You may remember from our discussion about the velocity of money, when we wrote that infinite banking is already happening all over the world under the radar. You may also remember us noting that the infinite banking concept has nothing to do with any particular insurance or financial vehicle.
However, for the average person who wants to set up personal banking system, there is a way to design permanent life insurance for infinite banking. This unique approach to designing a permanent life insurance policy for infinite banking is the focus of this article.
You see, when is comes to a permanent life insurance policy for infinite banking, some options are more ideal for setting up a personal banking system than others. The top choice for setting up your own infinite banking system for wealth building would have a few characteristics as follows:
- Leveraged growth
- Tax advantaged growth
- Asset protection
By referring to the above characteristics, you ideally need a place to put your money for guaranteed growth that offers all of the above. Typically, when our clients do a side by side comparison with other options for building a reserve of ready cash, the option of purchasing a permanent life Insurance for infinite banking will prevail.
Best Permanent Life Insurance Policy for Infinite Banking
Of course, I’m NOT talking about just ANY permanent insurance because all permanent life insurance policies are not created equal.
There are many types of life insurance that may be suitable for a variety of purposes. A few examples are: life insurance for children, second to die life insurance, limited pay life insurance and indexed universal life insurance.
For purposes of this discussion, when we talk about cash value life insurance for infinite banking, let’s make the following assumptions about the ideal pool of companies and policy options that support the steps to creating your own personal bank using life insurance:
- Permanent policy verses term life
- Policy designed to accrue cash value (rather than maximize death benefit)
- Solid history of dividend payments
- Mutual verses a stock company
- Non-direct recognition (or direct recognition with solid history)
About Permanent Life Insurance
A permanent life insurance policy vs a term life insurance policy would be a policy that offers a permanent death benefit when all premiums are paid vs a term life policy that only provides a temporary death benefit for period of years. Although term life has its uses, it has often been referred to as renting a death benefit.
Policies that would be categorized as permanent would include the spectrum of whole life insurance AND universal life insurance policies. Whole life insurance is also commonly referred to as cash value life insurance and is arguably the most conservative and reliable type of life insurance, but perhaps less flexible than its counterpart.
Whole life insurance policies offer a guaranteed return or accrual of cash value as well as a non-guaranteed projected rate of return in the form of dividends. In a mutual life insurance company, whole life dividends paid are often tax advantaged because they are categorized as a return of premiums overpaid by the policy holders rather than as income.
Universal life insurance which is offered in a few different forms depending upon how the assets are invested and returns are offered to policy holders.
For example, indexed universal life offers policy holders a return of cash based upon a number of market indexes (such as the S&P 500 index) that may be selected by the policy owner. Usually, policy owners are offered a maximum rate of return (the cap) in a booming market as well as a floor against losses if markets head south. Variable universal life allows for individual stock fund investments and may only be sold by someone with a securities license.
One advantage that whole life insurance for infinite banking is that these policies consistently offer tax free accumulation through the payment of dividends. Although IUL policies may offer higher returns in booming market years, they also can experience losses, even with a floor of zero *.
* Some IUL policies do offer a no loss guarantee and tax free accumulation of cash values so this can be considered on a case by case comparison.
This contest between whole life vs IUL may be a classic comparison between the tortoise and the hare; however, for infinite banking purposes, the tax advantages of whole life dividends do add an advantage for long term cash accumulation.
Designed for Cash Accumulation and Growth
Permanent life insurance for infinite banking needs to be expertly designed to expedite and maximize cash value accrual without violating current tax laws. This is something that many experienced insurance agents will get wrong unless they have special expertise because they simply look at this all wrong.
In other words, most life insurance agents are fixated on the death benefit only (which also provides higher agent commissions), and thus operate under the mistaken idea that a cash value life policy will take at least 10 years to mature and begin to accrue adequate cash value for self financing. This is simply NOT TRUE.
Current insurance laws and IRS rules allow MORE MONEY than just the base premium to be paid into a policy.
Why pay more into a whole life policy for infinite banking than the base premiums?
To answer this question, you should as another which is…why would the IRS limit how much folks can pay into a whole life policy?
I suggest, and you can verify for yourself, that the tax laws that apply to life insurance dividends are so good that years ago, folks were dumping lots of money into whole life insurance policies.
As a result, the IRS as the ultimate party pooper, created the modern day MEC rules which stands for Modified Endowment Contract. In a nutshell, if you put too much $$$ into a whole life policy all at once, you lose the tax advantaged growth that is available.
That said, there is a formula to determine how much extra money can be paid in without the policy “MEC-ING OUT” and usually this is accomplished through what is called a paid up additions rider. Most life insurance companies now help to police policies to make sure that a MEC doesn’t happen.
So, using paid up additions and based upon your target cash value accumulation, as well as your budget, you can come up with a predictable plan to have a minimum cash value available for private financing within a specific targeted time frame.
In making this calculation, we don’t forget about the death benefit but it isn’t a primary focus. As a secondary focus, sometimes a term life policy rider is added to a policy to add death benefit, rather than adding it to the whole life policy at the expense of cash value accumulation.
Dividend Payment History
In our pool of options to identify the best company offering the ideal whole life insurance policy for infinite banking, a key consideration is a strong dividend payment history because this contributes directly to your ability to accumulate expedited cash value within the policy.
Some of our top dividend paying life insurance companies for infinite banking after extensive experience, and investigation concerning a number of criteria, are Mass Mutual Life Insurance, Penn Mutual, Ohio National and American United Life Insurance, to name a few.
Mutual life insurance companies are preferable when researching the ideal permanent life insurance for infinite banking in our humble opinion because they are owned by the policy holders, rather than the public shareholders.
Ownership by the shareholders is why dividends are returned to the policy holders as a return of premiums AND thus the tax advantages.
Non-direct recognition refers to a whole life insurance company that does NOT alter its dividend rates based upon outstanding loans taken by the policy owner against the policy cash value.
Non-direct recognition may be preferable for infinite banking because you want to be able to take full advantage of policy growth (cash value accrual) while ALSO taking advantage of policy loans for other investments such as real estate and hard money lending.
Non-direct recognition loans allow you to maintain financial leverage AND create a financial arbitrage with your cash because the loan rates for policies are historically low variable rates (or fixed in some cases).
An exception to the rule (and there are others) is Penn Mutual Guaranteed Choice Whole Life which is a top rated company with a strong history of dividend payment that has not appeared to impact policy growth regardless of policy loans. Thus, Penn Mutual is a top choice to consider regardless of its direct recognition status.
Top Advantages of Using Whole Life Insurance for Infinite Banking
[vs. Other Financing Options]
In our recent article about real estate investing with infinite banking, we discussed the key disadvantages of traditional bank financing such as:
- High closing and loan origination costs
- Time requirements for obtaining loans
- Encumbering assets and thereby created re-sale risks
- Inflexible repayment terms and related risks
- Uncertainty of bank calling a loan
Of course, the above list isn’t exhaustive, as you may be able to think of other disadvantages to using a traditional bank for financing, such as the entire bank imploding as occurred with the death of Washington Mutual bank. Bank loans are plagued by all of the above disadvantages and even the wealthy are at the mercy of the bank unless they create a viable alternative.
The point is that there is a better way.
You might also think that saving or going with private lenders is a viable alternative so we should address those ideas.
Is Saving Really a Great Idea?
Since youth, we’ve been ingrained with the idea that saving is prudent exercise. However, I challenge you to consider who is doing the “ingraining”.
One of our key inspirational authors, George Antone, who wrote The Banker’s Code and The Debt Millionaire points out that it is important to “adopt the mindset of the banker”.
When saving, you’re missing out on the opportunity cost of investing that money (loaning it out) AND that the banks have convinced you to park your money with them, so they can use it in this way.
The Problem with Private Loans
Private loans offer some advantages such as speed and not appearing on a credit report.
However, these loans are generally more expensive (10-12% or more) AND usually are for a shorter term (12-24 months).
As such, they are great for certain types of investments, such as a real estate flip, but not for something that may require a longer term such as a rental property.
So, after laying the groundwork above, we circle back to our premise of why there is an ideal way to use permanent life insurance for infinite banking, within the framework discussed above, TO CREATE a private financing system.
Instead of depositing money into a bank account and getting less than 1% interest in today’s market, you could purchase permanent life insurance for infinite banking THAT IS DESIGNED for rapid cash value accumulation.
Quick Tip: The objection that whole life insurance shouldn’t be used for self banking because it is expensive is based upon the faulty premise that a whole life policy can only be designed for maximum death benefit. With paid up additions, money is added to the policy the same way that it could be deposited in a bank.
Of course, early in the policy period, expenses and up front costs are paid, just as real estate would entail up front closing costs, commissions, and fees. Depending upon your policy design, some time will be required for the cash value and policy to “kick in” and this could range from 3 – 7 years. However, loan proceeds may be available in as little as 1 -2 years.
Review of Key Advantages
Because permanent life insurance loans are from the insurance company, in most cases, and backed by your policy cash value, your origination costs are minimal.
Speed of obtaining funds is also optimal, as in being funded in hours rather than days.
No need to leverage existing assets that may need to be unencumbered for flexibility needs (i.e. re-sale if a hot offer presents itself or a down market is looming).
Flexible re-payment terms * offer protection against uncertainties in the market.
* Disciplined repayment of policy loans is highly recommended under all infinite banking programs, because this is essentially to maintaining momentum and maximizing ongoing cash value growth for future security and investment.
…and finally, last but not least, you’re in control of this process because this ideal permanent life insurance for infinite banking is YOUR LIFE INSURANCE ASSET and thus, YOU DO NOT RISK having a third party lender call your loan or engaging in some other self serving nonsense that is prejudicial to your interests.
To learn more, about how to use permanent life insurance to design and build an infinite banking strategy, e-mail or give us a call today for a complimentary strategy session.