Why Entrepreneurs and Business Owners Should Consider the Infinite Banking Concept
Do you own your business…or does your business own you?
For many business owners, getting their dream up and running comes with an endless loop of securing financing for startup or expansion costs, and then working tirelessly to pay back lenders until (or in some cases, IF) the company becomes financially stable.
Even then, expanding or branching out into new territory can force the lending, equipment financing, or other borrowing process to start all over again.
But there is a better way to both secure and control your company’s financing needs through a process that can also help you grow and protect personal wealth – and to even generate tax free income in retirement. This is through the Infinite Banking Concept.
Infinite Banking is not a newly created get rich quick scheme, but rather it is a strategy that has been used by some of the wealthiest families in history, as well as some of the world’s biggest corporations, including McDonalds, JP Morgan Chase, and Disney, for well over a century.
That being said, the Infinite Banking Concept is also considered an advanced financial strategy. So, if it is a viable component for your business operation, it is essential that you obtain expert guidance throughout the process of setting up and maintaining your plan. This should start by obtaining the advice of a life insurance professional who is well-versed in creating Infinite Banking policies focused on maximizing cash value growth in the early years.
An Overview of the Infinite Banking Concept
Infinite Banking entails “overfunding” a permanent (i.e., cash value) life insurance policy in order to enhance the cash value growth, and then using the policy as a means to grow wealth and finance high ticket purchases, such as property, vehicles, business equipment, inventory, and other expenses.
John Cummuta, author of “The Banker’s Secret to Permanent Family Wealth,” states that the Infinite Banking Concept allows people to “Live your life…And build your wealth…Using the SAME money.”
The idea behind the Infinite Banking Concept (IBC) is to use your own assets for big cash needs rather than taking out loans from a bank or other lender. This gives you more control over your money. It also keeps you from paying interest to an outside bank or lender, and to continue generating a return on the policy’s cash value while your funds are also “working” to finance large purchases.
Basically, you are using your cash value as collateral for a life insurance loan, then using that loan to purchase assets, such as cash flowing businesses, real estate, or investing in your own business venture. You will then pay back your loan, by making payments to insurance company, rather than to a 3rd party lender. The key is that your cash value account is still earning true compound interest returns on the entire balance, and you are making a return on whatever asset you used the loan to purchase. So you are essentially using one dollar to make money in two different places.
Why Whole Life Insurance is Recommended in IBC Planning
Dividend paying whole life insurance is an asset used as the “wealth storehouse” in the Infinite Banking Concept. This type of policy grows the cash value at a guaranteed interest rate. In addition, whole life policies that are purchased through mutual insurance carriers may also be eligible to receive dividends – tax free return of premium that can be added to the cash value to further increase the growth. (Although dividends are not guaranteed, some mutual insurance companies have been paying them consistently for over 100 years).
The growth that takes place in the whole life insurance policy’s cash value account is tax deferred, meaning that there are no taxes incurred on the gain unless or until withdrawn. As an alternative to withdrawing cash, though, funds from a whole life insurance policy can be borrowed tax free.
Although there is interest charged on the borrowed funds, it can be well worth it as life insurance policy loans are typically close to a wash loan, meaning you are earnings as much interest in the policy as you are paying on the loan. Currently, one of the top companies we work with offer loans at 5.75% and pay dividends of 5%.
Additionally, life insurance loans are:
- Easier to obtain than loans from banks or lenders (there are no credit checks or other burdensome qualification criteria)
- Received more quickly (often within just a few days)
- Private (they aren’t reported to the credit bureaus and won’t show up on a credit report)
- Allowed to be used for any purpose
Because whole life insurance loans are simply using the policy’s cash value as collateral (because the loan actually comes from the insurance company), interest will continue to be generated on the full amount of the policy’s cash value.
Whole life insurance policy cash values are guaranteed, which provides a certain level of predictability and certainty.. Here, both the principal and the previous gains are protected – regardless of what happens in the stock market, since whole life insurance is a non-correlated asset. So, the growth can continue to compound – and over time, it can build up exponentially.
As a form of life insurance coverage, whole life also includes a death benefit component, which can be used as a financial cushion for loved ones if the insured passes away. Death benefit proceeds are received by the beneficiaries income tax free.
It is important to note that not all whole life insurance policies may be used in the Infinite Banking Concept. Rather, this strategy requires a properly designed policy with the appropriate add-ons (i.e., riders) so as to maximize its performance.
How Infinite Banking Benefits Entrepreneurs and Business Owners
When an entrepreneur establishes a personal banking system using whole life insurance, they can gain access to capital whenever it is needed. This helps to ensure that funds are available for fueling new projects, expanding operations, or taking advantage of additional profit-generating opportunities.
In addition, Infinite Banking may also be used as a cash flow management system for businesses, rather than relying on traditional bank accounts. The benefit here is that as your cash is sitting in an infinite banking policy, it is earning much higher returns that a typical big bank savings account offers and it is usually earning higher returns than you will get with a CD or money market account. And those gains are income tax deferred.
Some of the other advantages of using infinite banking in your business could include the following:
- Reducing risk
- Supplying future liquidity to fund and grow the business
- Providing a financial “safety net” for your loved ones and survivors
- Presenting legacy planning and business succession alternatives
- Offering additional revenue source(s) for the business
- Generating tax free retirement income
Both new and established businesses can face many risks. But, an infinite banking plan can help to remove the need for the business to take on more risk in several areas. Infinite Banking is most commonly executed using a properly structured dividend paying whole life insurance policy – and whole life insurance is considered to be one of the safest assets in all of finance.
Consider this: banks in the United States own so much life insurance that there is a separate accounting acronym for these assets known as BOLI – Bank Owned Life Insurance. BOLI is a Tier 1 asset, which means that it is considered by the regulators to be the safest type of investment of those that are under regulations.
This means that business owners who own an Infinite Banking policy can count on both the death benefit and the cash value being there when they need it for financing purposes, as well as for a “safety net” for their loved ones in case of the unexpected.
Supplying Future Liquidity to Fund and Grow the Business
The cash value in an Infinite Banking policy could be used for supplying future liquidity to both fund and grow your company. For instance, rather than borrowing money from banks, venture capitalists, friends and family, or going through the SBA (Small Business Administration), it may be possible to borrow from a properly structured whole life insurance policy for business start up costs instead.
Depending on the type of business you operate, funds from an Infinite Banking policy could also be used for a myriad of other needs, too, such as:
- Purchasing business equipment and supplies
- Obtaining inventory
- Buying a physical location (land, building, warehouse, etc.)
- Paying taxes
Businesses also need a place to “store” their capital – ideally someplace where it can safely generate a return. Yet, while bank accounts and money markets provide an option for this storage, the funds that are placed in these accounts earn next to nothing.
On the other hand, a whole life insurance policy can provide tax deferred compound growth – and it can do so without putting any principal (or previous gains) at risk. In addition, these financial vehicles also allow for liquidity. So, money can be accessed in times when the company’s profits are lean or when it is needed for making big ticket purchases like inventory and equipment.
Further, the cash value in a whole life insurance policy could be used to help the company secure financing – even on projects or opportunities that traditional banks and lenders feel are “too risky.”
There is also no need for the business to fill out lengthy loan paperwork or to endure credit checks in order to secure the funding with a whole life policy. Rather, once the insurance company is notified regarding how much is needed, money may be received in as little as a few days.
As an added bonus, whole life insurance cash value is also protected from creditors and lawsuits in many states. Therefore, if the business is sued, these funds will remain safe (as well as private).
Providing a Financial “Safety Net” for Survivors
While most people don’t like to dwell on the “what if’s,” the reality is that they still must be planned for. Otherwise, the financial consequences could be dire. This is particularly the case for business owners who may have others (in addition to loved ones) counting on them for some or all of their financial support. (In this case, employees and/or partners who are generating an income).
An Infinite Banking policy can provide a financial safety net in several ways, such as:
- Providing funds to keep the company afloat while a successor or new buyer is found
- Paying income tax free proceeds to the business owner’s spouse and/or other loved ones to use for income replacement, debt payoff, or other financial needs
- Bypassing probate, which could save up to 15% (or more) on court fees, and keep the business owner’s financial details private and out of the public record
If there is an outstanding cash value loan balance at the time of the insured’s passing, this will also be paid off using funds from the death benefit.
Presenting Legacy Planning and Business Succession Alternatives
Many people wish to leave a legacy when they’re gone. This could include donating to a favorite charity, paying for loved ones’ future college education costs, or funding other noble causes. One option with Infinite Banking is for legacy creation outside of the business, using the life insurance policy’s death benefit.
In addition, as discussed above, an Infinite Banking strategy can also help with laying out and funding plans for either the succession or the sale of a company when the business owner is no longer willing or able to run it.
To transition the business, it could require that the new owner or partner come up with funding so that they can “buy out” the former owner’s share. There are strategies that can be put in place ahead of time that can create both a road map and funding for this process.
As an example, if there is more than one owner of the company, each could purchase a policy on the other(s) in order to fund a buy-sell agreement, with the business named as the beneficiary.
Then, if one of the owners dies, the proceeds from the death benefit can allow the surviving owner(s) to purchase the deceased’s shares of the business. Going this route can also help the surviving spouse / loved ones of the deceased, as death benefit proceeds could be paid to them in order to buy them out of the company (and in turn, provide them with liquidity, too, for income replacement, debt payoff, or other needs).
Offering Additional Revenue Source(s) for the Business
Having an Infinite Banking policy could also provide an avenue for additional revenue for a business owner. This could include providing an alternative income source in slow periods, such as during the “off season” for companies that generate the bulk of their cash flow only during certain times of the year. If this income is generated through a policy loan from the cash value, it will also be received tax free.
It may even be possible to generate a profit when taking out a loan from the cash value. For instance, if funds are borrowed at an interest rate of 6%, and the money is used to buy into a business opportunity that generates a return of 10%, the business owner/borrower will come out ahead.
Generating Tax Free Retirement Income
Similarly, a properly structured participating whole life insurance policy can also be used as a tax free cash flow generator so that you can supplement your retirement income. Funds from a policy may be accessed via withdrawals or loans.
While cash value withdrawals are taxable above the amount your contributed to the policy (i.e. on gains), loans are received tax free. This can be extremely beneficial in a high income tax rate environment. In addition, these funds won’t have a negative impact on the potential taxability of Social Security retirement benefits – so in essence, you can net out more spendable income from that source, too.
When funds are borrowed from an Infinite Banking policy, interest will continue to accrue on the entire amount of the cash value. This is because you are technically borrowing from the insurance company and simply using your cash value as collateral.
So, if you have $80,000 in your policy’s cash component – and you borrow $30,000 – interest will continue being generated on the full $80,000…even as the borrowed funds are being used for other needs and wants.
And, even though you will have a loan balance, if this is not repaid by the time the insured passes away, the remaining balance will be paid off using proceeds from the policy’s death benefit (with the remaining funds then being paid, income tax free, to the beneficiaries).
How to Set Up an Infinite Banking Plan for Entrepreneurs
According to Nelson Nash, creator of the Infinite Banking Concept, and author of Becoming Your Own Banker, “Everyone should be in two businesses – the one in which you make your living and the other should be the banking business that finances whatever you do for a living.” He goes on to say, “Of the two businesses, banking is the most important. Businesses come and go – but banking is eternal.”
There are several steps involved in setting up your own Infinite Banking plan. These are:
- Purchasing a properly designed high cash value whole life insurance policy from a mutual insurance company
- Adding the appropriate policy riders
- Funding the policy
- Borrowing funds from the cash value to finance purchases and/or other business expenses
- Repaying the borrowed funds
- Repeating the process
Choosing a dividend paying whole life policy from one of the top mutual insurance carriers is recommended as the best option for an Infinite Banking plan. These policies offer numerous guarantees, along with:
- Tax-advantaged growth
- Protection of principal (in any type of stock market or economic environment)
- Policy loan options
- Death benefit (i.e., a financial “safety net” for your survivors)
You should also be able to add various riders to the policy. Two of the most common whole life insurance riders that are used with the Infinite Banking Concept are:
- Paid Up Additions (PUA) – This rider allows the policyholder to purchase more death benefit and increase the cash value growth.
- Term Life Rider – This rider offers term life insurance coverage that may be converted to permanent death benefit protection at some point in the future.
In designing your Infinite Banking policy, you will want to make sure that you keep the death benefit low, while at the same time maximizing the cash value to enhance accumulation and growth. A key item to be mindful of here is not turning the policy into a Modified Endowment Contract, or MEC, because doing so could cause the policy to lose its tax advantages.
Is the Infinite Banking Concept Right for Your Business?
While there are numerous benefits to using the Infinite Banking Concept in your business, it is not the right strategy for everyone – and even if it is right for you, there are many “moving parts” involved.
With that in mind, it is critical that you understand whether or not an Infinite Banking policy is a viable way to go in your business, and to have a knowledgeable guide who can assist you with properly setting up a plan.
This is where the Infinite Banking specialists at Insurance and Estates can help.
If you have questions about whether or not a properly structured whole life policy and the Infinite Banking Concept may work for you – and your business – we’re happy to provide you with more details.
Please leave any questions or comments below. We do our best to respond in a timely manner.
Becoming Your Own Banker: Unlock the Infinite Banking Concept. By R. Nelson Nash. Copyright January 1, 2009.
Using Infinite Banking in Your Business. By Rachel Marshall. The Money Advantage. May 10, 2021. https://themoneyadvantage.com/infinite-banking-for-business/
Unveiling The Secrets of the Rich: The Infinite Wealth Strategies (The Intelligent Banker by Infinite Wealth Strategies Book 1). By Josh Nelson. Copyright April 18, 2021.
The Banker’s Secret To Permanent Family Wealth. Live your life…And build your wealth…Using the SAME money. By John Cummuta. Copyright January 27, 2016.