It’s not a new idea. People have been borrowing against the cash value of their whole life insurance policy for a couple centuries.
Infinite banking has been around for a VERY long time. It’s a way to set up your own banking system by using dividend-paying, permanent life insurance as a savings vehicle.
But this idea has gained more popularity in the past few years thanks to books like Bank On Yourself and the concept of Infinite Banking.
So, how does Infinite Banking work, and more importantly, should you give it a try? Let’s take a closer look.
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How Does Infinite Banking Work?
Getting money to pay for college, to do home improvements, or to start a business often requires a loan from a bank. And a bank loan requires you to pay interest in exchange for using the bank’s money.
Depending on your loan type and your creditworthiness, you could be paying 3 to 30 percent a year on the money you owe the bank.
With Infinite Banking, or Being Your Own Bank, you’d be borrowing from your own funds, avoiding this need to pay interest to a bank.
So where did you get an asset large enough to make a bank loan unnecessary? Infinite Banking assumes you had the asset growing all along within your whole life insurance policy.
Using Whole Life Insurance for Infinite Banking
The core purpose of life insurance is to provide a death benefit for your family in case you die. The death benefit could replace your income, pay off your house, or simply pay your final expenses.
Whole life is a more complex type of life insurance. Along with the death benefit, a whole life policy accrues its own cash value, slowly, over time.
After 20 or so years have passed, assuming you’ve always paid the premiums, your whole life policy can hold a significant cash value which will be gaining a modest amount of interest.
This cash value could replace the role of your neighborhood bank when you need a loan.
Pros & Cons of Infinite Banking
There are advantages to borrowing from your whole life policy, but it may not be a good idea for everyone.
Pros of Infinite Banking
The most obvious advantage to borrowing from your whole life policy vs. borrowing from a bank is avoiding the interest you’d pay a bank.
Other advantages include:
- Tax Free Access: Unlike with a traditional IRA, you could access money through your whole life policy without paying income taxes on the funds.
- No Age Restrictions: Unlike with retirement accounts, you could access your whole life insurance cash value at any age without facing a penalty.
- Preserving the Asset: If you pull money from a 401(k) or IRA, you lower the value of that asset. You’re not actually using your life insurance value, only borrowing against it, so its value doesn’t diminish.
- Market Independence: No matter what happens with the broader market, your whole life policy’s value should continue to grow at the rate stated in your insurance contract.
- Asset Protection: If you’re concerned about losing assets in a business or personal legal dispute, the value of your whole life policy is usually protected.
- The Death Benefit Itself: Even without its cash value, life insurance offers invaluable peace of mind if you’d like to provide for your family after you die.
Cons of Infinite Banking
Using the cash value of whole life insurance as a bank isn’t for everyone. For example:
- Accruing Value Takes Time: Your whole life insurance’s cash value takes awhile to grow. Within the first 7 to 10 years, your policy wouldn’t be worth very much. It may take 20 or more years for your policy to grow into a useful asset.
- Contributions Are Compulsory: If you hit a rough patch and can’t afford to contribute to your IRA or 401(k), that’s OK. You could catch up later. With whole life, you’d have to pay the premiums each year or else risk your policy losing value or even lapsing.
- Whole Life is Expensive: Whole life insurance costs significantly more than term life. If you’re on a tight budget and simply need to protect your family in case you die unexpectedly, you can get more value from term life insurance.
Is Infinite Banking A Good Strategy For You?
There are some great reasons to use the infinite banking concept, including tax-free access to your money – but it’s NOT for everyone.
Best Candidates for Infinite Banking:
Considering these pros and cons, I would have no hesitation recommending the concept of Infinite Banking to the following clients:
- Financially Secure Clients: Someone who knows he or she can afford the