Infinite banking is a process in which you create your own banking system by getting a dividend-paying permanent life insurance policy to work for you. Developed by economist Nelson Nash, infinite banking allows you to essentially become your own banker, with the freedom to access your policy’s cash value by borrowing from yourself — and paying yourself back — at any time. Imagine never having to worry about a credit check, high-interest payments or having to apply for a car or student loan ever again — this could be a reality via infinite banking.
- How Does Infinite Banking Work?
- Advantages of Infinite Banking
- Disadvantages of Infinite Banking
- Does Infinite Banking Work for the Average Person?
- Alternatives to Infinite Banking
- The Infinite Banking Concept in a Nutshell
The Infinite Banking Concept is dependent upon a whole life insurance policy. Whole life insurance, versus the more common 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, like 20 years.
Premiums for a whole life insurance policy are higher than for a term life policy. Here are the three components of where your monthly premium payments go:
- The portion that covers the death benefit
- Fees and operational costs
- The cash value portion held in a savings-type account
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.
Here’s how to set up an infinite banking system and the prerequisite 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.
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 policy’s 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 just your monthly premiums, it could take you a decade or more to build a significant cash value you can borrow against. Adding the paid-up-addition, or PUA, insurance rider to your policy will let you pay more into your cash value so you can grow it faster.
6. Go Ahead and Borrow
When you’re ready to borrow, your loan will come from the cash value of your policy, 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. And the loan isn’t recognized by the IRS as income, so it’s tax-free.
7. Pay Yourself Back
You will be charged interest, although it’s likely to be lower than interest on a bank loan. And 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.
On average, 34% of Americans’ monthly income goes toward paying off debt, according to Northwest Mutual’s Planning & Progress Study. IBC focuses on how to redirect that money back to yourself through privatized banking.
Here are the advantages:
- Dividends, loans and withdrawals are tax-free.
- Your cash value and death benefit increase over the policy’s lifetime.
- You can contribute additional money towards your policy value.
- You may borrow for anything you’d like, with no explanations.
- There are no credit checks required to borrow from your policy.
- You can lend money from the cash value to family or loved ones.
- Interest rates are generally lower than for a traditional loan.
- You’re creating a financial source by funding your own future loans while building an inheritance for your beneficiaries in the form of a policy death benefit.
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:
- 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 only receive the policy’s death benefit.
Explore: What Is Long-Term Care Insurance?
Infinite banking might not work for the average person because it requires serious commitment and enough earnings and cash flow to afford the high monthly premiums. A large amount of money has to be contributed to the insurance policy before borrowing against it makes sense.
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:
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 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. Read more about high-yield accounts to learn how to access their benefits.
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 An individual 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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