The following article covers the top 10 most frequently asked questions we get about the infinite banking concept in the context of a properly structured dividend paying whole life insurance policy.
Top 10 Frequently Asked Questions About Infinite Banking
- How soon can I take out a policy loan?
- What is the guaranteed interest rate on these Infinite Banking policies?
- Why do you recommend mutual companies instead of stock companies?
- Are whole life insurance premiums flexible?
- Is my death benefit guaranteed?
- Why use whole life for Infinite Banking and not Indexed UL?
- How do I pay a policy loan back and do I determine how it is paid back?
- Do I have to fund a whole life policy for my whole life?
- What is the MEC limit?
- Does the life insurance company keep my cash value when I die?
With a properly designed policy focused on high early cash value growth you can take out a life insurance policy loan within 1 month of starting your policy.
As a general rule of thumb, you can expect your policy to have amassed roughly 75% of the year one premium in cash value after 12 months.
Generally, the guaranteed cash value equals total premium payments contributed to your policy by year 9 or 10.
However, depending on your policy performance, the non guaranteed cash value may equal your premium payments made by year 4 or 5.
Currently, the non guaranteed internal rate of return (IRR) is around 4.5-5.5% on whole life policies designed for high cash value growth.
The guaranteed interest rate of your life insurance policy designed to practice infinite banking is determined by the specific carrier you choose.
Typically, you can expect a guaranteed interest rate to be between 3-4%. And as mentioned above, the non guaranteed internal rate of return (IRR) is around 4.5-5.5% on whole life policies designed for high cash value growth.
Remember, your rate of return on your policy can be accessed income tax free. So, when comparing it to other savings accounts, be sure to factor in the rate of return with taxes.
For example, you might be able to get 2-3% right now on a CD. But thanks to taxes, the actual return will be significantly lower.
Interested in finding out what your guaranteed interest rate would be? The best way to know for sure is to have your agent create an illustration for you.
Mutual life insurance companies operate for the benefit of its policyholders, whereas a stock insurance company is focused on shareholder appreciation for the benefit of its shareholders.
As a whole life insurance policyholder in a mutual insurance company, you are an owner in the company. And you have certain ownership rights that do not exist for a policyholder of a stock insurance company.
Another reason is that most participating life insurance policies are with mutual insurance companies.
For more, please see our article covering mutual insurance companies vs stock insurance companies.
The premiums on a whole life policy designed to practice infinite banking are very flexible. These policies are structured to that your have a premium payment and a paid up additions rider payment.
Your policy’s paid up additions rider allows you to pour additional cash into your policy above and beyond your premium payment.
In any given year, you can opt out of paying your paid up additions. That way, if your finances are tight for a given year you do not have to make the larger payment.
In addition, over time your dividend payment grows so that it is large enough to cover your premium payment. This allows you to use your dividend payment to cover your premium.
There are other ways to pay your whole life insurance premiums, including choosing to have your policy become paid up life insurance.
You life insurance death benefit is guaranteed, minus any outstanding loan balance.
For example, if your death benefit is $1,000,000, then upon your passing your beneficiary will receive the full $1,000,000, guaranteed by the insurance company.
However, if you have an outstanding loan taken out against your cash value, your death benefit will equal the total death benefit minus your outstanding loan.
So, if you die and you have a loan from the carrier of $100,000 outstanding against your cash value and a $1,000,000 death benefit, your death benefit payout will be $1,000,000 – $100,000, or $900,000 death benefit paid to your beneficiary.
One gigantic benefit of using indexed universal life vs whole life is that a whole life policy is designed so that the cost of insurance is determined at the outset.
What that means for the policy owner is that the premiums on the whole life policy are fixed.
In contrast, the premiums on indexed universal life are not fixed. As you age, your cost of insurance goes up.
Now, so does your cash value. But if your IUL policy does not perform as illustrated, you can find yourself in a position where your premiums are higher later in life that what you planned for.
So the main benefit of whole life vs indexed universal life is the guaranteed premium payment throughout the life of the policy.
One huge advantage of life insurance loans is that you determine your payback schedule and payment amount.
With most insurance companies, you can pay a policy loan back with a monthly EFT bank draft, or call in and give them a payment over the phone.
And the best part is you determine either how much you want to pay per month, or calculate the payment amount based on the interest rate and the number of years to pay back the loan.
The most important part to grasp is that all the loan repayment options are flexible and are determined by you.
Also, later in life many people use their policy loan provision to supplement their retirement income.
As a result, they do not pay back their loan. Rather, the annual cash value growth and dividend payment of their whole life insurance is used as tax free retirement income.
You can choose to fund your policy for a limited time or for your whole life.
There are limited pay whole life insurance policies that allow you to fund your policy for a set period of time, say 7, 10, 15 or 20 years.
After you have paid into your policy for the predetermined period of time, the policy is paid up, and you no longer have to make premium payments.
Alternatively, if you choose a whole life policy to age 121, you can pay into the policy for a period of years until the policy dividend equals your annual premium.
At that time you can elect for your dividend payment to pay your premiums.
MEC stands for modified endowment contract. Your MEC limit will vary depending on various factors.
When designing a policy for maximum cash value growth you will want to be able to put as much into the policy through your premium payment and paid up additions as possible, without violating the MEC rules.
If you violate the MEC rules your policy will lose some of the tax advantages it maintains as cash value life insurance.
The good news is the insurance company will monitor your policy and alert you if you are ever in danger of “MEC’ing” your whole life insurance policy.
The answer to this question is best answered by analogy.
Consider if you could purchase a piece of real estate that offers a guaranteed return every year, and as it grows, it offers you access to a totally liquid tax deferred account that builds in a true compounding interest environment.
Using real estate investing as an analogy to a whole life policy, equity in the real property is like the cash value in the policy AND the house is the death benefit.
So in a whole life policy, the cash value account funds the death benefit, so it isn’t forfeited. Think of your cash value as the equity in your home.
If you pass away with a piece of real estate in debt, the loan needs to be paid, and the same goes for your policy.
Now realize that with a properly designed policy for infinite banking, your cash value increases annually, and so does your death benefit, particularly when you use your dividend payment to purchase paid up additional life insurance.
That way, the more your cash value grows, the more your death benefit grows, resulting in an ever increasing death benefit that could potentially grow year in and year out until you die.
So there you have it, our top 10 most frequently asked questions about infinite banking. If you have more questions, please check out our infinite banking wiki, or simply leave a question or comment below.
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