Infinite Banking Explained: How It Works and Should You Do It?
If infinite banking explained works is on your radar, this short guide cuts through the noise. Here is what is worth knowing, and how to put it to work today.
Key Takeaways
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- Infinite banking, which is also sometimes referred to as “banking on yourself,” is built on a compelling idea: use whole life insurance to l...
Infinite banking, which is also sometimes referred to as “banking on yourself,” is built on a compelling idea: use whole life insurance to let your savings grow tax-free and then lend yourself money at attractive rates from the policy’s cash value (also tax-free).
Too good to be true? In most cases, yes.
Infinite banking is an overly complex strategy with significant fees, risks, and opportunity costs.
It requires substantial, consistent premium payments, and there’s a risk of losing coverage if you can’t keep up with the premiums. Even if you can pay them, it may take 10 years before there’s enough cash value to borrow against.
Moreover, the returns on the policy’s cash value component are frequently lower than the returns on investing the same amount in a well-diversified low-cost portfolio, such as a mix of stocks and bonds (even when tax consequences are factored into the equation).
In this guide, I’ll explain infinite banking, how I arrived at the conclusion above, and explore alternative strategies.
In this article:
ToggleInfinite Banking Strategy Explained
In theory, infinite banking allows your money to grow tax-deferred while giving you access to cash at favorable interest rates. The strategy was first detailed by economist Nelson Nash in his 2000 book Becoming Your Own Banker.
Nash’s background was primarily in the insurance industry, having worked as a life insurance agent for over 35 years. Nash passed away in 2018, but the for-profit Nelson Nash Institute is still in operation and continues to promote the idea and educate practitioners.
In a nutshell, here’s how the infinite banking strategy works:
- Purchase a whole life insurance policy with a cash value component.
- Overfund the policy in the early years by paying more than the minimum premium.
- Use the dividends earned on the policy to purchase “paid-up additions” (PUAs), which increase the policy’s cash value and death benefit.
- Borrow against the accumulated cash value tax-free at favorable interest rates.
- Repay the policy loans while the cash value continues to grow, allowing you to borrow again.
The main benefit of this strategy is that it allows you to grow your wealth tax-deferred while providing access to tax-free funds through policy loans.
While these steps may seem simple, the devil is in the details. Implementing an infinite banking strategy requires careful planning and a thorough understanding of how whole life insurance policies work.
Term vs. Cash Value Life Insurance
For those unfamiliar with life insurance, it’s key to understand that it comes in two main types: term and cash value (also known as permanent).
Term life insurance provides coverage for a specific period of time, such as 10, 20 or 30 years, and pays out a death benefit if the insured person dies within that period. Once the term expires, the coverage ends. (It also ends if, at any time during the term, you’re unable to pay the premiums.)
In contrast, cash value life insurance provides lifelong coverage and includes a savings component. This type of policy appeals to people who want permanent life insurance security as well as the potential to accumulate cash value (via the savings component) over time.
While it’s not an apples-to-apples comparison, as you’re getting added benefits with cash value insurance, the cost difference between term and cash value policies is significant.
For instance, a cash value policy offering a $1 million death benefit might cost a 30-year-old approximately $10,580 in annual premiums. In contrast, a 20-year term policy for a similarly healthy 30-year-old male could be as affordable as $360 a year.
How Whole Life Insurance Works In Infinite Banking
Infinite banking uses whole life insurance, which is a type of cash value insurance that provides lifelong coverage, has fixed premiums, and includes a guaranteed savings component.
When you pay premiums for a cash value policy, a portion of the money goes toward the life insurance coverage, while another portion is allocated to the cash value.
The cash value in a whole life insurance policy earns interest or investment returns, depending on the specific policy, and typically grows over time.
(Note that other types of cash value life insurance, such as variable life insurance, may offer investment returns that vary based on the performance of selected investment options.)
This growth is tax-deferred, meaning you only pay taxes on the gains once you withdraw the mo
Final Thoughts
Before you check out, double-check infinite banking explained works against current offers and any coupons you can stack. Small habits like this add up to real savings over a year.
Originally published at thewaystowealth.com.
R.J. Weiss
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