Imagine a world where you’re not just a customer at the bank, but the bank itself. Intrigued? Welcome to the concept of infinite banking.
This trendy financial strategy promises to transform a traditional whole life insurance policy into a powerful tool to manage your wealth, finance your dreams, and secure your financial future.
But is infinite banking all it’s cracked up to be? Or it is just an insurance salesman’s deadliest weapon?
In this deep dive, we’ll unravel the truth behind infinite banking. We’ll examine the principles, benefits, and potential pitfalls. And ultimately, we’ll determine if this strategy is a financial masterstroke or a well-marketed mirage.
If you love the idea of being your own banker, sticking it to middlemen, and taking charge of your financial destiny… let’s dive in!
What Is Infinite Banking?
Infinite banking is a financial strategy that calls for using a cash-value life insurance policy to support your own borrowing needs.
By taking loans from your life insurance policy, you are not dependent on banks or traditional lenders. This creates greater financial flexibility and control. And it’s where the concept of “being your own bank” originated.
The idea is that as you pay premiums into a whole life insurance policy, it accumulates cash value over time. This cash can then be borrowed against for various needs or opportunities, effectively creating a personal line of credit.
History And Origins
The term “infinite banking” is credited to economist and author Nelson Nash. Nash coined the term in his seminal book “Becoming Your Own Banker: Unlock the Infinite Banking Concept.”
However, various forms of the strategy have been around for much longer.
When the stock market collapsed in 1929, for example, thousands of banks failed and lending suddenly became unavailable to businesses. Faced with no other options, J. C. Penney reportedly borrowed from his life insurance policy to keep his namesake company afloat.
Walt Disney did the same. When he couldn’t find a banker willing to loan him the money, he borrowed from his life insurance to fund Disneyland’s construction.
In the end, it cost Walt $17 million to build the park. Today, Disneyland is worth over $120 billion and it employs more than 34,000 people.
A recent study from California State University Fullerton found that Disneyland contributes more than $8.5 billion annually to the economy of Southern California. That is an incredible return on investment, no matter how you slice it!
Ray Krock is another industry titan who used life insurance for business purposes.
He used the cash value from his life insurance to buy McDonald’s from its original founders and fund the Ronald McDonald marketing campaign. That loan led to the company’s rapid expansion and the birth of one of the most recognizable corporate mascots in the world.
These three historical examples illustrate the value of infinite banking. When other funding sources were unavailable or unwilling, these visionaries turned to their life insurance policies.
How Infinite Banking Works
Certain types of insurance accrue “cash value” over time. Once that cash value has crossed a predetermined threshold, policyholders can take a loan from it.
If a business opportunity, an emergency, or a personal need arises, the policyholder can tap their policy quickly. This loan is typically tax-free and can be used for virtually any purpose. The policyholder is borrowing from their own funds, so there’s no approval process or credit check as with traditional loans.
While repaying the loan is not legally required, it is generally advisable to do so. Otherwise, the insurance company will reduce the death benefit by the corresponding amount plus interest.
Fortunately, the policyholder can set their own repayment schedule and amount, offering significant flexibility. Interest does accrue on these loans, but it’s typically lower than commercial loan rates.
As long as the insurance policy remains in good standing, you can rinse-wash-repeat. Hence the “infinite” moniker!
3 Steps To Establish Your Bank
Insurance is a contentious topic. Many people hold strong views on its best use, so the concept of creating your own “banking” system might not suit everyone.
This is especially true for the types of insurance that build cash value, which are essential in infinite banking.
Remember, infinite banking is a long-haul strategy. So before going down this path, it’s important to determine your interest, ability, and willingness to see it through.
1. Assessing Your Financial Goals
To start, ask yourself: “Do I need life insurance?” If the answer to that question is no, – this isn’t the strategy for you.
If you do want life insurance, the next question is: “Do I want permanent life insurance?”
Many people gravitate to “term” insurance, which covers you for a specific period of time, because it tends to be the most cost-effective way to manage mortality risk. However, this type of coverage does not build up the cash value needed for the infinite banking strategy.
“Whole life” insurance, on the other hand, is much more expensive but it does build cash value. If the idea of paying a larger premium for the rest of your life is unappealing – this likely isn’t the strategy for you.
That being said, there is a middle-ground solution.
If you are on a limited budget and still want to pursue infinite banking, start with term – for now. Once your budget allows, you can always explore a “term-to-permanent” conversion.
2. Budgeting For Infinite Banking
The premiums for a permanent life insurance policy are based on your age, gender, health, and life expectancy.
The average healthy, non-smoking, 30-something-year-old male can expect the monthly premium of a permanent policy to be in the range of a monthly car payment.
As you move away from any of the ideal insurable traits (young, healthy, etc.), those costs go up (see chart below).
| Cost Comparison By Life Insurance Policy Type | |||||
| Policy/Age | 30 | 40 | 50 | 60 | 70 |
| 10-Year Term (Men) | $44.99 | $67.14 | $142.19 | $337.45 | $1,052.99 |
| 10-Year Term (Women) | $36.16 | $53.17 | $111.79 | $239.50 | $706.94 |
| 15-Year Term (Men) | $54.01 | $80.28 | $181.23 | $463.34 | $1,531.81 |
| 15-Year Term (Women) | $45.40 | $66.89 | $143.79 | $326.35 | $1,079.24 |
| 20-Year Term (Men) | $63.75 | $103.21 | $244.59 | $651.76 | $2,108.42 |
| 20-Year Term (Women) | $52.25 | $82.71 | $179.44 | $456.70 | $1,727.95 |
| 30-Year Term (Men) | $104.33 | $175.60 | $455.38 | N/A | N/A |
| 30-Year Term (Women) | $86.54 | $137.88 | $303.14 | N/A | N/A |
| Universal Life (Men) | $457.23 | $673.81 | $1,073.00 | $1,846.33 | $3,287.38 |
| Universal Life (Women) | $390.52 | $578.85 | $921.93 | $1,548.16 | $2,710.37 |
| Whole Life (Men) | $791.94 | $1,224.72 | $1,985.28 | $3,405.56 | $4,916.67 |
| Whole Life (Momen) | $666.94 | $1,003.06 | $1,615.00 | $2,726.11 | $4,772.28 |
| Source: US News & World Report. Average monthly rates are for a nonsmoker male/female who falls in a Standard Plus risk class (Average Health) and is buying a policy with $1 million coverage. | |||||
To successfully implement infinite banking, you must cover the costs of premiums now and into the future.
However, you can always start with a smaller policy and ramp up the cash value by increasing the size of your premium payment – if the policy (and your budget) allows it.
But the key to really growing cash value is taking advantage of compounding. The longer you let earnings on both the money saved and your previous gains grow, the more options you will have for infinite banking.
3. Finding The Right Kind Of Insurance
Depending on your preferences, there are a few types of permanent life insurance to consider.
Whole Life Insurance
The original permanent life insurance policy. Whole Life offers stability with fixed premiums and an accumulating cash value.
There are various payment plans you can pick from, and if the cash value grows large enough, it can generate enough surplus earnings to let you stop paying premiums altogether (while keeping your coverage intact).
Universal Life Insurance (UL)
These policies provide the flexibility to adjust premiums and death benefits as your financial circumstances change. One popular variant of this type of policy is Indexed Universal Life Insurance, which ties cash value growth to the performance of stock or bond indices like the S&P 500.
Variable Life Insurance
These policies allow policyholders to choose where their cash value is invested. Many insurance providers offer investment choices similar to what you might find in your 401k or brokerage account.
This type of coverage can carry more risk than whole or universal life insurance because it places more emphasis on volatile investments for cash value growth.
Variable Universal Life (VUL)
As the name suggests, VUL policies combine the features of both variable life and universal life insurance. VUL provides the freedom to tweak your payments and the payout after death.
However, this increased flexibility does come with additional risks. Poor investment choices could result in losses of cash value. In this scenario, you would have to increase your monthly payment or risk losing insurance protection.
How To Evaluate Infinite Banking
There are several pros, cons, and misconceptions to consider when evaluating if infinite banking is the right strategy for you. Here are a few to be aware of:
Pros
Tax Treatment: Life insurance policies enjoy a few tax advantages. The growth of cash value inside the policy, loans taken out of the policy, and the final death benefit are all non-taxable. This allows your money to grow much faster than it would in other types of vehicles (such as savings accounts).
Guarantees: Some policies guarantee the rate of return for cash value. Others, however, fluctuate based on the performance of the investments chosen for the policy’s cash value.
Liquidity: Traditional lenders often require applications and credit checks, which can slow down the borrowing process. With cash value policies, it is easier to obtain loans. Plus, policyholders can borrow funds without any explanation or credit score requirement.
Flexibility: With a loan from cash value, there is no specific deadline for repayment. Repayment isn’t actually required at all, if maintaining life insurance coverage is not a concern. This flexibility allows borrowers to pay back the loan at their own pace.
Cons
Insurability: The structural bones of this strategy are based upon the assumption of insurability. If there isn’t a need for life insurance or some personal characteristic makes insurance unfeasible, that assumption may not be met.
The Cost of Insurance: Due to the cash value and lifelong coverage, permanent insurance costs are significantly higher than other alternatives.
It Takes Time: If you expect to draw a loan right away, think again. Building up cash value can take years, especially if your policy incurs too many extraneous fees. Unless you have the money to “overfund” initially, you will need to be patient. It may take 10 years or more to enjoy the benefits of infinite banking.
The Budget to Build: Infinite banking requires a dedicated effort. You’ll need to allocate a considerable portion of your income – typically around 10% – toward building up the cash value in your policy. This may not be financially feasible for everyone.
Opportunity Cost: By investing so heavily into your insurance policy, you may be forgoing the opportunity to put that money to work elsewhere. Keep a close eye on the performance of your cash value – and compare that to alternatives like stocks and bonds.
Complexity: Using life insurance as a source of liquidity is a nuanced strategy. You need to know your insurance policy like the back of your hand, stay disciplined, and monitor your cash value. Make sure this added complexity is worth it, especially relative to other options.
Common Misconceptions
Immediate Access to Cash Value: Insurance is first and foremost about risk management, and there is a cost for that. Early in the funding stages of a life insurance policy, most of the premium goes to the cost of insurance. As a result, cash value builds up rather slowly.
To access this cash value, you may have to wait 10 years. In fact, it could be even longer if you experience negative returns on your underlying investments.
Interest-Free Loans: The concept of infinite banking is grounded in the idea that you are building your own bank and using an insurance policy as the infrastructure to do so.
When it comes time to borrow from yourself, there is a real cost in the form of interest payable to the insurance company. You do have the flexibility to pay the loan back at your pace (or never), but interest will continue to accrue on the loan at rates dictated by the insurance company.
This increases the total cost of the loan over time and will reduce the death benefit if it remains outstanding.
Insurance Companies Will Help You With This: Insurance companies are happy to write you a life insurance policy and collect your premiums. Many, however, are ill-equipped to help you use their policies to facilitate infinite banking.
Typically, they do not cater to nor provide any ongoing support for this advanced strategy. So, if you are serious about pursuing infinite banking, partner with someone in the insurance industry who specializes in this subject matter.
The Bottom Line
At its core, infinite banking is about building cash value inside a permanent life insurance policy so that you can borrow against it when needed.
This strategy does provide a powerful financial safety net. In time, you will no longer be dependent on a bank’s approval for a loan. Instead, you will have full flexibility and control.
However, it’s a long-term strategy that calls for commitment and a deep understanding of insurance. Plus, it’s crucial to evaluate the opportunity cost of investing in your insurance policy versus the market.
Infinite banking relies heavily on the performance of the life insurance policy, which often grows at a more conservative clip compared to investments in the stock market. And the more you forgo in performance, the less effective this idea becomes.
Ultimately, infinite banking is a nuanced financial endeavor best left to investors who feel confident evaluating and navigating these tradeoffs. But if you’re up for the long haul, this strategy can flip your financial management game on its head in a pretty unique way.
