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Using Life Insurance to Pay Off Debt …Faster (While You Are Still Alive!)

Fact Checked by Jason Herring & Barry Brooksby
Licensed Agents & Life Insurance Experts.
Insurance and Estates, a strategic life insurance provider composed of life insurance professionals, is committed to integrity in our editorial standards and transparency in how we receive compensation from our insurance partners.
Using Life Insurance to Become Debt Free

How to Pay Off Debt Using Life Insurance

The main focus of this article is how to design a high cash value whole life insurance policy that turns your liabilities into a compounding, cash flowing asset.

When building and protecting wealth, two of the biggest challenges are taxes and debt. But believe it or not, both of these risks can be controlled – as well as reduced or eliminated – using a financial tool that has been available to investors for centuries.

According to Experian, the average amount of total consumer household debt in the U.S. in 2023 is $103,358. This equates, on average, to Americans making debt payments that are nearly 10% of disposable income. This debt can comprise home mortgages, student loans, and credit card balances.

Regardless of how much debt you owe, though – or the type of debt you carry – any time you make a payment to a bank or other lender, that money is lost to you forever. However, using a properly structured whole life insurance policy focused on maximizing cash value growth can allow you to become your own “banker” and borrow money for making purchases and paying off existing debts, while at the same time continuing to significantly grow your wealth with true compound interest growth – and you can even do so using the very same dollars.

How Debt and Interest Can Work For You or Against You

There are two primary types of debt. There is bad debt (destructive debt) and good debt (productive debt). Bad debt is going to be the kind of debt that takes money out of your pocket, also known as a liability. Good debt is the type of debt that puts money into your pocket, also known as an asset. The 🔑key is to eradicate bad debt and accumulate good debt. However, this is easier said than done.

Bad debt (and over-leveraged good debt) can be hazardous to your financial health – both in the short and long term. What many people don’t realize is that just like money can grow and compound over time, losses can also do the same. Therefore, what you ultimately lose by paying interest to someone else can be staggering.

Plus, throughout the years, the compound interest that YOU won’t earn on that money could be significant. In fact, compound interest can be powerfully negative when it is working against you.

For more on this topic of how much potential money you will make in your lifetime versus how much you will actually keep, please see our article on Your Maximum Lifetime Potential

Because people only earn a finite amount of money during their lifetime, sending a share of it to banks and other lenders in the form of interest instead of saving it for yourself is a primary reason why most people fall short of what they need for retirement and other financial goals.

Opportunity Cost

One way to help pare down debts is to curb your purchasing. Oftentimes, a key question is whether or not a purchase should be made in the first place. With that in mind, you should know why you are buying a particular item or service and how the opportunity cost of the purchase could impact your cash flow and your net worth.

Your opportunity cost is derived at by taking the purchase price of the item plus any sales tax, (You might also consider how much those dollars cost you in the first place before the government took its share), then you compare the cost to how much that amount of money would have made for you given time to grow in a compound interest account.

If you do decide to move forward with making a purchase, the next question to ask yourself is how you will pay for it. For instance, if you pay cash outright, you won’t have to worry about obtaining a loan and making payments. However, that cash will also be gone and unavailable for making any future purchases or investments (another example of opportunity cost). Nelson Nash, author of Becoming Your Own Banker, reminds us that we finance everything we buy, whether we get a loan or pay cash. Both have a “cost”.

Infinite Banking

But there is a way that you can eliminate your debt, make future purchases, and allow the interest that you would otherwise have paid to a bank or lender to work for you at the very same time.

The Infinite Banking Concept, or IBC, allows you to become your own bank – and using this strategy can make the difference between your purchases being expenses or actually being investments.

So, ask yourself if debt is working for you or against you – and if the answer is the latter, using the Infinite Banking System could turn that around and not only allow you to pay your liabilities off faster, but also allow you to grow wealth safely, consistently, and with a number of nice built in guarantees.

Why Your Best Alternative to FDIC is High Cash Value Whole Life

You Can Beat the System By Becoming the System

Most people see life insurance as a way to pay off debt when you die. Typically, life insurance beneficiaries can receive the policy’s death benefit income tax free and use the funds for replacing lost income or paying off a mortgage and/or other debts of the insured.

But there is another way to use whole life insurance structured for high cash value growth to pay off your own debt now, as well as to benefit from purchases you make in the future and grow your savings in a tax advantaged manner.

Financial advisors will often recommend that people pay down debt by:

  • Working more (to earn more income)
  • Spending less
  • Refinancing their home (which essentially entails trading equity for “bad,” or unsecured debt)
  • Consolidating all debts into one single larger balance

While some of these might be good options depending on your situation, there is a better way.

Using life insurance to pay off debt involves two coordinated strategies. These are:

  • Debt Snowball or Debt Avalanche
  • Infinite Banking Concept (IBC)

Debt Snowball/Avalanche

Many debt reduction or elimination programs recommend the use of debt snowballing – and this can work when using the Infinite Banking Concept to pay off balances, too. Debt snowballing occurs when you pay off the debt with the smallest balance first, and then one by one, work your way up to paying off your larger debts.

This differs from debt stacking, aka debt avalanche, where you start with the debt that has the highest interest rate first and then work your way towards the one with the lowest rate.

Which one is best? It depends. Some people prefer one of the other based on their financial makeup. You can also run the numbers on each and see which one gives you the best outcome.

But if you are only using the debt snowballing or debt avalanche method you are missing a vital piece of the equation. By adding in this final piece of this get out of debt strategy, rather than being back to ground zero where you have no debt but also no money, you will instead pay off all your debt and have the all that money you used to pay off that debt sitting in your infinite banking policy.

The Infinite Banking Concept

The Infinite Banking Concept, (AKA “IBC”), has taken on a lot of other names, such as cash flow banking, be your own bank, family banking concept, bank on yourself, perpetual wealth strategy, becoming your own bank, circle of wealth, your family bank, and wealth maximization account.

Infinite banking is a strategy of using properly structured high cash value whole life insurance as your own personal “banking” system, rather than a traditional bank. The primary benefit of using life insurance for this purpose is it provides a tax-favored vehicle that offers contractually guaranteed growth for you to pass your finances through, rather than use a typical savings account or money market account where your gains are taxed and the interest rate is not guaranteed.

The main feature is that you can use your policy’s cash value as collateral, taking out a loan, to purchase cash flowing assets, such as investing in your business or investing in real estate, while your cash value in your policy is still earning true compounded interest returns. You then purchase cash flowing investments with your borrowed dollars, while simultaneously earning compound interest in your policy’s cash value account, making your money work for you in two places at once. You would then use your cash flow from your investment real estate or business to recapitalize your “bank” and repeat the process again and again.

Infinite Banking can also be used to pay off debt in much the same way. Rather than earn a paycheck and use those dollars to pay the bank, lender, or credit card company, you would instead fund your infinite banking policy. You would then take out a loan and use that money to pay down your debt. However, your dollars are doing two things simultaneously here. The first thing your dollars are doing is paying down your debt, but you are also earning compound interest on those same dollars in your policy, using your death benefit as your ultimate collateral.

Velocity of Money

recycling your dollarsThe Velocity of Money is a term that every banker knows and most of the masses have never heard.  This concepts refers to the banker’s understanding that money cannot stay stagnant AND the faster money moves, the more profits are made.

When you incorporate a properly structured whole life insurance policy you can use the same dollars that you otherwise would have used for your debt payoff, but by redirecting them, not only will your debt be eliminated, but your money will also continue to grow and compound.

The right whole life insurance policy will allow you to “recycle” your money by borrowing money to spend, then putting money back in the policy’s cash value to “repay” it, and then spending the same dollars again. In fact, by repeating this process over and over again, an Infinite Banking program can gain a tremendous amount of momentum.

The cash value grows faster when using the Infinite Banking strategy because you are paying the interest that you were previously sending to other lenders to your own “bank” instead. Recapturing this interest is huge, because not only does the interest end up in your bank instead of a “traditional” lender’s, but also because that interest goes on to generate more of its own interest through compounding.

And as you pay back your loan to your banking policy, the loan is decreasing, which means the simple interest you are paying on that loan is decreasing. So you pay down your debt, then you pay down your life insurance loan, and in the end you are out of debt and have amassed cash value in your policy that can now be used to purchase cash flowing assets, or simply earning interest plus dividends in a safe environment, unconnected to market volatility.

Paid-Up Additions

An infinite banking policy is enhanced by adding a paid up additions (PUA) rider to the policy. This rider allows equity to build in the policy’s cash value almost immediately. With the PUA rider, additional dollars are placed into the policy to increase the cash value’s performance.

In this case, each dollar of premium that is allocated to the paid up additions rider will create a small paid-up life insurance policy that has its own cash value created right away. Essentially, you are only contributing the required minimum amount of premium to fund the insurance portion of the base policy and placing the rest of the money into the cash value to grow and compound.

There are different ways to structure an infinite banking policy. For those who want access to as much cash as possible in the shortest time, a 90/10 policy design might be best. However, long term that might not be the most efficient policy design, so it is important to work with your agent on what policy design will be best for you based on your specific goals.


Dividend paying whole life policies that are purchased through mutual insurance companies are also eligible to receive dividends (although life insurance dividends are not guaranteed). These are received tax free and when added to the cash value, they can further add to the compound growth – which in turn can increase your borrowing power. Many mutual insurance companies have been paying life insurance dividends consistently for decades – and in some cases, for more than 100 years.

Unlike borrowing from a traditional bank, there is no credit check required when you borrow from your cash value life insurance policy. Nor is there an endless stack of application paperwork required. Rather, you simply contact the insurance company, tell them how much you need, and you will typically have the funds within just days.

Additional Benefits of Using Whole Life Insurance

In addition to using high cash value whole life insurance as a conduit for paying down debt, there are many other benefits that you could take advantage of, too, such as:

✅Tax advantaged growth. The funds that are in the cash value of a life insurance policy grow tax deferred. This means that there is no tax due on the gains unless or until they are withdrawn. But when you borrow funds from the cash value instead, they are received tax free. So, this is a win-win.

✅Guaranteed return. Your policy’s cash value will receive a guaranteed return that is set by the insurance company. And, even though this rate may not be as high as a “potential” gain in the stock market, there are also no losses.

✅Protection of principal and previous gains. Because your cash value is protected in any type of stock market or economic environment, there are no losses to make up for – so your money can continue to grow and compound over time.

Death benefit. Because your IBC plan is a life insurance policy, the death benefit coverage can be used as a financial “safety net” for your loved ones and legacy intentions (such as making a donation to a favorite charity).

Penalty-free access to funds for potential healthcare needs. Many life insurance policies will allow you to access a portion of the death benefit proceeds penalty free if the insured is diagnosed with a chronic, critical, or terminal illness or if they require long-term care services. This can be extremely beneficial if certain medical or healthcare services are not covered under health or long-term care insurance.

Protection from creditors. In most states, life insurance cash value is protected from creditors. This can include bankruptcy and lawsuits.

Tax free retirement income supplement. By taking advantage of the policy loan feature, you can access funds tax free to supplement your retirement income – regardless of what the then-current tax rates are. In addition, this tax free income won’t count against your Social Security retirement benefits when determining whether or not they will be taxed.

Dollars Working Double Time. In addition, one of the most significant perks of using a properly structured whole life insurance infinite banking policy is the fact that you can borrow against it while at the same time still generating a return on the full amount of your cash value. This is because you are not technically borrowing money from the cash value itself, but rather from the insurance company, and simply using the cash value as collateral, which will be taken out of your death benefit if you never pay back the loan.

So for example, if there is $120,000 in your policy’s cash value, and you borrow $50,000, your policy’s cash value return will continue to be generated on the full $120,000. This is another example of benefiting from the same dollars twice.

Wash Loan

Taking it a step further, it may even be possible to receive the borrowed funds cost free as well as tax free. This is because, even though the insurance company typically charges interest on policy loans, this interest could be offset by the return that the money in your cash value is continuing to earn.

For instance, if the insurer charges 5% simple interest on the policy loan, and the funds that are in your cash value are also generating a compounding return of 5%, then you will have secured a no cost distribution. And, if the return on the cash value is higher – which it could be, due to added growth factors like dividends – it is possible for you to generate a profit. This is a concept known as arbitrage, which entails earning an interest rate that is higher than the loan rate on the funds that you have borrowed.

And as you pay down your life insurance loan, the actual interest that you pay will be less and less as the principal on the simple interest loan goes down. So as you are making 5% compounded in your policy and paying down a 5% simple interest loan to the insurance company, you are still coming out ahead on your money.

Loan Payback on Your Terms

One last thing about life insurance loans is that you choose how much and when to pay back the loan. And you can also choose to never pay back the loan if that makes the most sense for your situation. If you die with an outstanding loan, the life insurance company will take the loaned portion out of your death benefit, with the remaining death benefit going to your beneficiary.

Using Whole Life Policy Loans Examples

Properly Designing a Whole Life Policy to Maximize Growth, Cash Flow, and Purchasing Power

Not all whole life insurance policies are right for use with the Infinite Banking Concept. Rather, this strategy requires a specifically designed policy that focuses on minimizing the death benefit and maximizing the cash value.

Further, because everyone’s goals and needs are different, there isn’t one single policy that will work for all investors and retirees across the board. Therefore, it is necessary to custom design a policy that works for you, which will largely entail structuring the base premium versus the paid-up additions to match your goals.

As an example, you could build a policy where the base premium (i.e., the premium amount that is necessary to keep the policy in force) is your minimum payment and your paid up additions are your “flexible” premiums. That way, you can comfortably make your base premiums, but yet also have the ability to place more cash into your policy to enhance the growth of the cash value.


It is important to note that there are some guidelines that must be followed to ensure that the whole life insurance policy does not lose its tax benefits. For example, you don’t want the policy to become a Modified Endowment Contract, or MEC.

This is a type of tax qualification for a life insurance policy that’s cumulative premiums exceed federal tax law limits. If this happens, and your policy becomes a MEC, then the taxation structure – as well as the policy’s classification – can change.

Under a Modified Endowment Contract, the gains are withdrawn first, which are taxed as ordinary income. In addition, if you make such withdrawals before turning age 59 ½, you will also incur an additional 10% IRS “early withdrawal” penalty.

Because the Infinite Banking Concept can be somewhat complex, it requires careful structuring of the life insurance policy and therefore, it is important that a life insurance specialist who is well-versed in IBC policies set up your plan.

How to Fund Your Infinite Banking Policy

If you’re already struggling with debt or all of your income is already being spent on other obligations, how can you fund an infinite banking policy?

There are some ways that you could find the funds you need, such as:

✅Transferring money out of low-yielding financial vehicles. While you may want to keep some of your money in “safe” places like money markets or CDs, these accounts don’t typically generate as high of a return as the cash value in a whole life insurance policy and you will eventually have to pay taxes on any gains. So, you could consider moving at least some of your funds.

Redirecting some retirement plan contributions. If you participate in an employer-sponsored retirement plan, such as a 401(k), you could redirect at least some of these contributions into your personal banking system. In this case, your money isn’t going away. It is just going into an alternate financial vehicle.

Increasing your income. Today, there are many ways to generate extra income on your own schedule, rather than having to get another “job.” For example, freelancing, driving for ride sharing sites like Uber or Lyft, delivering food and grocery items through Door Dash or Instacart, or taking on a variety of other side gigs.

Making – and sticking to – a budget. Sticking to a budget can help to prevent you from making unnecessary and impulse purchases, leaving you more money for your IBC policy.

Reviewing your current expenses. Take a close look at what you are currently spending on bills like cable, cell phone, and incidentals such as gym memberships and subscriptions. There could be room to cut some costs here, too.

✅Paying yourself (i.e., your infinite banking policy) first. One of the best ways to ensure that you have money available for your Infinite Banking policy is to “pay yourself first.” By making your premium a priority, you can oftentimes still come up with what you need for paying your other living expenses each month.

Is Paying Off Debt Using Life Insurance the Right Strategy for You?

If you have debt that you would like to eliminate more quickly than originally anticipated – whether that is a mortgage balance, vehicle loan, student loan, unsecured credit card balances…or all of these – a properly structured life insurance policy could provide you with a viable solution…one that could also help you build up your wealth at the same time. And the life insurance specialists at Insurance and Estates can help.

Getting out of debt with the Infinite Banking Concept could be an integral part of your financial security. At Insurance and Estates, we will work with you to find the right tools for accomplishing your financial, retirement, and legacy goals. Because no two situations are the same, we will customize a plan that is based on your specific short- and long-term objectives, matching it with your risk tolerance and ideal time frame.

So, feel free to contact us at (877) 787-7558 and talk with one of our experts to determine whether paying off debt, growing wealth, and protecting your loved ones with cash value life insurance is the right strategy for you.

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