Welcome to a deep dive into the pros and cons of the infinite banking concept®. While there are many pros to infinite banking, there are some cons that you should consider. And while we are advocates of this concept, it is not for everyone or every situation.
At Insurance and Estates we love infinite banking. It is an awesome strategy which allows for maximization of your cash and assets. We have written extensively on this subject. You can can click the following category Infinite Banking to find many more articles on this subject.
The Infinite Banking Concept, (AKA “IBC”), has taken on a lot of other names, such as family banking concept, bank on yourself, perpetual wealth strategy, becoming your own bank, circle of wealth and perpetual wealth system. These are the alternative names we are aware of but there are most assuredly more.
Each of these describe the concept of infinite banking which uses permanent cash value life insurance as your own banking system. The details of how this is done will follow in our article below covering the pros and cons of the infinite banking concept.
Pros and Cons of the Infinite Banking Concept
We came up with 10 Pros and 4 Cons you should be aware of. You can scroll down the page or click on a heading below to immediately jump to that section.
Infinite Banking Concept Pros
All too often we see people confuse infinite banking with life insurance, specifically dividend paying whole life insurance.
However, infinite banking is not a product, but as the name entails, it is a concept for which life insurance just happens to be the best vehicle to practice the concept with.
Infinite banking uses life insurance but IT is NOT life insurance.
This is an important distinction and why so many critiques of the infinite banking concept are so off base.
Find a critique of infinite banking and you will find that the person is not truly talking about infinite banking but will actually be critiquing whole life insurance.
What is wrong with that?
The main issue with not distinguishing infinite banking from whole life insurance is that the person writing the article bashing infinite banking is actually bashing whole life insurance, and typically old school whole life insurance that has been designed to maximize the death benefit, with little to no thought into the cash value accumulation aspect.
Typically, this shows up by the person bashing the low guaranteed returns of whole life (currently at 3.5-4%) and how it fails to compete with buy term and invest the difference, AKA BTID.
But what the article attacking infinite banking always fails to address is the actual concept of infinite banking and how, when done correctly, it can create a climate of unparalleled financial wealth building due to the nature of the concept.
Although not exhaustive, our IBC pros and cons list below will cover some of the major benefits of this concept when used in conjunction with whole life insurance and hopefully provide our readers with some juicy food for thought.
So, let’s get on with the pros…
We cannot stress enough the importance of having your money stored in a safe environment, free from the ups and downs of the stock market or real estate market.
Whole life insurance is an asset that is not correlated to the stock or housing market.
What does “non correlated” mean?
In a world obsessed with the stock market, it is important to have assets that are non correlated, i.e. not tied directly to the stock market, that do not move in lock step with the fluctuations of the market.
One great thing about whole life insurance is it is not tied to the stock market.
Rather, whole life offers guaranteed cash value growth year over year, providing policyholders with an excellent “safe bucket” of assets that can help insulate you from the ebbs and flows of the stock market.
And consider this, since January 2022, we have seen a large pullback in the overall markets. Over the last year we have yet to see a large crash, although the S&P 500 finished 2022 down over 19%. To put that in perspective, the past two stock market crashes (2000 and 2008) led to at least 50% losses.
Whole life insurance is a great way to create some stability in an otherwise unstable world by providing a safe bucket, a rock solid financial foundation, against the next inevitable market downturn.
In addition, if you are looking to truly diversify into different asset classes, instead of having your entire nest egg in the stock market, a participating whole life policy is a great option.
When you engage in the strategic use of whole life insurance applying the infinite banking concept you improve your cash flow and liquidity.
Consider this fantastic infinite banking example.
If you have equity in real estate, how liquid is that equity?
The answer is, not that much. If you want to gain access to the equity in your home or investment real estate you have to sell the property, qualify for a HELOC or Cash Out RE-Fi.
Rather, if your equity is in your life insurance policy, an advantage this offers is that you have unhindered access to your policy’s cash value.
To access your cash value, all you need to do is call your insurance company and ask for a check to be issued. You can usually receive a check within just a few days – no qualification – no evaluation – no hassle.
In addition, consider this.
If you had a $500,000 home with 100% equity (i.e. you owed zero), most people would tell you, “Great job, you are debt free!” However, what if you owed $500,000 on that same property (a liability), but you also had $500,000 in a bank account (an asset), or better yet, a life insurance policy earning tax deferred compound interest?
Would you still be debt free?
In reality, you would have a $500,000 debt, but you would also have $500,000 LIQUID CASH available for you whenever you needed it. Your balance sheet would reflect ZERO overall debt, with a growing asset (your cash value).
However, if all that equity was in your home and trouble hit, how difficult would it be to take all or even some of that equity out? The answer, pretty difficult if not impossible.
So, a huge benefit of infinite banking using whole life insurance is that you can store your wealth in a liquid asset. And that asset provides true compound interest growth, in a tax favored environment. (More on this below)
Another pro of IBC is that you are in control (i.e. the owner and operator) of your own personal or family financing company. You are using life insurance as your own bank as you become your own banker.
Becoming your own banker means you can:
- loan money out to your own company,
- charge your company interest,
- then your company pays you for the use of your money,
- your company can write off the interest,
- you recoup the interest, which
- you use to pay back your policy loan, and
- you then repeat the process ad infinitum.
Each time you loan your money out to either yourself, your family, your business, or whoever, you are charging interest.
As you recoup the money with interest, you are adding more money into your bank (policy) than you started with.
The result is that over your lifetime you have amassed wealth beyond what you ever believed was possible.
When you employ an infinite banking strategy you are placing your equity into a tax-advantaged storehouse for later use. The cash in your storehouse (your policy) is growing due to “true” compound interest.
It is true compound interest because you are never touching your actual principle, but instead are borrowing from the carrier’s general fund. That way your money in your policy is continually compounding, even while you are paying simple interest on a policy loan, which currently can be variable or fixed.
You are allowed to continually add to your policy in addition to your normal premium through vehicles known as life insurance supplement riders, additional life insurance riders, or paid up additions.
Paid up additions
Paid up additions, also known as PUAs, allow you to take cash profits from your various assets (real estate, oil, dividend stocks, you name it), re-invest that cash into your “bank” and convert those cash profits into tax free dollars via policy loans, to use for additional cash flow asset purchases, large ticket purchases (vehicles, office equipment), retirement income, etc.
And don’t forget about the death benefit
The life insurance death benefit is not the main focus when implementing the concept of infinite banking but it does provide a leveraged death benefit payout in the early years should you die prematurely.
Having a lump sum death benefit provides peace of mind knowing that your loved ones are taken care of if you die young.
401K or IRA
For those that choose to fund a 401k plan or IRA, there is no death benefit. A beneficiary family gets the proceeds from the 401k or IRA as is, minus any income tax owed, which is taxed as ordinary income (the highest taxed type of income).
In contrast, with life insurance, the death benefit is tax free.
As an example, an individual may elect to pay $1,000 a month in premium toward an IBC policy. At the end of year one, they would have nearly $10,000 in cash value available. In addition, that money is growing tax free (as we’ll see next) and the depending on their age, the owner is insured for $100,000 or more.
So the death benefit is there from day one, which is huge financial leverage dollar for dollar, when you consider you only put a fraction of money into the policy. Your IRA or 401k death benefit would be zero, because IRAs and 401ks have no death benefits.
Please note: You can also add a term life insurance rider to your IBC policy in the early years to get additional death benefit protection for your family. Adding a term insurance rider is a great strategy to build cash value quickly, while also having a larger initial death benefit. When employing the infinite banking strategy our goal is to build high cash value ASAP.
Your policy’s cash value accumulates tax free. And you can completely avoid ever paying taxes on your policy gains by choosing to take out life insurance loans.
Taxes are the number one killer of wealth and your number one expense throughout your life.
A properly structured cash value policy designed for infinite banking can help you avoid taxes altogether versus having your money grow tax deferred in an IRA or 401K, only to be at the mercy of the government and whatever the tax rate currently is when it comes time to take your money out.
So, you may be wondering, how does a whole life insurance policy grow?
One way your policy grows is through life insurance dividends.
Participating life insurance provides an annual dividend payment, considered a return of premium for tax purposes, to its eligible policyholders.
Although not guaranteed, most top mutual insurance companies have paid a dividend every year for over 100 years.
Life insurance dividends can be used for many different things but ideally you want to use the dividends to purchase additional paid up life insurance.
So what happens is, your dividend goes back into your policy and buys even more death benefit.
As you do this, your policy’s death benefit will continue to grow, in addition to your policy’s cash value.
Although you may be tempted to withdraw cash from your policy, it is important to understand that life insurance policy loans are not taxable.
You are using money that has grown at around a guaranteed rate of 3.5-4% a year, plus dividends that add another potential 2-3% a year. That is a potential 5-6% yield that compounds year after year that you can use tax free via loans.
(Note: potential returns vary but when interest rates rise, your whole life returns will most likely increase as well. At one time, dividends from whole life companies were double digits.)
And if you are not being taxed on your gains, it is similar to earning another 2-3% interest, depending on the tax bracket you fall into.
On a side note. Consider that normal stock market returns are taxed around 20% or more. That means if you earn $10,000, you will pay around $2,000 in taxes that year (maybe higher). If you earn $10,000 in your policy you will pay ZERO taxes, even though you have access to that money via collaterally assigned policy loans.
Think about what the long term implications of not being taxed on your entire cash value accumulation will be.
It is truly amazing compound interest growth over the long haul, and why whole life insurance is the best vehicle to use when practicing infinite banking.
Now we just mentioned above one reason whole life is the best vehicle for infinite banking.
In addition, a properly structured participating whole life policy provides a few incredible guarantees.
Whole life insurance guarantees:
- Guaranteed cash value accumulation
- Guaranteed death benefit
- Guaranteed fixed premiums
- Guaranteed compounding interest rate growth
Along with the above guarantees, you can also earn dividends. Although dividends are not guaranteed, the companies we recommend have paid dividends for the last 100 years, and in many cases much longer – that includes paying dividends through the years of the Great Depression and the Great Recession!
For many asset classes, the public can simply do a search and find out what you are up to.
For example, running a credit report or title search will tell you a great deal about an individual’s financial holdings.
However, with life insurance your policy’s information is private. Your life insurance holdings does not show up on any reports or searches.
Further, when you take out a policy loan for infinite banking, your loan does not show up on a credit report, which comes in handy when you are applying for financing. And there is another reason why this privacy is beneficial – creditor protection.
There are many states that provide creditor protection for life insurance.
So, if you are faced with some financial strife, your cash value may be sheltered from creditors.
Additionally, if you are sued, your money in your policy may be protected from a judgment.
You can click the link above to check with your particular state for more.
Infinite Banking Concept Cons
As you can see above, the advantages of implementing an infinite banking strategy using whole life insurance are many.
However, there are a few disadvantages as well that need to be addressed when considering if this is the right path for you.
For many people on a shoe string budget the infinite banking concept can be cost prohibitive.
Although there is no set minimum monthly payment, in order to truly follow this concept and see its fruit you would need to try and put around 10% of your income into your policy, or at least $300 a month.
For many people who are just getting by this can be prohibitive and it precludes many from ever attempting this awesome wealth building strategy.
The good news is there is often places where you can “find” additional money that is slipping through the cracks. Our team of pros can help you shore up you finances and “discover” money you never knew you had.
The infinite banking concept is not for the faint of heart. You have to be disciplined and have a strong inner conviction that you want to see this through to the end. As Nelson Nash would say, You have to be an “honest banker.”
An “honest banker?”
The most powerful aspect of infinite banking is the long term growth that is fueled by borrowing against your policy AND PAYING IT BACK!
If you don’t pay back your policy, you will slow the growth, and ultimately miss out on maximizing your policy to pass on as a legacy.
Like many things in life, the best things come at a price (despite what popular wisdom tells you).
With infinite banking the price is a disciplined approach to your finances. The rewards will be amazing but you must be willing to walk the road less traveled.
As with any life insurance policy, you must qualify for an infinite banking policy.This means that if you have existing health problems, it might be harder for you to qualify for a policy.
The good news is that whole life insurance may actually be easier to qualify for than term life.
When applying for life insurance with health issues it pays to have options and choose a company that you are more likely to be approved with.
Another con you will find associated with infinite banking is that when you practice personal financing using your life insurance you are putting all your “eggs” into one basket.
Since all your money is only in your life insurance asset, you are breaking one of the main tenets proposed by financial “gurus” who tell us to diversify, diversify, diversify!
Well, as advocates of infinite banking, you can safely assume we do not follow the current trends pushed by so called financial experts.
The idea that you have to diversify assumes that the market may move against one of your positions so being diversified acts as a hedge against market volatility.
What really occurs with diversification is the owner of the account entrusts his portfolio to an advisor who takes into account the owner’s risk tolerance and creates a portfolio to match.
With a properly structured dividend paying whole life policy designed for infinite banking you don’t have to worry about market volatility.
As we mentioned above, whole life insurance is a non correlated asset.
Further, it offers guarantees and is backed by some of the most financially sound companies in the world.
So since you don’t have to worry about volatility, you also don’t have to concern yourself with diversification.
There are two reasons I say this.
Reason one: With an infinite banking policy you have certain guarantees, such as guaranteed cash value growth, guaranteed death benefit, and guaranteed fixed premiums. It is this certainty that removes the need for diversity in your portfolio.
Reason two: If you are practicing infinite banking you are using your whole life insurance as an asset to borrow against for the purchase of other assets.
As you are doing this you are engaging in diversification by purchasing cash flowing assets.
So the bottom line is this, by implementing infinite banking into your wealth building strategy you will automatically diversify in order to maximize your policy, your wealth and your legacy.
IBC Pros and Cons Conclusion
Thank you for reading our article covering the infinite banking concept pros and cons. Hopefully we gave you a lot to think over.
This concept is not easy to grasp because it requires a paradigm shift in the way you view money. However, for those who stick with it, the rewards are nothing short of life changing.
The real trick is…
Finding someone who will be willing to look at your financial situation with you and help you determine whether the concept of “being your own banker” makes sense for you.
The good news is that’s pretty much what we do all day here at I&E, so, if your interested in finding out how you can use life insurance as your own banking system, we are here to help.
Interested in taking the next step towards your own infinite banking policy? Please check out our many webinars and e-books on our resources page. You can also drop us a note in the comments section below and let us know how we can help you take the next step on your journey today.
Disclaimer: The Infinite Banking Concept® is a registered trademark of Infinite Banking Concepts, LLC. InsuranceandEstate.com is independent of and is not affiliated with, sponsored by, or endorsed by Infinite Banking Concepts, LLC.