and more volatile than the other options, even though they can provide a higher return;
- SPIA, which stands for “Single-Premium Immediate Annuities, an annuity funded by a substantial lump sum of money;
- MYGA, which stands for “Multi-Year Guaranteed Annuities,” is a type of fixed annuities with a fixed rate for a certain period of years – for example, 1, 2, or even 10 – after which you can renew the contract, but the rate may change.
You might also want to learn how annuities differ from pension plans. We’ve created a pension vs. annuity guide that will help you understand all the differences.
Infinite Banking: FAQ
Q: Is infinite banking a scheme?
A: Infinite banking is not a fast money-making scheme. Instead, it’s a stable financial plan that is achieved through your whole life insurance policy. It won’t grow as fast as some market-based investments, but it’s stable and offers protection against volatility. In other words, it allows stable growth as it’s not exposed to market fluctuations, and you’ll get a guaranteed rate of return, along with the death benefit.
Q: When did infinite banking start?
A: Infinite banking or the infinite banking concept (IBC) started in the 1980s when Nelson Nash formulated it. He also wrote a book Becoming Your Own Banker that demonstrates the main principles and benefits of infinite banking.
Q: Can I become my own bank?
A: Yes, you can – by utilizing the concept of infinite banking, a strategy that allows you to use whole life insurance to ensure stable money growth and emergency funds you can borrow from yourself.
Q: Does infinite banking work?
A: Yes, infinite banking is a strategy used for decades, and it offers steady growth and optimal benefits. That said, in order for infinite banking to work, you’ll have to obtain a whole life insurance policy and have the right mindset – to be focused on protecting your wealth and set clear financial goals for the future.