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

life insurance agent speaking with her clients about their policy
SolisImages / iStock.com

Infinite banking is a way to become your own bank, by taking out loans against a permanent life insurance policy. 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 Infinite Banking?

Infinite banking lets you become your own bank by leveraging the value of a dividend-paying permanent life insurance policy. Developed by economist Nelson Nash in the 1980s, infinite banking gives you the freedom to access your policy’s cash value by borrowing from yourself — and paying yourself back — at any time. 

What Is the Infinite Banking Concept?

The Infinite banking concept revolves around a whole life insurance policy. Whole life insurance, versus 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
A Better Way to Bank

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, 9.58% of Americans’ monthly disposable income currently goes toward debt repaymentInfinite banking focuses on redirecting that money back to yourself through privatized banking.

Here are the advantages of IBC:

  • You may borrow for anything you’d like, with no explanations.
  • There are no credit checks required to borrow.
  • Dividends, loans and withdrawals are tax-free.
  • The policy’s cash value continues to increase over the policy’s lifetime, even while you’re borrowing.
  • You can contribute additional money toward your policy value.
  • You can lend money from the cash value to family or loved ones.
  • Interest rates are generally lower than for a traditional loan.
  • You can pay yourself back at your own pace.
  • You’re creating a financial source by funding your future loans while building an inheritance for your beneficiaries in the form of a policy death benefit.
A Better Way to Bank

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 banker. This carries some disadvantages:

  • Monthly premiums can be high.
  • Unless you make advance arrangements, the life insurance company will absorb the cash value upon your death, and the beneficiary will receive the death benefit.
  • If you don’t pay the loan back, the amount will be deducted from the death benefit.
  • Qualifying for a new whole life insurance policy may be difficult for older individuals or those with poor health.
  • The amount paid toward a permanent life insurance policy and the cash value balance could grow more over time in other investments such as an index fund.

How Do I Start Infinite Banking?

If the concept of funding yourself appeals to you, here are some steps to consider to 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.

A Better Way to Bank

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.

7. Pay Yourself Back

You will be charged interest, though it’s likely lower than 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

IBC could be a powerful personal finance tool for higher-net-worth individuals who could 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.

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.

Chris Ozarowski contributed to the reporting for this article.

Information is accurate as of Oct. 13, 2022.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

This article has been updated with additional reporting since its original publication.

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.

Share This Article:

A Better Way to Bank

About the Author

Cynthia Paez Bowman is a personal finance writer with degrees from American University in international business and journalism. Besides writing about personal finance, she writes about real estate, interior design and architecture. Her work has been featured in MSN, Brex, Freshome, MyMove, Emirates’ Open Skies magazine and more.
Learn More