There is a lot of misinformation out on the WWW with regards to the infinite banking concept®. In the following article we will attempt to demystify the concept and provide our readers with the insight needed to more fully understand this important financial idea or strategy.
Is the Infinite Banking Concept® a Scam?
ANSWER: NO, the infinite banking concept is not a scam. A scam is some sort of fraud, such as a Bernie Madoff Ponzi scheme.
Rather, Infinite banking is a concept that explains a specific “how to” of using your money to work for you.
Infinite banking is the strategy of using whole life insurance as your own personal source of financing.
That fact, that it uses whole life insurance, is why the concept is immediately tossed aside by most, since the most vocal financial pundits, such as Dave Ramsey, tell everyone to buy term and invest the rest into mutual funds.
Sadly, most people won’t go deeper into the concept. As a result, they miss out on one of the greatest financial breakthroughs they could participate in. For infinite banking is not just a concept, it is a revolution.
But to understand what it is you need to first understand what a “concept” is, and then in turn dissect the idea of infinite banking, what it is and how it works. So let’s begin with some definitions.
Infinite Banking Concept Definitions
Concept DEFINITION: an idea, a plan, a process, or an understanding based upon an experience, reasoning, and/or imagination. Source.
Infinite DEFINITION: limitless; having no measurable parameters.
Banking DEFINITION: business conducted by a bank (i.e. receive deposits and make loans).
Some Other Financial Concepts
Let’s look at some other financial concepts to get a firmer grasp on what a concept is and how infinite banking should be viewed.
Inflation: the concept of inflation is that the price of goods and services increases over time.
Compound Interest: the concept that describes the idea of how principle plus interest grows over time.
Liquidity: the level of access to an asset. The more access to the asset the more liquid the asset will be.
Leverage: the concept of using a little to get a lot, primarily via using other people’s money to greatly enhance your potential return. Financial leverage is the eighth wonder of the world.
Time: the concept of measuring the past, present and future taken in totality.
Money: a medium of exchange; a promise
Time Value of Money: the idea or concept that describes the phenomenon that present money is worth more than future money.
These are just a few financial concepts that exist. The point is, these concepts are not a scam. Instead, these financial concepts are ways to describe a certain observed experience or phenomenon.
For example, take inflation.
With inflation, the price of goods goes up as the money supply increases. We observe higher prices and we attribute those higher prices to an increased money supply. No one would say inflation is a scam. Inflation is simply a word that describes an idea (i.e. a concept). In much the same way, no one who understands IBC would say infinite banking is a scam, but rather, infinite banking is an idea, a concept, or a strategy.
So what is Infinite Banking?
At its core, infinite banking is a concept or strategy of using some financial vehicle as a private banking system where the cash accumulation or growth in this chosen financial vehicle is used to “self-finance” various purchases, including, but not limited to, other assets, paying down debt, or buying vehicles.
The concept teaches that you are the banker and the borrower. The concept’s focus is on the idea that when you take over the role of financier in your own affairs you will be able to gain financial freedom and independence unparalleled to any other financial strategy available.
Notice how none of what I am describing has to do with an actual product, i.e. whole life insurance?
Rather, infinite banking is an idea, a concept, a strategy.
So Why Do People Call Infinite Banking a Scam?
Sadly, many people fail to differentiate infinite banking from cash value life insurance. As a result, to many people ignorant of the concept, infinite banking equals whole life insurance. However, that massively oversimplifies the concept and is even misleading.
You see, the concept could just as easily (though not as effectively) be carried out using other investment vehicles, such as a savings or checking account, a money market account, a certificate of deposit (CD), or any other place where you can store your money. However, you want your money to be liquid, so putting it into mutual funds would not be ideal.
You would then implement the infinite banking concept by borrowing your money from the investment vehicle and then repaying yourself with interest back into your savings vehicle of choice.
Time out—Why Would I Pay Myself Interest?
I have to stop here in my explanation because most people want to know why on earth anyone would pay themselves interest.
Paying yourself interest is a very important tenet of infinite banking and one of the main strategies of being your own banker.
The idea behind this is that we do not value money the way a bank does. When a bank loans out money it receives interest on that money. However, when we spend our own money we do not pay ourselves interest, let alone pay ourselves back at all.
“You finance everything you buy. You either pay interest to someone else or you give up the interest you could have earned otherwise.” -R. Nelson Nash
The concept of infinite banking would have you purchase an item and then pay back your “bank” at a market interest rate that a bank would charge you. That way you are properly valuing your own money the same way a bank does.
As you pay yourself back with interest you are growing your cash account, which in turn is growing with compound interest.
It is this “recapturing” of interest that truly sets the infinite banking concept apart from other financial concepts.
So Getting Back to Why Infinite Banking is Not a Scam
As I mentioned above, people think infinite banking and life insurance are synonymous.
However, there are many other financial vehicles you can use to implement this financial strategy.
So the question becomes, why choose dividend paying whole life insurance also known as participating whole life?
Why Participating Whole Life Insurance?
A properly designed dividend paying whole life insurance with paid up additions and/or other appropriate life insurance riders offers guarantees that cannot be matched by any other known financial vehicle.
There are various infinite banking concept pros and cons associated with whole life insurance.
A few benefits of whole life insurance that set it apart include:
- Dividend paying whole life insurance provides guaranteed tax-advantaged cash value growth.
- Under IRC 7702, the interest and dividends in the policy are not taxable income.
- The cash value continues to grow via compound interest, even when you have an outstanding policy loan.
- Policy loans from life insurance are tax free.
- Your cash value is liquid and contractually guaranteed to be available to you upon request.
- Unlike other savings vehicles, such as a 401k plan, cash value life insurance also has a death benefit for increased leverage.
Dividend paying whole life insurance provides guaranteed tax-advantaged cash value growth.
Your cash value growth is guaranteed by the life insurance company. You do not have to worry over what the stock market is going to do. With coverage from a top dividend paying whole life insurance company you are contractually guaranteed a specific return on your money. The peace of mind in knowing your cash value will continue to grow regardless of what happens in the stock market is extremely liberating.
Under IRC 7702, the interest and dividends in the policy are not taxable income.
The internal revenue code actually has a section that carves out an incentive for cash value life insurance. Under IRC 7702, the interest and dividends in the policy are not taxable. Any time you can obtain a tax advantage it is probably a good thing to take it.
The cash value continues to grow via compound interest, even when you have an outstanding policy loan.
When you borrow against the cash value in your policy what you are actually doing is borrowing money from the insurance carrier’s general fund and using your cash value as collateral. The money in your cash account continues to grow via interest and dividends.
That means your money is working for you in two places at once: in your policy and in your investment vehicle of choice that you used your policy loan to purchase.
For example, infinite banking and real estate are a great combination. You have a lump sum of money that you use to buy your investment property. Your cash flow is used to buy a life insurance policy. You grow your whole life policy and use the cash value as collateral for a down payment on another investment property.
You can refinance your original property and use it to buy another investment property. The cash flow from you new property buys another policy.
You are using infinite banking to take full advantage of the velocity of money, while building up your reserves in a tax advantaged vehicle. It is a wealth building machine.
Policy loans are tax free.
You can take out a policy loan from life insurance without having to pay income tax on that loan. So you are gaining access to your cash value equivalent that has accumulated via premium payments and interest and using it for whatever you choose.
And you never have to pay the life insurance policy loan back, although it is a good idea to pay it back, with interest, when practicing infinite banking.
But the good news is you create your own payback terms. You can pay as much or as little back into your policy, over a timeline you create. You will never have such flexible terms with typical bank financing.
Your cash value is liquid and contractually guaranteed to be available to you upon request.
As the policyowner, you have the #1 claim to your cash value. The company must give you the first right to your money at all times. Therefore, you have ultimate liquidity on your money in your policy.
Compare the liquidity offered with cash value life insurance to that of equity in your home.
With your home, the equity is illiquid. You have to apply with a lender for a cash out refinance or home equity loan. And you might not qualify for a loan, so you cannot touch the equity.
Not so with cash value life insurance. Your money is liquid and available upon request. And there is no credit check or approval process. The money is yours, no questions asked.
Unlike other savings vehicles, such as a 401k plan, cash value life insurance also has a death benefit for increased leverage.
A typical 401k plan is a scam. Think about it, you put your hard earned dollars into the plan and then you cannot use those dollars (minus a few exceptions for 401k withdrawals and loans) until you are age 59 ½. At that time you are using future dollars that have become devalued due to the time value of money (another concept, i.e. idea).
On top of that, a 401k or IRA does not offer a death benefit. Instead, if you die tomorrow, your family would receive a check for the amount in your IRA or 401k, minus some additional expenses. That is it.
Cash value life insurance also includes a death benefit that is initially substantially more than the cash value in the policy. The result for your family is if you die prematurely, your family will receive a lump sum death benefit income tax free. The concept of getting a large death benefit for a relatively low premium is called leverage.
Infinite banking is a concept, an idea, or a strategy that describes a disciplined process.
Infinite banking is not a scam. Anyone who tells you it is simply does not understand the concept nor the implications of implementing it into your life.
Thank you for reading our article, Infinite Banking Scam. If you have further questions, please give us a call for a free complimentary consultation or fill out our questionnaire.
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