Infinite Banking: What Is It and How Does It Work?

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Infinite banking involves building a cash value component of your whole life insurance policy. As the policyholder, you can potentially tap into this cash value. When you take a loan from your own life insurance policy, you essentially become your own banker. Imagine never having to worry about a credit check, high-interest payments or applying for a car or student loan ever again — this could be a reality via infinite banking.

Being your own banker can be a useful tool on your path to financial freedom. Take a closer look at how the infinite banking concept works.

What Is the Infinite Banking Concept?

The infinite banking concept (IBC) allows individuals to become their own banks, leveraging whole life insurance policies to create a pool of liquid capital they can borrow against.

What Kind of Life Insurance Do You Need for Infinite Banking?

The infinite banking concept revolves around a whole life insurance policy. Whole life insurance — unlike term life insurance — is a permanent life insurance policy. This means the policy is guaranteed for a lifetime as long as the premiums are paid on time. In comparison, a term life insurance policy only lasts for a certain time period, such as 20 years, or up to a certain age, such as 65.

Premiums for a whole life insurance policy are higher than for a term life policy. Your monthly premium payments go toward three components:

  • Fees and operational costs
  • The portion that covers the death benefit
  • The cash value portion held in a savings-type account
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Part of each premium payment is funneled into the cash value savings portion. This is a unique feature of a whole life insurance policy, because you can borrow against this growing, tax-deferred cash value portion to fund major life expenses, such as buying a home or paying for college. The cash value of your life insurance policy will enable you to become your own banker when you follow the principles of infinite banking.

How Much Money Is Needed for Infinite Banking?

The amount you need to start infinite banking will depend on your life insurance policy provider. Age may affect the cost of monthly premiums, so it’s often best to start as early as possible.

Since you can only borrow against the cash value savings portion, a large amount of money has to be contributed to the insurance policy over time before borrowing against it makes sense. Because of this, infinite banking may not always be a good solution for the average American.

Is Infinite Banking Legitimate?

While many Americans may not have heard of infinite banking before, it is a legitimate way to borrow money without using traditional banking. Of course, the infinite banking concept may not be a good fit for everyone and has its advantages and disadvantages.

Advantages of Infinite Banking

According to the Federal Reserve, 9.70% of Americans’ monthly disposable income currently goes toward debt repayment. Infinite banking focuses on redirecting that money back to yourself through privatized banking.

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Here are the advantages of infinite banking:

  • Borrow for anything you’d like — no explanations
  • No credit checks required
  • Tax-free dividends, loans and withdrawals
  • Policy’s cash value continues to increase, even while you’re borrowing
  • Contribute additional money toward your policy value
  • Lend money from the cash value to family or loved ones
  • Lower interest rates than for a traditional loan
  • Pay yourself back at your own pace
  • Creates a financial source by funding your future loans while building an inheritance for your beneficiaries

Disadvantages of Infinite Banking

Infinite banking requires a long-term strategy and plenty of discipline. The insurer won’t set regularly scheduled payments on your behalf but will expect the loan to be repaid. It’s up to you to be financially responsible when you’re your own banker. This carries some disadvantages:

  • Potentially high monthly premiums.
  • Life insurance company absorbs the cash value upon your death, and the beneficiary will receive the death benefit — unless you make advance arrangements.
  • Any amount unpaid will be deducted from the death benefit.
  • Difficult to qualify for if you’re older or have poor health.
  • Amount paid toward the life insurance policy and cash value balance could grow more over time in other investments, such as an index fund.

How Do You Start Infinite Banking?

If the concept of funding yourself appeals to you, here are some things to consider as you get started. Here’s how to set up an infinite banking system using a whole-life policy:

1. Start Young, While Premiums Are Lower

Like all life insurance products, premiums are lower when you’re younger. Because your premium is locked in for the life of the whole life policy, the earlier you get in, the better.

2. Choose a Reputable Insurer

Infinite banking is a lifelong process, so make sure you choose from reputable life insurance companies you’re confident will be around for the long haul. You don’t want to get stuck in a situation where the insurance company you’ve been paying premiums to goes bankrupt. Look at the financial strength ratings, such as the A.M. Best rating, before moving forward with any insurance company. 

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3. Choose a Non-direct Recognition Policy

Whole life insurance policies pay you dividends on your investment. But if you’re borrowing against their value, the insurer might only pay dividends on what’s in the account. A non-direct recognition policy pays you dividends on the full cash value, even if you’ve borrowed against it.

4. Choose a Policy With a Cash Value Rider That Benefits Your Loved Ones

In most policies, the life insurance company will absorb the cash value upon your death, and your beneficiary will be paid the death benefit. To avoid losing the cash value you’ve built over a lifetime, add a rider on your policy that gives the beneficiary both the cash value and face value.

5. Add a Paid-Up Addition Rider

Paying your monthly premiums could take a decade or more to build a significant cash value you can borrow against. Adding the paid-up-addition insurance rider to your policy will let you pay more into your cash value to grow it faster.

6. Go Ahead and Borrow

When you’re ready to borrow, your loan will come from your policy’s cash value, which is used as collateral. Just call up your insurer and request funding. Unlike a traditional loan, there’s no need to explain why you need the money, and the loan won’t affect your credit. The loan isn’t recognized by the IRS as income, so it’s tax-free.

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7. Pay Yourself Back

You will be charged interest, though it’s likely lower than the interest on a bank loan. Although there are no required monthly payments, you are expected to repay the loan. Take as long as you’d like to pay it back — but be aware that borrowing reduces the death benefit until it’s repaid in full.

Alternatives To Infinite Banking

This concept doesn’t work for everyone, but there are alternatives for borrowing at favorable rates and watching your savings grow over time. The key is consistency and financial discipline. Here are some alternatives:

Traditional Banks

Most commercial banks offer a variety of savings and loan products that fit their customers’ needs. Learn more at GOBankingRates’ Annual Best Banks Rankings.

Credit Unions

Credit unions are nonprofit institutions that reinvest all earnings back into their products. They offer competitive loan and savings rates that are often more favorable than a traditional bank’s.

High-yield Savings Accounts

Several online banks offer high-yield savings accounts that could offer you a higher interest rate than a savings account through a traditional bank.

The Infinite Banking Concept in a Nutshell

Infinite banking could be a powerful personal finance tool for higher-net-worth individuals who would benefit from tax savings and want the freedom to borrow money quickly. Individuals can borrow from their whole life insurance policy without a credit check or lengthy underwriting process.

Although it’s a great resource for funding major expenses like a college education or real estate, covering these types of loans requires a large investment into the policy’s cash value over time.

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Advice

A quality permanent life insurance policy and a long-term financial plan are needed for infinite banking to work. Start early — even if you don’t think you need to borrow until years later. The younger you buy whole life insurance, the cheaper it is. Getting coverage early also gives you more time to build cash value before you hit major milestones such as buying a house or paying for a dependent’s college education.

FAQ

The concept of infinite banking isn't necessarily easy to grasp. Here are the answers to some questions you might have.
  • Is infinite banking a scheme?
    • Infinite banking is a legitimate way to get your hands on the funds you might need without the help of a traditional bank.
    • If you want to tap into infinite banking, you'll need to make significant premium payments to a whole life insurance policy. Although this concept isn't a scam, it's not the right financial choice for everyone.
  •  How much money do you need for infinite banking?
    • There is no set amount required for infinite banking. But typically, only high-net-worth individuals have the funds to tap into this option.
  •  What are the risks of infinite banking?
    • When you use infinite banking, you run the risk of leaving your dependents with a smaller death benefit. If you don't repay the loan to yourself, the insurance company will deduct what you owe from your death benefit.

Chris Ozarowski and Sarah Sharkey contributed to the reporting for this article.

The article above was refined via automated technology and then fine-tuned and verified for accuracy by a member of our editorial team.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

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