In this post
- The Borrowing Strategy Calculator
- What Is Infinite Banking? Is Infinite Banking Legitimate?
- The Infinite Banking Concept: The Basic Process
- Advantages of Infinite Banking
- Advantages of Using Whole Life Insurance Policies for Infinite Banking
- Disadvantages of Infinite Banking
- Disadvantages of Using Whole Life Insurance for Infinite Banking
- History of Infinite Banking
- Infinite Banking: Controlling the Banking Function
- Infinite Banking: Does It Really Work or Is It a Complete Scam?
- Infinite Banking Examples
- Whole Life Policy Examples
- A Conceptual Look at IBC Cash Value Growth
- Understanding Policy Loans at a Deeper Level
- Final Thoughts on Infinite Banking
How To Model Infinite Banking Using The Borrowing Strategy Calculator
What Is Infinite Banking?
There are so many articles and posts about infinite banking. Why add to the pile? Well… if I didn’t think I had anything valuable to add to the topic, I wouldn’t have bothered… and I’ll just leave it at that. I’ll let you be the judge from here on out.
First off, there are essentially two aspects to infinite banking: The concept/product/hard numbers and… the psychology behind the concept. Almost everyone wants to know the numbers first, and so… the marketers, insurance agents, journalists, bloggers, and everyone else talked, does videos about, and writes (often poorly) about the former, and almost no one (well… no one, really) writes about the latter.
In this post, I will cover the concept, product used, and hard numbers behind how it works. I’ll cover the psychology aspect of it in another post because it deserves its own treatment.
Ok, so to begin with, The Infinite Banking Concept®, as envisioned and created by R. Nelson Nash, is the process of creating your own private “banking system” by utilizing specially-designed dividend-paying whole life insurance policies to hold all the money you’ll need for all your future financing needs. A financial advisor or life insurance agent might also suggest using indexed universal life insurance. But if you want to stick to the original teachings of Nash, you’ll use whole life.
Either way, the point is to control “the banking function” in your life as opposed to letting traditional banks be in control of it (and, as a consequence, in control of you). Traditional loans benefit the bank. Life insurance loans benefit you.
Whole life insurance is a type of cash value life insurance policy combining both a death benefit and a cash surrender value. The life insurance cash surrender value represents equity in the policy, which many policyholders and even your friendly neighborhood life insurance agent regards as “savings”. I’ve seen a lot of infinite banking pros go so far as to describe it as your own personal bank which allows you to avoid dealing with traditional banks.
Personally, I wouldn’t go that far with it.
It’s not a bank. It’s not a bank account. It’s permanent life insurance.
And, if you truly understand how a whole life insurance policy works, including all of its many tax benefits, you won’t confuse yourself about being your own bank. You’re not your own bank. Rather, you might think of it as being your own banker, and merely utilizing whole life insurance as a tool to get the job done.
Subtle, but important, difference.
The Infinite Banking Concept: The Basic Process
To make The Infinite Banking Concept® work as described by Nash, you need a whole life policy and —this is important — cash flow. The original concept (which has been lost in the modern marketing messages) emphasized the need for high cash flow and the need for regular financing. Nash himself promoted the idea to forestry and logging businesses, as his own background was in forestry, and using whole life insurance was a great way to finance business operations compared to more traditional lending options.
Some businesses are cash flow heavy, but also need to take on debt regularly to finance their business activities, and these businesses are the perfect candidate for this kind of financial strategy. Think forestry and logging businesses, farms, construction, commercial trucking, some medical imaging and specialized healthcare businesses, private aviation businesses, franchise restaurants, waste management businesses, manufacturing and CNC machine shops, corporate hospitality type businesses, auto dealerships, commercial printing companies, oil and gas companies, commercial laundromats, shipping companies, and so on. Or… businesses that have a really long Cash Conversion Cycle, and are holding inventory for long periods of time. Or… businesses that regularly use accounts receivable factoring —whole life policy loans are going to be a lot less expensive than taking the hit from a factoring company. Or… businesses with large, somewhat regular, CapEx.
And… because of the guaranteed nature of the whole life policy, financing things this way is probably a much lower risk than what they are doing now.
Unlike other types of financing, whole life policy owners have complete control over the repayment schedule. Meaning, you can “dial up” or “dial down” the loan repayment, and no one from the insurance company will harass you for a loan payment. Cash flow tight this month? Skip the loan payment. Strong cash flow? Pay extra. This aspect of whole life policy loans give the policyholder an incredible advantage, but also some risk if the loan payments are skipped long enough and the cash value is depleted to a point where the policy is at risk of lapsing.
I mean… if a business owner is financially responsible, and able to pay his debts, the risk of this strategy is very low, and the upside is absolutely tremendous. But again… the strategy was specifically intended for high cash flow businesses with ongoing financing needs.
It’s not that other types of businesses, or individuals, can’t use infinite banking. It’s just that it isn’t the target audience. High cash flow, and a regular need for borrowing money —that’s the target audience. And… frankly, not everyone fits that demographic. That doesn’t mean whole life insurance can’t be used by anyone else, obviously. If you have the cash flow to support the premiums, and you regularly borrow money for business needs, then this is probably going to work out very well for you.
The types of accumulation-focused whole life policies used for infinite banking are, generally speaking, issued by mutual life insurers. The policy is, in essence, an extension of the life insurer’s general investment account (GIA). When you buy a whole life policy, you’re not merely buying a policy. You’re buying the underlying company. Specifically, the company’s GIA, which powers all of its insurance products.
Here’s the basic idea of how money moves into and out of that general account, powering the whole life policy:
Step 1: Fund The Policy
Fund a specially-designed dividend-paying whole life insurance policy to rapidly build up its cash value. Funding can be done with either a lump-sum payment, an annual, semi-annual, quarterly, or monthly premium payment, or a combination of a lump sum and ongoing scheduled premiums. If you’re having trouble finding the money to fund a policy, read How To Do Infinite Banking When You Have Low Funds.
Step 2: Borrow Against The Policy’s Cash Value
When there’s sufficient cash value in the policy, you can borrow against it when needed for major purchases or to make investments in other businesses. The loan originates from your insurer, which you are a part owner or member of. Unlike traditional loans, there’s no credit check or financial underwriting. You just request the money, and they give it to you, no questions asked (except where to send the money).
Your loan is collateralized by an equal amount of money from your policy. You own the insurance policy outright, and have full control over this credit. It can never be taken away from you or canceled. Additionally, your policy’s guaranteed cash value growth never stops (even with loans outstanding!), allowing you to fund purchases now without sacrificing future financial plans and goals.
Step 3: Repay The Policy Loan And Add Additional Money To Your Policy
Repay your loan to your insurance company at a rate and repayment schedule you choose and control, and add additional money to your policy through special policy riders, to grow your policy values and build a larger credit line for future purchases.
Your insurer will help you build additional credit through guaranteed interest payments and non-guaranteed dividend payments. Dividend payments (called “divisible surplus”) are generated through lower-than-expected expenses and profits of the insurer, which are yours to keep as part owner of the company. Dividend payments are not guaranteed to be paid but, once paid, become part of the guaranteed values of the policy and can never be lost.
Advantages of Infinite Banking
- You build, own, and control your personal credit, not a 3rd party lender or credit bureau;
- No external authority can control or dictate how and when you can finance your needs;
- You pay yourself the interest that would otherwise go to another lender, saving yourself hundreds of thousands, perhaps millions of dollars in interest over your lifetime;
- You can implement infinite banking at your own pace. No need to rush or conform to traditional financial planning rules;
- You’ll have more control over your cash flow; your whole life policy can be used to cover short-term cash flow needs like covering employee paychecks until your accounts receivables are paid. It can also cover longer-term cash flow needs like working capital;
- It simplifies personal finance by making you the center of your own financial universe; you operate in an economic environment you control;
- You can start infinite banking with modest funds, or use lump sums to “front load” a policy;
Advantages of Using Whole Life Insurance Policies for Infinite Banking
- Policy values grow at a guaranteed rate for your entire life, while premiums remain level and do not increase;
- Policy values are guaranteed against loss, secured by a 100% reserve system, and are backed by some of the most financially stable companies in the world. A reinsurance net and State Guaranty Fund provides several extra layers of protection;
- Dividends can be substantial and add a significant amount of money to the policy;
- You get tax-deferred growth on all the money in your policy, and tax free access to cash values for any reason (or no reason at all);
- It can be used as an emergency fund or to pay off medical bills or other personal debts;
- It is, for all intents and purposes, a “bulletproof” financial product;
- Life insurance is a private asset, meaning it does not show up in public records and is not included on your taxes. No one will know you have a whole life contract unless you tell them, not even your creditors;
- Life insurance products are an alternative to other tax-advantaged accounts, retirement plans, mutual funds, and other investments, while still giving you special tax advantages like tax free access to your savings when you need it;
- Life insurance loans require no credit check, and no lengthy applications. You simply fill out and sign a short 1-page loan form, detailing the amount of money you want from your insurer (you don’t even need to state the reason why you want the money or what you will spend it on——it’s completely private);
- It’s not correlated with other asset classes, and has a structural advantage over other, riskier, assets and investments;
- Policy loans are cheaper than just about any other financing method available. Net cost of an insurance loan from many insurers is 2% or less;
- Because every loan is secured by an equal amount of money from the policy, it’s impossible to be “upside down” on your loan.
- It’s one of the simplest, and safest, financial products you can buy;
- Policy values are generally protected against creditor claims (some states have stronger protections than others);
- Many whole life policies allow you to spend the death benefit before you die if you are diagnosed with a terminal or permanent chronic illness, and which results in you being too sick or hurt to live without some form of assistance from others.
- The policy continues to grow, even when you borrow money, allowing you to accomplish current financial goals without sacrificing future ones.
Disadvantages of Infinite Banking
There’s nothing wrong with the core ideas of infinite banking, but there are some disadvantages to the way it’s commonly practiced and implemented.
For example:
- Infinite banking requires you to be an “honest banker”, pay back all loans, with interest, and often at a rate that exceeds what the insurer requires. While you do have a lot of flexibility in the repayment schedule, unpaid policy loans continue to accrue interest and might eventually cause the policy to lapse if they remain unpaid for extremely long periods of time. Also… many people have negative emotions surrounding debt, and resist paying back loans at an appropriate repayment rate. This attitude will eventually crash your infinite banking system.
- Expenses tend to rise to match current income, making it impossible to save money. Infinite banking requires a strong saving habit, which conflicts with many people’s current lifestyle and spending habits.
- Many individuals succumb to The Arrival Syndrome. They believe they already “know it all”, and thus stop learning, growing, and eventually feel as though they already have “enough” life insurance. They think of whole life insurance as an “investment tactic” instead of a financial strategy.
- Many people are addicted to “rate of return”. Specifically, short-term interest rates. They let “rate of return” dictate their decisions. For Infinite Banking to work, a policyholder must treat rate of return as a secondary consideration, and focus more on the volume of interest earned and paid. Volume of interest refers to the actual amount of money earned and paid on loans.
- An individual is sometimes unwilling to make “becoming your own banker” a way of life. However, Infinite Banking is a way of life, and requires entirely new habits to be formed in order to be successful long-term.
- Some individuals lack conviction in what they’re doing, and so they fall into old habits which undermines the Infinite Banking strategy and way of life.
- Some individuals try to take on too much at once, move too fast, get in over their head, then fail. Infinite Banking takes time to implement, time to change old habits, time to restructure finances. It requires persistence, but also patience.
That covers the high-level stuff. I wrote an entire blog post covering all of the downsides to The Infinite Banking Concept®.
Disadvantages of Using Whole Life Insurance for Infinite Banking
- The forced savings aspect of whole life can feel like a “ball and chain” for some individuals. Some policies can be made more flexible by relying on non-guaranteed elements, but all policies have a required base premium which must be paid each and every year through one of several means;
- Requires long-term thinking and patience. Rate of return is negative in the early years of the policy, and are slow to ramp up. It may take 6-9 years to break even (i.e. for cash surrender value to equal premium payments);
- Borrowing against a life insurance policy reduces the net policy values (both cash surrender value and death benefit) of the policy, which might be needed if you die prematurely;
- If the policy lapses for any reason, and there’s a gain in the policy (total cash value exceeds total premium payments), income taxes will be due on the gain;
- Borrowing against the policy may increase the risk of policy lapse, especially if the policyholder fails to repay the loan or if the policy is underfunded;
- Some life insurance companies discourage policyholders from using their policy for Infinite Banking, and discourage any infinite banking agent from selling “Infinite Banking policies”.
History of Infinite Banking
Infinite Banking was originally conceived and created in the 1980s by R. Nelson Nash, then later introduced to the public through his book, Becoming Your Own Banker: The Infinite Banking Concept (now called “Unlock the Infinite Banking Concept”).
It is still the best source for understanding the original concept and how it was implemented when Nash first created it.
A competing book called, The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future, by Pamela Yellen, promises to teach you an “enhanced” version of this concept. It is more conceptual than Nash’s book, with fewer “by the numbers” examples. Yellen’s version of this concept includes the use of special term life insurance riders, which might allow a policyholder to pay more premium into the policy than Nash’s original idea allowed for.
While Nash presents an entirely new formulation of the idea of using whole life insurance as a source of personal credit, and gives it a name people can really grab onto, the seeds of that idea date back to Benjamin Franklin’s last will and testament.
Shortly before his death, Franklin had his will amended to include a provision for a 200-year insurance policy that would be used to help apprentices (and later, entrepreneurs) get their ideas off the ground. The insurance policy allowed apprentices to borrow money from the insurance fund at 5% interest. Over time, the fund would continue to make loans to many thousands of individuals and would eventually be used to fund city beautification and infrastructure projects for the cities of Philadelphia and Boston.
This idea of using an insurance policy that would last for several hundred years, making countless loans to those in need and being continually refueled by borrowers, actually worked.
Others tried similar ideas, with varying degrees of success.
In the late 1800s and early 1900s, John Wanamaker——the pioneer of the modern department store——popularized the idea of using whole life insurance, specifically, as a form of credit that one could borrow against to start and grow a business.
At the time, many of his peers thought he was crazy for insisting on carrying minimal to no debt and for wanting to manage his own money and self-finance his business using whole life insurance and endowment policies.
Wanamaker ignored them and pursued his own vision and path.
When asked about life insurance, Wanamaker freely gave his opinion about it, and why he funded his whole life insurance policies before reinvesting in his own business:
“Twenty years ago I had a capital of about a half million dollars. I then realized that a business man with a half million of capital and a million and a half of insurance on his life would have better credit than one with a half million of capital and no insurance — so I took the insurance. I now find that trading on the credit it created I made more profit than if the money which went into insurance had gone directly into my business.”
To the members of the National Association of Life Insurance Underwriters, he plainly stated his reasons for owning 62 whole life policies (from the business biography of John Wanamaker):
“I simply worked out five conclusions as the result of my own thinking, without any moving cause except my own judgment.
“First: that at the time I knew I was insurable and I could not be sure of immunity from accident or ill-health and it might be that at some future time I would not be insurable. This was the first step to the building up of my 62 policies.
“Second: that life insurance was one of the best forms of investment because from the moment it was made it was good for all it cost and carried with it a guarantee and there was protection in that investment that I could not get in any other.
“Third: that life insurance in the long run was a saving fund that not only saved but took care of my deposits and gave the opportunity for the possible profits that not infrequently returned principal and interest and profit.
“Fourth: that life insurance, regarded from the standpoint of quick determination, was more profitable than any other investment I could make.
“… I did not know what life insurance really meant to me until my policies were falling due—and I had a large sum of money with which I began to build my Philadelphia store. I would not have been prepared to start my building when I did if I had not saved $2,500,000 little by little.”
Wanamaker paid over $800,000 in premium payments which, in today’s dollars, would be equal to roughly $22 million. His whole life policy’s surrender values were worth an estimated $70 million (in today’s dollars). His insurance and death benefits were worth even more.
At that time, he was the most insured man in America, only to be outdone by his son. At his death, Wanamaker’s business empire, financed largely with life insurance policies, was worth more than $100 million. Today, it would be worth many billions of dollars.
Infinite Banking: Controlling the Banking Function
The primary benefit of infinite banking is the idea that you control the banking function in your life, as opposed to a 3rd party lender or a credit bureau.
The life insurance policy serves as collateral for all policy loans. And, that policy’s value is ultimately driven by your own actions (i.e. premium payments and loan repayments). Thus, you are responsible for building up your own personal (or business) credit, and you also control how that credit is used. You may leave the capital with the insurer to invest, or you may use that capital for your own investments and other purchases.
In the context of infinite banking, the banking function refers to the process of financing purchases. Controlling the banking function means controlling the financing of your purchases with capital you own and control. You control both the capital and the mechanism used for financing, while an insurance company holds and manages the funds for you.
A fundamental idea of Infinite Banking is, ‘you finance everything you buy’. You’ll either pay interest to someone else, or lose interest on your savings when you pay cash.
Either way, there’s an interest cost. It’s either implied or explicit.
Everyone is familiar with explicit interest expense. It’s the interest you pay on a personal loan, credit card, mortgage, or some other debt.
Implicit interest expense is opportunity cost. Opportunity cost is the cost of making one decision versus another. It represents money you would have had if you had made a different choice. For example, if you have the opportunity to make $1 million by investing your savings, but you choose to pay off your mortgage with your savings instead, then you incur an opportunity cost. Assume your savings is $150,000—enough to pay off your mortgage of $150,000. By paying off the mortgage with your savings, you give up the $1 million of future savings. That is your opportunity cost.
The goal of Infinite Banking is to account for that opportunity cost, and allow you to finance all the things you would have to finance anyway—the house, your future investments, and more.
Does It Really Work Like You Say?
Does infinite banking work?
Yes, it really works. I wouldn’t have wasted all this time researching it, writing about it, and implementing it in my own personal life if it didn’t work.
Here’s the thing: “Infinite Banking” is a modern marketing name given to the centuries-old practice of building, owning, managing, and maintaining personal credit through participating (dividend-paying) whole life insurance. This strategy isn’t exactly new. And it’s more than a mere sales concept or gimmick. And, while the idea has been around forever, Nash gave it wings, a marketing budget, and elaborated on the finer details of exactly how a person might use whole life to self-finance all of one’s needs.
Nash’s vision was for individuals to “control the banking function at the you-and-me level” using dividend-paying whole life insurance. For whatever reason, this idea never caught on in the personal finance blogosphere or with personal finance gurus. They hate it because of the word “life insurance”. Can’t get past it. They have a mental block about it.
Anywho, the underlying premise and idea of The Infinite Banking Concept®, and all other similar ideas, is to build up significant capital, control that capital with contractually-guaranteed access to the money, and thus have total control and ownership over one’s own personal credit. This is something that must be done with some sort of permanent life insurance policy, as term life insurance does not have a cash value component.
When money is needed, the owner of a well-funded “infinite banking life insurance policy” borrows money from the life insurance company. A high value is placed on the capital inside the policy, and loan payments made to the insurer are generally in excess of what the insurer charges for the loan. In essence, the policyholder is recognizing the cost of capital in his policy and treating access to his money as a loan instead of a cash withdrawal that has no value. In the corporate world, the counterpart to this idea is something referred to as “Economic Value Added” (EVA).
When world-famous investor Warren Buffett talks about charging managers for the use of Berkshire Hathaway’s capital at a double-digit interest rate, he is implicitly using the core concepts of “Infinite Banking” inside his company (which happens to be an insurance company). During one shareholder meeting, Buffett elaborated on the idea, stating that he places a high value on Berkshire’s capital (higher than other lending institutions), and he pushes that cost onto managers (and anyone else) who wants to use the company’s capital.
This really cuts to the heart of the matter.
To successfully implement any variant of the infinite banking strategy, one must first value oneself (specifically, one’s own welfare and financial future) over others, placing a higher value on one’s own savings and capital than the capital and savings of others. This will become more apparent as you continue reading through this guide.
One of the foundational premises of all variants of Infinite Banking is the idea that you finance everything you buy——you either pay interest to someone else, or you lose interest on your money by cashing out your savings and investments to pay cash.
Even worse, by paying cash, you leave yourself with constantly diminished savings. The following illustration (figure 1) shows what happens when an individual always pays cash using the well-known “sinking fund” method to build up savings or capital, then depletes the fund to make purchases or investments in business:
The blue bars in the graph represent capital accumulation. After 5 years, the fund is depleted and the cash is used to make a purchase or invest into a business. By “paying cash”, one always erases long-term capital accumulation, leaving one with zero net capital every time the fund is used to make purchases or investments in a business. This process could be repeated an infinite number of times, with no net growth in capital accumulation or savings. Contrast this with an “infinite banking” type method of building credit through a specially-designed whole life contract, and borrowing against the policy for major purchases or to make investments in a business:
The blue arrows show the policy always growing, regardless of loan activity. The black line shows the effect of loans on policy values. Even if loans are subtracted from the gross guaranteed policy values (ignoring dividends completely), there is always net positive capital accumulation.
Non-guaranteed dividends only add to this base cash value. Either way, gross cash value inside a whole life contract always grows, regardless of loan activity. Figures 1 and 2 also show that there is no way to avoid an interest cost on purchases you make. You pay for it either directly or indirectly. The choice is yours.
By putting your own welfare (wealthfare?) ahead of others, and placing a high value on your own savings and capital, you gain a tremendous advantage over others who fritter away their money or who place a very low value on their savings and capital. You also give your future self a tremendous advantage that you would not otherwise have.
The contrast here is stark, uncompromising, and unequivocal.
Placing zero value on your capital and savings produces a zero long-term net value. Placing a high value on your capital and savings creates lifelong capital accumulation and savings, and thus, long-term financial security and net positive value.
It’s true that some individuals may potentially gain temporary, short-term, advantages (or merely the appearance of an advantage) by valuing others over one’s own self. But, such “other-ism” strategies are always short-term in nature. Those short-term thinking individuals are easily outflanked and outcompeted by individuals who value one’s self, one’s savings, and one’s welfare over others, think and plan long-term, and who engage in long-term financial strategies.
Note: This is not about putting others down, hurting or injuring others, or even defeating others. It is about raising oneself up to the highest standard possible.
In the context of financial security and independence, this is the ultimate choice ahead of you. Dividend-paying whole life insurance is simply a tool, a means to that end.
As a policy owner or member of a mutual life insurance company, you are also entitled to vote on important business matters to influence the direction of your insurance carrier and to ensure your (and its) long-term success.
Infinite Banking Examples
Example 1: Financing Policy Premiums
An easy way to get started with Infinite Banking is to simply finance your own policy’s premiums. Some of my policyholders did this just to “test the waters”. Every insurance company — auto, home, life — charges a finance charge for paying monthly (or any other mode except annual). This finance charge is the cost of doing business with the company.
Finance charges exist because premiums are due in advance (before the insurer will agree to provide coverage), but most people cannot afford to pay their insurance premiums in advance, so… the company agrees to finance the annual premium for policyholders and break that annual premium up into smaller payments. However, if you start out paying monthly premiums, and build up cash inside a whole life contract, eventually you can use that money to finance your own life insurance premiums.
Let’s look at a real policy to get an idea of how this works. Here are the options this policyholder has for paying his premiums:
| PAYMENT MODE | ANNUAL | SEMI-ANNUAL | QUARTERLY | MONTHLY |
|---|---|---|---|---|
| AMOUNT | $3,451.71 | $1,763.82 | $900.89 | $300.30 |
Insurance carriers typically charge anywhere from 7.5% APR to 9.5% APR, and sometimes higher. Yet, the average APR on a policy loan (as of 2023) is 6% or less. Meaning, it’s often cheaper to finance your own life insurance premiums using your built-in loan provision than it is to let the insurer charge their standard rate for monthly premiums.
After three years paying monthly premiums of $1,000 (and paying the insurer’s monthly finance charge), this policyholder decided it made more sense to finance his own policy premiums using premium loans (a special kind of policy loan used to fund premium payments).
Here’s how that looked for his policy:
| YR | NET PREM OUTLAY | NET CASH SURR VALUE | PREM LOAN | LOAN REPMNT | INT CHARGE | EXCESS TO PUA RIDER | NET DEATH BENEFIT |
|---|---|---|---|---|---|---|---|
| 1 | $12,000 | $7,905 | $0 | $0 | $0 | $0 | $431,083 |
| 2 | $12,000 | $16,677 | $0 | $0 | $0 | $0 | $457,827 |
| 3 | $12,000 | $27,192 | $0 | $0 | $0 | $0 | $484,605 |
| 4 | $12,000 | $40,662 | $3,451.71 | $3,603.60 | $86 | $65 | $515,939 |
| 5 | $12,000 | $54,543 | $3,451.71 | $3,603.60 | $86 | $65 | $544,631 |
| 6 | $12,000 | $68,688 | $3,451.71 | $3,603.60 | $86 | $65 | $573,167 |
| 7 | $12,000 | $83,614 | $3,451.71 | $3,603.60 | $86 | $65 | $601,896 |
| 8 | $12,000 | $99,336 | $3,451.71 | $3,603.60 | $86 | $65 | $630,796 |
| 9 | $12,000 | $115,906 | $3,451.71 | $3,603.60 | $86 | $65 | $659,878 |
| 10 | $12,000 | $133,378 | $3,451.71 | $3,603.60 | $86 | $65 | $689,173 |
This policyholder’s base premium (without paid-up additional insurance premiums) was $300.30 per month ($3,603.60/yr). By financing his own premium with the policy’s cash value, the insurer agrees to switch the payment mode to “annual” and eliminate the normal finance charge, reducing his base premium to $3,451.71.
Then, the policyholder agrees to repay the premium loan over the next 12 months. But, when he does this, he recognizes the actual cost of that premium. In other words, the insurer was charging him $151.89 per year as a finance charge to spread out the annual premium into 12 monthly payments ($3,603 – $3,451.71 = $151.89)… so, he repays his premium loan with the same amount he was paying when he paid premiums monthly ($300.30).
Of course, the insurer charges loan interest on premium loans. But, the loan interest is much less than the finance charge for paying monthly premiums ($86 vs $151), allowing the policyholder to net ~$65 every year. That $65 is put back into the policy through the paid-up additions rider, increasing policy values.
This method of paying premiums grows the policy more quickly than if he had paid the insurer a premium finance charge. And the net result is his policy is more efficient and costs are reduced, improving his policy’s growth. Processing the premium loan each year is not a burden. The policyholder can either initiate the loan himself with a simple phone call, or the insurance company will do it automatically for him under his policy’s automatic premium loan provision.
Now… this is a cool little gimmick, and I don’t know if this little arbitrage will continue to work forever, but… as long as the insurance carrier’s modal charge is higher than the policy loan rate, it will work.
Example 2: Buying A Vehicle Or Machinery
This policyholder started her whole life contract by using some accumulated savings as well as monthly premiums paid out of regular income:
| YR | NET PREM OUTLAY | NET CASH SURR VALUE | NET DEATH BENEFIT |
|---|---|---|---|
| 1 | $10,110.45 | $6,688.50 | $136,671.15 |
| 2 | $10,110.45 | $14,487.90 | $136,868.55 |
| 3 | $10,110.45 | $24,290.00 | $137,081.70 |
As you can see, the first 3 years of her life insurance policy are heavily funded with just over $10,000 of annual premium. Some of this premium came from personal savings, while some of it came from monthly premiums paid out of income. Her premium purchased $136,671.15 of death benefit and gave her $6,688.50 in cash surrender value. In the early years of her policy, the annual returns are negative. Not ideal, but normal for whole life insurance.
The benefits come in the 4th year and beyond:
| YR | NET PREM OUTLAY | NET CASH SURR VALUE | POLICY LOAN FOR CAR | LOAN REPAYMENT | EXCESS TO PUA RIDER | NET DEATH BENEFIT |
|---|---|---|---|---|---|---|
| 4 | $10,110.45 | $22,535.00 | $10,000.00 | $2,549.76 | $0 | $137,380.95 |
| 5 | $11,427.15 | $34,597.50 | $0 | $2,549.76 | $0 | $144,458.37 |
| 6 | $9,793.35 | $45,818.85 | $0 | $2,549.76 | $0 | $148,658.90 |
| 7 | $6,292.65 | $54,145.35 | $0 | $2,549.76 | $0 | $155,614.57 |
| 8 | $4,690.35 | $61,329.45 | $0 | $2,549.76 | $1,626.05 | $163,053.14 |
| 9 | $4,690.35 | $68,898.90 | $0 | $0 | $0 | $170,748.59 |
| 10 | $4,690.35 | $76,856.85 | $0 | $0 | $0 | $178,717.46 |
When it came time for the policyholder to buy a vehicle, she used a policy loan instead of borrowing money from somewhere else. Of course, she had cash available to buy the car, so why not just use the cash?
Had she paid for the vehicle in cash, she would have lost interest on that money until she was able to save it up again. By using a loan from her insurer, she was able to buy herself a new (new to her) vehicle without sacrificing her future savings — something she had always struggled with in the past. Unlike conventional loans, loans from a life insurance company are non-amortizing. Meaning, the insurer does not require a specific loan repayment schedule. The policyholder can create her own repayment schedule.
Because her insurer does not require any principal payment, they only charge interest on the loan. Specifically, interest accrues daily on the outstanding principal balance and is billed at the end of the year.
This little quirk inherent in her policy allows the policyholder to repay the principal of her loan during the year before paying interest. Her loan works in the exact opposite manner of every other retail or commercially-available loan. Again, because interest is assessed only on outstanding principal balances, accrued interest will decrease as that principal balance is paid down during the year. And, because of this, it dramatically reduces the total amount of interest paid to the company. Additionally, she can pay more money to herself—money that would have otherwise gone to her credit union as interest payments. Instead, this money goes right back into her policy to buy more paid-up additional life insurance, which generates more cash value and dividends.
The policyholder’s insurance carrier also practices a loan method called “direct recognition”. This means when she borrows money against her life insurance policy, the company changes her dividend rate to match the loan rate, in effect giving her the interest she paid on the loan back to her as a dividend at the end of the year. While dividends are not guaranteed, it can help make loans an even more efficient method of borrowing money.
In this case, the policyholder pockets $1,626.05 in cash—interest which would have gone to a car dealership’s financing arm or to her credit union. To be clear, this money is not interest she owes to the insurer, either. This is cash-money she pays to herself. She can choose to put this money into her savings account or some other investment. But, instead, she puts this money right back into her whole life contract. By doing this, she will increase her cash value and thus the amount she can borrow in the future.
She can repeat this process an infinite number of times.
And, this is an important part of the process. The more times you do this, the better it gets. Like I mentioned above, this process works very well for businesses that regularly need to borrow money for business needs, like buying vehicles, or machinery, or companies that do factoring (life insurance policy loans will be much, much, cheaper than factoring), or companies that are seasonal or that have a cash drag created by really long cash conversion cycles.
Whole Life Policy Examples
Most whole life policies sold today have a low early-year cash surrender value, especially in the first several years of the policy. It’s typical to see a whole life contract with a first-year cash surrender value of $0. But, no one really enjoys paying thousands of dollars in whole life premiums and seeing a big fat goose egg in the first year.
A Basic Whole Life Policy
Here’s an example of a typical “all base” whole life contract (click to see full size):
An Infinite Banking Whole Life Policy Example
Here is an example of a classic IBC whole life policy, as described in Nelson Nash’s book, Becoming Your Own Banker: The Infinite Banking Concept:
A Classic IBC Policy
Here is an example of a classic IBC whole life policy, as described in Nelson Nash’s book, Becoming Your Own Banker: The Infinite Banking Concept:
This is a classic “infinite banking” policy design. High level premiums are paid over a long period of time. A healthy percent of the premium is paid as paid-up additions premium which accelerates the cash value growth of the policy compared to an “all base” policy.
An IBC whole life contract typically has higher early-year cash surrender value than a traditional whole life contract. The first year cash surrender value in these policies is often equal to between 60% and 80% of the first year’s premium paid. And, subsequent annual net growth of the policy’s cash value is extraordinary.
As with all participating (dividend-paying) whole life policies, the whole life contracts used with The Infinite Banking Concept® are guaranteed insurance products. All policy values are guaranteed. In addition to the guaranteed growth rate, the participating nature of the policy means policyholders have the opportunity to earn dividends. Dividends are not guaranteed to be paid in any specific year, and are based on a combination of savings from mortality and operating expenses and gains from investment returns. If earned dividends are reinvested into the policy (i.e. used to buy additional single-premium paid-up whole life insurance), those dividends then become part of the guaranteed cash value and death benefit of the policy. This dividend enhancement also alters the trajectory of the initial guaranteed growth of the policy each and every year a dividend is paid.
Infinite banking also involves using policy loans to buy things——sometimes consumer goods, but more often investments or valuable assets that appreciate in value. The life insurance cash value actually becomes credit for the loan. The more cash value you have in your policy, the more personal credit you have to borrow against when needed. This is credit you have complete ownership and control over. No one can take it away from you, and you determine how much credit you want to build up inside your policy.
Because cash values are guaranteed, your personal credit and credit line is guaranteed. The risks inherent in traditional investing accounts don’t exist inside the whole life insurance policy. For some, this implication of this idea is revolutionary and refreshing. For others, it’s terrifying.
Building, owning, and controlling one’s own personal credit is a huge responsibility. Some feel they’re not ready for it. Others are terrified by the idea that they (and they alone) will determine their own creditworthiness. And some are still hypnotized by an anticivilization that teaches them it’s wrong to have that much control over one’s own life.
Regardless of which path one chooses, it doesn’t change the facts. Those who choose to build, own, and control their own credit through whole life insurance will have the ultimate financial advantage in life.
90/10 Split IBC Whole Life Policy
Here is an example of a 90/10 split IBC whole life policy. This policy design emphasizes short-term cash value growth and high illustrated IRR at the expense of long-term cash value accumulation. Some critics argue that this design is contrary to Nash’s original vision of infinite banking and whole life insurance policy design:
This is a classic “infinite banking” policy design. High level premiums are paid for the first 7 years, then premiums must be reduced to avoid MEC status.
An IBC whole life contract typically has higher early-year cash surrender value than a traditional whole life contract. The first year cash surrender value in these policies is often equal to between 60% and 80% of the first year’s premium paid. And, subsequent annual net growth of the policy’s cash value is extraordinary.
As with all participating (dividend-paying) whole life policies, the whole life contracts used with The Infinite Banking Concept® are guaranteed insurance products. All policy values are guaranteed. In addition to the guaranteed growth rate, the participating nature of the policy means policyholders have the opportunity to earn dividends. Dividends are not guaranteed to be paid in any specific year, and are based on a combination of savings from mortality and operating expenses and gains from investment returns. If earned dividends are reinvested into the policy (i.e. used to buy additional single-premium paid-up whole life insurance), those dividends then become part of the guaranteed cash value and death benefit of the policy. This dividend enhancement also alters the trajectory of the initial guaranteed growth of the policy each and every year a dividend is paid.
Infinite banking also involves using policy loans to buy things——sometimes consumer goods, but more often investments or valuable assets that appreciate in value. The life insurance cash value actually becomes credit for the loan. The more cash value you have in your policy, the more personal credit you have to borrow against when needed. This is credit you have complete ownership and control over. No one can take it away from you, and you determine how much credit you want to build up inside your policy.
Because cash values are guaranteed, your personal credit and credit line is guaranteed. The risks inherent in traditional investing accounts don’t exist inside the whole life insurance policy. For some, this implication of this idea is revolutionary and refreshing. For others, it’s terrifying.
An IBC whole life contract typically has higher early-year cash surrender value than a traditional whole life contract. The first year cash surrender value in these policies is often equal to between 60% and 80% of the first year’s premium paid. And, subsequent annual net growth of the policy’s cash value is extraordinary.
As with all participating (dividend-paying) whole life policies, the whole life contracts used with The Infinite Banking Concept® are guaranteed insurance products. All policy values are guaranteed. In addition to the guaranteed growth rate, the participating nature of the policy means policyholders have the opportunity to earn dividends. Dividends are not guaranteed to be paid in any specific year, and are based on a combination of savings from mortality and operating expenses and gains from investment returns. If earned dividends are reinvested into the policy (i.e. used to buy additional single-premium paid-up whole life insurance), those dividends then become part of the guaranteed cash value and death benefit of the policy. This dividend enhancement also alters the trajectory of the initial guaranteed growth of the policy each and every year a dividend is paid.
Infinite banking also involves using policy loans to buy things——sometimes consumer goods, but more often investments or valuable assets that appreciate in value. The life insurance cash value actually becomes credit for the loan. The more cash value you have in your policy, the more personal credit you have to borrow against when needed. This is credit you have complete ownership and control over. No one can take it away from you, and you determine how much credit you want to build up inside your policy.
Because cash values are guaranteed, your personal credit and credit line is guaranteed. The risks inherent in traditional investing accounts don’t exist inside the whole life insurance policy. For some, this implication of this idea is revolutionary and refreshing. For others, it’s terrifying.
Building, owning, and controlling one’s own personal credit is a huge responsibility. Some feel they’re not ready for it. Others are terrified by the idea that they (and they alone) will determine their own creditworthiness. And some are still hypnotized by an anticivilization that teaches them it’s wrong to have that much control over one’s own life.
Regardless of which path one chooses, it doesn’t change the facts. Those who choose to build, own, and control their own credit through whole life insurance will have the ultimate financial advantage in life.
A Conceptual Look at IBC Cash Value Growth
Let’s start with a basic whole life contract as a reference point. Here’s a conceptual illustration of a guaranteed $1 million Life Paid-Up At Age 100 whole life contract on a 40-year old male, standard risk rating, non-smoker:
And now, that same policy designed as an IBC whole life contract (using paid-up additions):
Premiums in this example, are payable to age 70. In reality, premiums can be scheduled for anywhere between 5 years and out to age 100. If you want a “short-pay” whole life, you would simply schedule premiums for 5 years and stop. If you wanted to pay premiums beyond age 70, you would schedule them for however long you want to pay them. And, if you want the flexibility to stop and restart premiums at will, then you can schedule in that kind of flexibility, too (with a custom whole life contract design).
The longest premiums can be paid is out to your age 100.
A Life Paid-Up At Age 100 policy takes a long time to “mature”. Meaning, it takes a long time to build up $1 million of cash value in the policy — stretching the accumulation of cash value all the way out to age 121. That’s a long time to wait.
The custom whole life contract reaches $1 million in cash value by age 71 — much sooner. To do this, it requires modifying the $1 million policy to accept more premiums than would normally be required to maintain the insurance. The focus inside the policy shifts from slowly building up $1 million over a period of 81 years to rapidly building up cash value as quickly as possible (in this example, the target age for $1 million was age 70, though with enough premium, any age can theoretically be targeted for the target cash value accumulation).
Furthermore, because this is a dividend-paying whole life contract, dividends can add a significant amount of cash value and death benefit to the policy:
In this example, the $1 million savings goal is reached by age 60.
That’s the accumulation potential of whole life insurance all by itself.
In addition to creating your own personal credit and financing system, infinite banking helps you reach that $1 million goal even more quickly through the use of strategic borrowing and repaying of loans.
Premium payments can be stopped while loan payments are being made, or you can continue paying premiums while repaying loans. If you stop paying premiums during a loan repayment period, cash value growth will slow down (but not stop). If you continue paying premiums while repaying loans, your cash value growth will start to accelerate towards the end of the loan term (provided you are following a strict repayment schedule that adds money back to your policy).
If you have a custom whole life contract, with flexible premium outlays, then it’s up to you to choose how to repay loans.
Understanding Policy Loans at a Deeper Level
Policy loans are very different from traditional bank loans. First, there is no credit application and your loan is only limited by the amount of cash value you have available in the policy.
Also, unlike loans from 401(k) or other retirement plans, these loans are true loans. When you borrow money from a retirement account, you are actually withdrawing money from it. When borrowing against a whole life contract, it’s a true loan against the policy itself. The cash value is what the policy is worth if you surrender it——it is equity in the policy. So, when borrowing money against it, no money ever leaves the policy. Because of this, you are effectively leveraging a conservative asset at a very low cost.
Secondly, there is no set repayment period. You choose the terms of the repayment. You may even keep the loan open until your death. If you do, the insurer will simply deduct the loan amount from your death benefit and pay your beneficiaries the remainder. When you want to take out a loan, you simply call up the insurer or fill out a simple 1-page form. The company issues the loan, and then secures the loan amount with an equal amount of cash value from your policy.
For example, if you have $100,000 in cash value in your policy, and you want a $10,000 loan, the insurer will give you $10,000 and then secure the loan with $10,000 from your policy. This leaves $90,000 available for future loans. As you repay the loan, your cash value is restored with each payment. What’s really special about these loans is that the insurer will continue to pay interest and dividends on the original $100,000 amount.
Some insurers change the dividend payout by lowering or raising it on any loaned cash value, while other insurers keep the dividend the same regardless of loan activity. You’ll hear the former referred to as “direct recognition” and the latter as “non-direct recognition.” This has been the source of much confusion for consumers, who often believe that a very specific type of loan needs to be set up on their policies for this to work. The reality is, both direct and non-direct recognition loans work well for this concept.
There’s no magic here.
With non-direct recognition, an insurer can afford to keep the dividend the same on loaned cash value because it either raises expenses in the policy or lowers the dividend they could otherwise pay to everyone, all the time (which slightly favors people who are taking loans all the time). It’s not a big deal, but something to be aware of.
With direct recognition, the insurer raises or lowers the dividend to reflect the fact that this money is no longer being invested by the insurer, but is instead out on loan. The policyholder’s interest payments, then, become a source of investment gain to the company, which is then fed back into the dividend pool which is repaid to the policyholder at the end of the year when a dividend is declared.
It sounds like a lot of rigamarole, but it results in a very low-cost loan. In some cases, the loan rate can rise above the normal dividend rate, which encourages policyholders to borrow money from the insurance company and, in return, receive a higher dividend payment than they would receive without borrowing money.
Another reason loans are sought-after by policyholders is that insurance companies allow policyholders to repay the principal of the loan before paying interest during the year. Again, this helps reduce the cost of the loan and makes it a very attractive source of funds when and if you do need to borrow money.
How Policy Loan Amortization Works
Not all insurance companies are “non-direct recognition” and much ado about nothing has been made about these various loan features. In truth, it doesn’t really matter whether the loan is “direct recognition” or “non-direct recognition”.
Either way you slice it, insurance loans are a very inexpensive way to finance things (most of the time). If you pay the insurer $1 in interest, and your dividend that year is $1, you’ve effectively recovered your interest cost. That doesn’t always happen, but it can. Now, if you pay $1 in interest to the insurer, and your dividend is $0.50 the next year and $0.50 the year after that, you still recovered your interest cost but it took longer.
Furthermore, a life insurance policy loan is the only loan I’m aware of where you can borrow money from a lender, and set up a repayment schedule to pay off the principal of the loan during the year before paying interest on the loan, thus reducing the total interest being paid to the insurance company over the life of the loan.
Is it possible to get a cheaper loan through a bank than though an insurer? Sure, anything is possible — it’s possible for a case of Jack Daniels to fall out of the sky and land on the roof of your house.
But seriously, a lot of it depends on what you give up by going to a bank and whether you’re really getting a better deal. Some insurance agents argue it’s all about the interest rate you’re paying. They’ll tell you if you can get a lower interest rate elsewhere, do it. And, while a lower rate is generally a good thing, the problem with that thinking is it’s not always obvious which is the better deal by comparing interest rates.
For example, here is how a typical life insurance policy loan schedule looks. This loan assumes a $5,000 loan paid back over 5 years at 5% APR (click to enlarge):
Here is the same loan repaid at an 12% rate (click to enlarge):
The loan principal is repaid in 50 months. If the policyholder carries out the payments to the full 5 years (60 months), roughly $1,440 will be added back into the policy’s cash value. You can click on the image to see a larger view of the payment schedule.
What this is saying is… if you normally qualify for a loan @ 12% APR (e.g. a commercial loan of some kind, a revolving line of credit, or a personal loan, or a margin loan or some other loan for investment purposes), then a loan is a lot less expensive than a conventional loan at the same rate. Not only are you paying less interest for the loan itself, money is being added directly to your policy at the end of the term (assuming you keep sending the insurance company money after the loan principal is repaid).
This is the effect of “infinite banking” at work — adding money back to your savings versus sending that $1,440 to another lender.
By putting that money back into your savings, you benefit yourself, you have more money available in your cash value to borrow against in the future, and you have more financial security than you did before. And… that is an ongoing process that builds over time, accelerating the build-up of that $1 million goal.
Interest rates are very low right now for things like mortgages. But, credit card rates and personal loans still carry a high APR. Personal loan rates vary from 4% up to over 30%, but 12% is the average. Borrowing money to invest in other businesses or to invest “on margin” is expensive. Charles Schwab currently charges an introductory margin rate of 8.325% for debit balances up to $24,999.99. The lowest rate they offer is 6.575%. So, if you borrowed money against your life insurance policy to invest, you’d want to pay at least that much to mirror the market rate for this type of loan.
You can repeat this process an “infinite” number of types — hence the name. With a conventional loan, you have to requalify each time you want a loan, and you are not adding money to your savings or policy cash value. You can also take on multiple loans at the same time from your policy as long as there is cash value available.
Some Final Thoughts on Infinite Banking
I’m not much for gimmicks — we have plenty of those in the life insurance industry. And, there is a lot of marketing around infinite banking. Most of it is terrible. I don’t know why. The concept is not new, and it doesn’t need to be embellished. Agents don’t need to lie or make up stories about how any of this works. The concept itself is really simple, and has been used for almost 200 years without too much changing. Yes, Nash put some marketing muscle behind it, and introduced some new ideas. But, there’s nothing here that should be regarded as controversial. About the only thing people argue about is whether you should do it with whole life insurance because… “whole life insurance is a scam”.
I just don’t have the patience to entertain these kinds of phony objections anymore.
Regardless of what you think about infinite banking, whole life insurance has helped build some of America’s most iconic businesses, and… it continues to be a core financial product for some some half-million Americans today and counting.
Right now, there is a bit more than half a trillion dollars sitting in whole life insurance policies at the major mutual life insurance companies. A lot of those cash values belong to high net worth individuals. Most low income and middle-class folks simply can’t afford, or choose not to buy it (with the exception of final expense insurance). The lower a person’s income is, the more they tend to rely on high-risk investment strategies for the bulk of their savings. Higher income folks, and individuals with a lot of savings and assets, tend to gravitate to lower risk products for a substantial portion of their investment portfolio, like… dividend-paying whole life insurance. And, the more money they have, the more they have to lose, the more they tend to favor guaranteed insurance products.
Anyway, there’s a lot of money flowing into the big mutuals. And, that doesn’t count the smaller mutual insurers and the stock companies selling other types of cash value life insurance. And, at least for whole life policies, each year that dollar figure grows at a guaranteed rate. And, as people die, and death benefits are paid out, more insurance is bought, which pushes the dollar amounts even higher. The momentum at this point is, I believe, unstoppable.
The Infinite Banking Concept® is not a strategy that everyone will find appealing. But, for some… it may be exactly what they need to feel more secure about their own financial future.
Whole life insurance is not going away. On the contrary, it’s seeing a resurgence.
Legal Disclaimer: The Infinite Banking Concept® is a registered trademark of Infinite Banking Concepts, LLC. Monegenix® and David Lewis are not affiliated with, endorsed by, or sponsored by Infinite Banking Concepts, LLC.
