Category: Infinite Banking Concept

My first piece of advice on this is don’t make this harder than it needs to be.

Using cash value loans against participating whole life insurance self-finance your business and lifestyle is as old as… well… the life insurance business itself. Look, this is not hard. And yet, the way it’s often explained and implemented leaves people scratching their head (I’m looking at you “IBC practitioners”). Don’t make it hard. Here’s how to keep things simple, while still benefiting from a deceptively powerful financial strategy.

Setting Up Your Policy

Setting up your own cash rich whole life insurance policy is a matter of first figuring out what your financing needs are, then solving for those needs with an appropriate amount of whole life insurance. Sometimes this is referred to as a “premium solve”, where a specific amount of premium is used as the basis to figure out how much death benefit can be purchased. Then, an additional amount of premium is added to the policy to “overfund” the policy (technically inaccurate, but whatever), resulting in a high cash value policy. The high cash value allows for generous policy loans.

Additionally, the life insurance policy should be purchased from a mutual life insurance company, as opposed to a stock (public) company. Mutual insurers are owned by its policyholders, which is important, since it entitles policyholders to both interest and dividends from the insurer.

Anyway, here are the 5 basic steps you must follow if you want to succeed with this:

Step 1: Fund Your Whole Life Insurance Policy

Don’t skimp on this step. I mean it. 

The number one reason people fail with this strategy is because they’re afraid to capitalize their policy with sufficient premiums. Plan on paying at least 10% of your income into a policy. That’s to get it started. You’ll probably have to increase that amount over time. 

If that sounds like a lot of money going to the life insurance company, it’s because it is. It’s supposed to be. This is the foundation for everything else you’re doing, so you need to put a lot of money into your policy. You can always borrow against it when you want or need to. But if there’s nothing in there to begin with, there’s not much to work with.

A lot of people fight this because they’re conditioned to think of insurance as an expense, not an asset. To be successful with this, you have to flip that mentality around. If you’re still having trouble with the idea of paying so much money into a policy, remember this: the whole idea here is that you’re establishing your own personal credit system—a life insurance-linked credit system, where you are the owner, funder, borrower, and customer of your own little policy-based lending system. No banks. No other 3rd parties, other than the life insurance company which you are part owner of. So… the first part of establishing your own system is… you have to build up your system. Part of that system is the life insurance policy.

So, don’t be afraid to put a lot of money into it. After all this is for you and your family. You are building a system of financial autonomy.

Step 2: Wait For Capital To Build Up

This is the “boring” part, and the step everyone wishes they could skip. 

No one wants to wait. They want to get to the “fun” stuff — borrowing. But, being patient pays off. Your “lending system” is always going to be slow to start. You have to just accept this. The cash value needs maybe 3-5 years to grow before you start borrowing. Technically, you can borrow in the first year (the first month, if you really want to), but it’s not ideal. It’s not how these policies are supposed to work. They’re supposed to “cook” for a few years. I realize this money is burning a hole in your pocket, but being patient will help you tremendously in the long-term. Don’t rush the process. Trust it.

Step 3: Borrow When Opportunities Arise

While you’re waiting, you’re going to start seeing a bunch of opportunities pop up. 

I promise. 

It will happen. 

People with money always have opportunities presented to them. They never have to chase them down. I suppose that can be both a good and bad thing. But, let’s assume it’s a good thing for now.

In Nelson Nash’s book, Becoming Your Own Banker, Nash writes about the many opportunities a person might encounter, from equipment financing to unusual real estate deals to maybe starting a car leasing company to service all the high income doctors and lawyers in town who like to lease a new vehicle every 3 years (gotta keep up appearances, right?).

Step 4: Repay Your Policy Loan

Something that never gets talked about enough is repaying policy debt.

For whatever reason, life insurance agents are in love with the idea that “you don’t have to repay these policy loans!” 

OK, that’s technically true. You don’t have to repay policy debt, but there’s another side to this. If you don’t repay it, the loan grows. See, the life insurance company ain’t stupid. It wants its money, which is ultimately your money (they owe it to you, which is why they want—to pay off policyholders). If you’re not going to repay policy loans, they’re going to force the payoff by adding the accrued loan interest to the total outstanding policy loan principal at the end of the year. And, when you die, the death benefit is reduced by an amount equal to the outstanding loan principal. 

Repaying policy loans solves this problem, and it ties in nicely with another of Nelson Nash’s ideas: don’t steal the peas. In other words, imagine you own a grocery store. And in this store, you sell all kinds of stuff—canned peas, for example. Regular customers who come in the front door pick up a can of peas and they pay for it at the checkout. But suppose you, being the owner of the store, take a can of peas for yourself and walk out the back door. You’re essentially stealing from yourself. Maybe you can get away with it now and then. But eventually, you’re going out of business with that kind of behavior. And, even if it doesn’t hurt you in the short-term, it will eventually hurt you. In practical terms, this usually leads to the slow death of your policy.

It’s the same with policy loans. Don’t steal from yourself. Repay the life insurance loan so they can pay those dividends back to you.

Step 5: Buy More Life Insurance

A major part of creating your own policy-based credit system, and becoming your own lender of that system, is expanding your system. I don’t necessarily like the “banking” analogy that Nash and others insist on using, but there is a useful analogy of sorts that I think illustrates the point:

Unless we’re talking about a lone country bank, when do you ever see a bank that only has one branch office? You don’t. There’s always a dozen or so within so many square miles. And, these days, they not only have physical branches, they have an Internet presence. Meaning, they’re everywhere. 

Translation: don’t forget to keep buying life insurance policies. No, they’re not banks, and you’re not really “becoming your own banker”, but I think you get the idea. I see so many policyholders buy one policy and call it good. They think this is all they need. Or they get distracted and go do something else.

No. This is not the way. 

You stay focused and keep expanding your portfolio of policies to accommodate more and more of your financing needs until the life insurance company refuses to sell you anymore life insurance (and they will, eventually).

What Is The Infinite Banking Concept®?

Now that I’ve covered the big picture “how to”, let’s dig a bit deeper into one version of this concept, shall we?

Nelson Nash may not have invented the idea of borrowing money from life insurance companies, but… he sure as hell did make it sound sexy. According to its discoverer, R. Nelson Nash, The Infinite Banking Concept® is all about “how much of the banking function do you control as it relates to your needs“. The Infinite Banking Concept® was born out of this initial seed idea. Along with this idea, Nelson Nash formulated several other important ideas in his book, one of which was “you finance everything you buy”. You either pay interest to someone else or you lose interest on your savings when you pay cash. 

Think about that for a moment. You cannot get away from interest cost. You can only run away from an interest payment (i.e. paying interest to someone else). The cost of money follows you around. You’ll always pay it, either out of pocket or as realized opportunity cost. The more you control the all this money in your life, the more opportunity cost you recognize, the more interest you can “recapture” from the system and the better off you are.

Now… there’s absolutely in Nash’s book that necessitates the reader buy life insurance. Nash insists that it’s all about the process, not the product. And yet… the entire concept is about buying participating whole life insurance. 

Whatever. Anyway.

Nash’s correct view about financing everything you buy doesn’t prove that life insurance is a necessary purchase. But… I do think life insurance is a valuable product, regardless of whether or not you use it for self-financing.

Can You Really Become Your Own Bank?

No. And, this is where I diverge from the gooroos promoting this concept. You will never be a bank unless you —wait for it— start a bank, and make the business highly transactional.

With that said, you can build, own, and control your own personal credit in the form of life insurance (crazy, I know), use that insurance as a way to finance things you want through policy loans, and then profit from those borrowing activities.

The life insurance industry refuses to acknowledge The Infinite Banking Concept® as an official way to use life insurance. Unofficially, however, I’ve spoken to lots of General Agents and even folks at the home office who say they really like the idea. The entire financial world is built around the idea of retirement planning, and here’s this idea which runs contrary to the mainstream way of doing things. It’s a very creative use of life insurance, doesn’t really hurt the insurance industry or life insurance companies when implemented responsibly, it’s not in any way illegal or immoral, and it empowers the policyholders and gives them more control over their money. 

Everyone wins.

At the same time, a lot of so called financial experts poo-poo this idea, which I think only helps make it more popular with folks who’ve been burned (usually more than once) by the financial industry and by financial planners (especially the full-of-themselves, narcissistic, “award winning” types). In my humble (but honest) opinion, a big reason why your typical financial professional doesn’t like IBC is because the policyholder remains in control of his money, not the financial professional. There’s a sort of role-reversal there. 

Many (most?) financial planners love a top-down approach to financial planning. They want more regulatory control over the financial industry (to “raise the bar” and keep competition down), and specifically the financial planning industry. They are in love with their credentials and the prestige of it all. 

The Infinite Banking Concept® is antithetical to that business model because it brings everything down to the “you-and-me” level.

Usually, with traditional financial planning, the client hands over all money and control to the financial planner, who does “top down” advice giving and planning. With IBC, the policyholder is in control and the financial professional is more like a consultant—very much a “bottom up” approach.

Why Would You Want To Become The Bank?

People hate banks, so why would you want to become one? 

Well, technically, you’re not becoming one. You are acting like one, though, in the sense that you’re borrowing money and managing the loans. Difference is, you’re acting as both the banker and the borrower. You are, in fact, a policy owner (policyholder) and thus… the owner of all the capital and credit inside the policy, the death benefit, and part owner of the company you purchased the policy from (assuming you bought from a mutual company).

This is an easy concept to understand, but a difficult one for a lot of folks to wrap their head around. 

Normally, you pay interest to a bank or lender you don’t have any ownership interest in. That bank then takes that interest and distributes it to its real owners—the stockholders. Now, instead of playing that game, what if you cut out the 3rd party bank and used your own company (or a company you had an ownership stake in)? Instead of the shareholders earning all the interest and dividends, that money would be sent to you. You’d be the one profiting.

Bam. 

There you go. That’s why you’d want to do this. When you buy a whole life policy, you become part owner of the mutual insurance company, and are thus entitled to both the interest earned from investments plus any share of the business’s profits (dividends). Dividends on whole life policies are paid meritoriously, meaning the more insurance you own, the more premium you pay, the more dividends you can potentially earn.

And, on the borrowing side of things, policy loans are more efficient and, almost always, a lower cost way of borrowing money compared to traditional loans.

How Much Money Do You Need To Start A WHOLE LIFE POLICY?

People who have never bought life insurance before understandably don’t know how much they should be putting into a policy. Don’t overcomplicate this. Treat your whole life insurance policy like you would any other asset or savings account (even though it’s not a savings account). 

There are two things to keep in mind when funding a policy…

1. Deciding On A Dollar Amount

Your initial premium should be something you can comfortably afford. Ideally, this will be 10% of your net income, but if you feel you can do more, then do it. Most insurance companies will allow you to pay up to 25% of your income into a policy without additional underwriting. Some have hard limits on the percentage of income you can put into a policy.

2. The Option To Change Premium Payments

If your policy is designed to be flexible, you won’t be locked into that initial premium forever. You might be able to increase that premium or add one-off (unscheduled) payments now and then. And you definitely should be able to lower the amount when needed (e.g. when repaying policy loans).

Bottom line: The policy should be flexible enough for you to add money to it within a specified range, rather than a fixed amount that can never be changed.

Final Thoughts

I get that this isn’t for everyone. Some people won’t be able to afford the relatively high premiums required. Others simply don’t like whole life insurance for one reason or another. And, even if you really like the idea and can afford it, it still might not be the right thing for you to do. 

A couple of “for instances” for you:

1. Smokers;
2. People with more serious health problems; or,
3. Anybody who would be rated substandard might not like the way their whole life insurance plan performs. 

I’ve seen some illustrations where the substandard rating is so bad, the policy never generates a positive IRR on cash value, ever. In those cases, whole life insurance isn’t the answer unless you want a permanent death benefit.

Or, if your time horizon is less than 10 years, this concept probably won’t work well for you.

Really, you need to think long-range, have the ability to make payments for decades, and be willing to enter a whole new world where retirement is not the norm, and where you become personally responsible for all your own financing needs.

It’s a tall order. And, frankly, an order many people aren’t ready for.

This whole new world is scary for a lot of folks. And for some, it might be a bad idea. But, for the right person, it might be just what they’re looking for.

Anyone who has ever had to deal with an incompetent loan officer asking for the same paperwork 6 different times within the span of a week probably sees at least the general value in not having to interact with these idiots.

Enter the Infinite Banking Concept (IBC).

The infinite banking financial strategy is all about “controlling the banking function in your life” using a specially-designed dividend paying whole life insurance policy (a type of permanent life insurance policy with both a death benefit and cash value component), so you don’t have to rely on 3rd-party lenders or traditional loans for financing. 

You pay premiums into a whole life policy, cash value builds up inside the policy on a tax free basis, and when there’s sufficient cash value in your “infinite banking policy”, you either surrender some of the paid-up additions or take a policy loan to buy whatever you need. Policy loans are the preferred method, but the classic Becoming Your Own Banker book by R. Nelson Nash (2000) actually showed some policy illustrations using withdrawals for “banking” instead of loans.

Regardless, your infinite banking agent is almost certainly going to tell you to use policy loans instead of partial surrenders, and for the most part, that’s good advice. When you repay your policy loan, you’re repaying the insurance company—an entity you have partial ownership stake in through the policy itself. So, as a borrower, you get the benefits of borrowing from a company you “own” and then as part owner of the company, you collect the profits that normally would go to the stockholder of a public company.

You’re essentially sitting on both sides of the table. Win-win.

What’s not to love?

A few things… maybe. Here are the disadvantages of infinite banking as I see it…

Whole Life Policies Require High Premiums

The only way infinite banking works is if you pay a lot of premium to the life insurance company.

It’s not uncommon to start infinite banking with $20,000-$50,000 (or more) per year in premium. Most of this premium ends up as cash value in the first year of the policy, so it’s ultimately coming back to you. But it has to go in there first. You cannot thin-fund your policy. That’s not how infinite banking works. Most infinite banking pros will want to see at least 10% of your annual income going into a policy. 

Of course, not all policies are funded with tens of thousands of dollars every year. Some policies can be funded with a mere $5,000 annually. But, you’ll rarely see illustrations less than $10,000/yr these days. 

Some policies are funded with a large lump sum amount, plus a smaller monthly premium payment. It just depends on what the policyholder is starting with, and what they can afford. If you’re not going to pay premiums of $5,000-$10,000 per year, for example, you’ll probably have to start with a large lump sum amount to get your policy started.

Basically, you have to be “bought in” on the whole infinite banking concept. You can’t half-ass it. And if you do, God help you. You’re not going to like the end-result. The infinite banking system hinges on making these high premiums for decades on end. This is how you build up your capital surplus and “become your own banker” (BYOB). You’re not going to BYOB with no “B”.

In fact, this was a core tenet in Nash’s book—’Don’t be afraid to capitalize’. Not everyone likes the idea of saving up this much money. It’s weird, but I get it. I don’t agree with it, but I get it. Still, the only way the infinite banking concept works is for you to be a serious saver. There’s just no way around it.

Cash Value Growth Can Be Slow

Cash value growth inside a whole life insurance policy, even one designed for infinite banking, can be slow. This is especially true of the guaranteed growth part of the policy’s cash value, which is why your life insurance agent will use a paid-up additions rider (PUA rider) on your policy. The goal of the PUA rider is to help accelerate your policy’s cash value growth, but it can only do so much. “Accelerate” does not mean “instant”, and I think a lot of people get disappointed when their policy’s cash value doesn’t grow as fast as they want it to, even with a healthy PUA payment. 

I’ve seen more than a few folks get frustrated by this. Even after having “the talk” about patience and how it pays off, they eventually get mad and quit.

It can take several years for the total premiums you pay to equal the total net cash value of your policy (often referred to as the “break even point”). “Break even” might take between 4-5 years, but could also take between 6-9 years, depending on the company, policy, and how the infinite banking policy was designed. 

Some whole life insurance policies have suppressed guaranteed cash value growth in the early years so the insurer can boost the dividend payout later, thus optimizing long-term cash value accumulation. If you have a policy from a company that does this, you have to be even more patient for the payoff. 

Often, high early-year cash value growth comes at the price of long-term policy performance, and can even cause policies to MEC later on due to the excessive “forced premium”. Early “break even” points might also reduce the ability to put in premiums later on or cause a slowdown in cash value growth later on. So, if you’re impatient, you’re hit on the back end of the policy’s cash value growth curve, which can also be very frustrating.

End of the day, cash value growth can be very slow in any infinite banking policy your agent designs for you. The point here is cash value is supposed to grow slowly and steadily. If that bothers you, you’re going to be very frustrated holding this policy for decades.

Poor Customer Service From The Life Insurance Company

Customer service is very much hit or miss at the life insurers these days.

Let’s face it, it’s an entry-level job and the insurance companies don’t always hire the cream of the crop here. They’re not criminals or anything, but they aren’t always the most helpful folks you’ll encounter. And, even when you’re dealing with a reasonably intelligent, normally-adjusted, human being, keep in mind the dude taking your call at 4PM on a Friday afternoon ain’t interested in what you want from your whole life insurance policy. He just wants to clock out in an hour, go to the bar, and “unwind” from a tough week of being beat up on the phone by serial complainers.

Now, don’t get me wrong. I’ve worked with some absolutely amazing customer service people. People who—frankly—deserve more pay and a better job title for what they do. But… many (most?) of the service folks you’ll encounter aren’t infinite banking experts. Just something to keep in mind.

Infinite Banking Involves Loans

Infinite banking emphasizes the use of policy loans. Some people don’t like paying interest, even if it’s to themselves or a company they have ownership rights in. While the loans are tax free (a point IBC practitioners are quick to point out), they also accrue interest which must be paid every year. If you don’t pay the interest on the policy loan, the interest gets added to the loan principal and the loan starts to compound against you.

Very bad.

Lapsed Life Insurance Policies Kill Tax Benefits

If you overloan any of your policies, or there’s not enough cash value in your whole life insurance policy to keep it in force using the automatic premium loan feature, it will lapse. If your policy lapses, you’ll lose your policy’s tax free benefits, and you’ll owe income tax on all the gains realized in the policy.

Life Insurance Policy Loans Reduce Your Death Benefit

Even if your whole life insurance policy doesn’t lapse due to loan activity, every policy loan reduces the death benefit by an amount equal to the loan until the loan is repaid. If you repay the loan, the death benefit is restored. However, if you don’t pay the loan back, the amount will be deducted from the death benefit when you die.

You Might Not Qualify For An Infinite Banking Policy

Qualifying for a new whole life insurance policy may be difficult for older individuals, those who smoke, or those in poor health. Although your agent might describe it as “being your own bank”, the reality is the insurer views it as a permanent life insurance policy, and all insurance policies require you to pass both medical and financial underwriting. 

If you can’t get through underwriting, you don’t get a policy. End of story.

You Might MEC Your Whole Life Insurance Policy By Taking Loans

It’s rare, but I’ve seen it happen where very large policy loans taken too early on in the contract cause the policy to MEC.

It happens as a result of a sudden change in the ratio between the life insurance cash value build-up, death benefit, and premiums paid. If a loan causes your policy to MEC, you’ll lose virtually all the advertised tax benefits, including the tax free access to cash values. You won’t lose the tax deferred growth of the policy, but the IRS will reclassify your policy as a “modified endowment contract”, and treat it like a more traditional investment, applying the rules than normally apply to retirement and other tax advantaged accounts.

Most people don’t want this to happen to their policy. It sucks, and virtually destroys your ability to use your policy as an emergency fund (since you’ve lost tax free access to the cash value) or in any other meaningful or practical way for infinite banking.

Cash Value Withdrawals Can Also MEC Your Infinite Banking Policy

In Nash’s first book, some of the illustrations he included show a withdrawal of cash value from a whole life insurance policy, not a loan. 

Thing is, it’s probably easier to MEC your infinite banking policy with cash value withdrawals (partial surrenders) than with loans because the partial surrender permanently reduces the death benefit of your policy. Withdrawals made earlier on in the life of the policy are riskier than withdrawals made later on in the life of the policy.

And just like with MEC’ing your policy with loans, you’ll also lose most of the policy’s tax advantages, including the tax free policy loans your policy if you MEC it by taking too many withdrawals (or excessively large withdrawals) early on.

The Infinite Banking Strategy Requires Long-Term Thinking And Planning

I know this sounds like a weird “disadvantage”, but some people haven’t developed a long-term mindset. These people are functionally children. So, pretty much anything that requires long-term thinking and planning is endlessly frustrating to them. 

Childish, I realize. But it is what it is. 

Really, it amazes me how many people think 5 years is “long-term”. You need to think longer. How long? Try, your entire life. Average life expectancy at birth for both men and women is between 70-80 years. Obviously, if you live to age 80, you’re going to live longer.

Point is, you’re not buying a whole life policy for 5 years. You’re buying it for—wait for it—your whole life. If you’re not really sure you want to own a policy for the rest of your life, might not be something you want to get involved in.

It Requires A Complete Shift In Your Thinking And Attitude

People are trained and conditioned to be followers from a very young age. They’re taught to obey authority, stop questioning authority figures, and fall in line with the “mainstream”. Once this attitude, behavior, and habits are established, it’s very difficult for a person to change. Yet, this change is necessary for you to be successful with the infinite banking strategy.

Infinite banking is not just a product, and it’s not just something you do occasionally, for fun. You basically have to overhaul your entire approach to money. A lot of people simply don’t want to do that, and don’t like the changes that must be made for infinite banking to work.

You Might Be Joining A Cult

As much as your authorized infinite banking insurance agent doesn’t want to admit it, “The Nelson Nash Institute” has become, well… an institution. Back when it was the Infinite Banking Institute, it was a bit more acceptable. The focus was on the idea. Now, the focus is mostly on what Nash said, what Nash did. It’s very much become a “What Would Nash Do?” (WWND) groupthink type of organization.

This sort of thing tends to kill innovation and causes stagnation, which (in my opinion) is exactly what’s happened. It also leads to odd consensus-like statements and viewpoints about how infinite banking should be done, and how it shouldn’t be done, policy design “rules” and so on.

Self-Insuring Is Probably A Bad Idea

A section of the Becoming Your Own Banker book delves into the idea of self-insuring for certain kinds of insurance—auto comprehensive and collision. This always struck me as a bit off course because the infinite banking book is about becoming your own banker, not becoming your own insurance company. 

Self-insuring requires some special risk management chops and for most people, in most situations, it’s best to just let the insurer handle comp and collision. Not saying it can’t work, but for most people it’s going to be a bad idea.

It’s Not A True Emergency Fund

An emergency fund is money you can access immediately. Life insurance cash value takes some time to get access to—typically 3-5 business days. Don’t get me wrong. It’s an excellent backstop for a saving’s account or maybe even a credit card. And, if you need large sums of money for unplanned non-emergency type stuff, then it works great.

But if you get into a car accident and need a tow, or your pipes burst during a hard freeze in the middle of winter, or if you need money to bail out your buddy or something, you’re better off using cash savings or a credit card.

You Cannot Buy Unlimited Amounts Of Life Insurance On Your Kids Or Other People

No. Just, no. 

This doesn’t work. 

And in the circumstances when it does work, it’s rather limited. 

Life insurers don’t want you buying a bunch of life insurance on other people before you’ve fully insured yourself. And even when you’ve bought enough life insurance on yourself, they still don’t want you to buy a bunch of life insurance on other people. And if you manage to convince an underwriter to underwrite your children, here’s the deal: the death benefit limit on your children generally must be 75% or less of whatever death benefit coverage you have on yourself.

If you can’t buy insurance on yourself because of health reasons, well then that’s just how the cookie crumbles. 

Insurers generally prohibit buying insurance on strangers and most other people outside your immediate family or business relationships (spouse, children, business partners, etc.). Remember, this is not a “bank” from the insurer’s point of view. To them, it’s a death benefit, and they don’t want the inherent risk of stranger-owned life insurance on their books.

Premiums Cannot Equal Income – You Cannot Treat It Like It’s Your Own Bank

One of the ideas some agents still push is buying so many infinite banking policies that your premiums will equal your income. At that point, the policy’s dividends become your new source of income. 

While there are probably ways to pull this off in your old age, most life insurers will not allow you to pay more than a certain percentage of your income into a life insurance policy because… as far as they’re concerned, this is still life insurance, not a savings account or a bank account of any kind. A real savings account you can slosh money into and out of. Banks generally don’t have restrictions about how much of your income you put in there. 

Life insurers do.

Repeat after me: whole life insurance is not a bank.

Non-Direct Recognition Is Oversold

The infinite banking die-hards still insist that non-direct recognition loans are a requirement to practice the infinite banking concept. They’ll also tell you non-direct recognition “works better” because the insurer doesn’t change your dividend when you take policy loans. 

I’ve written about this elsewhere, but the long-and-short of it is both non-direct recognition and direct recognition loans work fine. Non-direct recognition policies are subsidized, which is how the insurer can afford to pay the same dividend regardless of loan activity (which the IBC practitioners deny, but which is a well-established fact in the insurance industry, and which can be easily verified by examining any insurer’s financial statements). The subsidy results in an effective spread being worked into the dividend rate, which lowers everyone’s dividend to give the appearance (illusion?) that you’re getting something for nothing.

But there’s no free lunch. Every Austrian economist knows this.

Infinite Banking Doesn’t Replace Investing

If what you really want is a way to invest your money, infinite banking isn’t for you. Life insurance isn’t an investment. It’s a financial product that helps you manage a variety of different financial risks. In the context of the infinite banking concept, your whole life policy is solving for the financial risk of not having enough capital and not having access to credit when you need it.

The Infinite Banking Concept Can Be Alienating

The infinite banking concept can be quite alienating. 

First of all, you’re funneling an inordinate amount of your cash flow into a life insurance policy. Most of your peers won’t understand how life insurance cash value works, so they’re going to see this as an oddball move. Most personal finance goo-ruse don’t like the infinite banking concept, either. They’re addicted to traditional/mainstream retirement planning. Anything that deviates from that is “weird”, or more likely, “wrong”.

Another thing is, all your friends and family have been told by the personal finance industry that whole life insurance is a scam, so… strike two. You’re not going to get any support from your usual support structure.

On top of this, you’re self-financing everything you buy. This is abnormal to a lot of people. Most people use credit cards, personal loans, auto loans, and mortgages, to buy stuff, not cash value from a life insurance policy. If they buy life insurance at all, it’s term life insurance. That’s what they’ve been told to buy. They also go deep into debt, and spend years—sometimes decades—digging themselves out of debt. They keep up with the Joneses, and are always leasing new cars, living beyond their means. 

You can’t do that with infinite banking, so you’re going to be the boring friend or family member who can never afford to do “fun stuff”.

You Might Drive Your Spouse Crazy

… and if you have a normie spouse who likes to spend money all the time, you’re going to drive them crazy, too. Even if they’re not a spendthrift you might still drive them crazy. The whole idea of building up cash value and then borrowing against it will sound like some sort of strange Rube Goldberg machine to them. 

They’re also going to think (and be told) anyone promoting this alienating sort of lifestyle is harmful to your traditional support structure, driving a wedge between you and “normal society”, and is probably not giving you good financial advice.

It’s a lot to battle.

A client once told me his wife thought he was insane buying so many whole life insurance policies. She didn’t understand how the cash value in those policies worked. All she saw were these large premium bills from the insurance company and she saw them as an expense, not as cash value savings. So, as a result, she believed they were “insurance poor”, even though her husband’s policies have millions of dollars worth of cash value in them, and the policies themselves generate enough dividend income to pay for just about any lifestyle she could possibly want.

Yet she still believes, for whatever reason, they’d be better off with term life insurance and some money stuffed into a savings account.

You Might Drive Your Accountant/Financial Advisor Crazy

Most accountants push tax-advantaged qualified retirement plans as a “tax planning” strategy. A lot of them don’t “get” the logic of infinite banking. They might understand how cash value is an asset, but they’re not going to understand the logic behind using it.

Weird, but true.

If your accountant has a more traditional mindset, be prepared to fight with him every year about your infinite banking system.

You Might Not Have The Time To Manage Your Life Insurance Policy Loans

While you don’t have to actively manage the cash value in your policy, you do have to keep tabs on any loans you take, and be diligent about repaying them. Staying organized is key. Usually, all it takes is a spreadsheet and some basic math to calculate how much to repay those loans with.

But, I get it. Not everyone wants to do that. 

And, if you’re taking multiple loans, and truly being your own “banker”, you’re going to spend a fair amount of time managing policy loans and tracking repayments, optimizing things, and so on. I’m not saying it will take over your life, but there are going to be times when you’re spending an evening (maybe even a Friday night—GASP!) poring over spreadsheets. Just a heads up.

You Might End Up With The Wrong Whole Life Insurance Policy Design

There are basically four different ways an insurance agent can design your policy. The wrong policy design might leave you with a policy you don’t want, or can’t use, or one that causes tax or other problems later on down the road.

Here are a few basic ways to design whole life policies:

All base premium – This is not an infinite banking life insurance policy. This is more like a traditional life insurance policy with low or zero early-year cash value. Life insurance policies with zero cash value in the early years aren’t usually the type of policy design that’s associated with infinite banking. Don’t get me wrong. A traditional whole life policy can work just fine once there’s cash value in there. But it’s not the typical infinite banking design.

A 90/10 design – This is becoming more and more popular and I don’t know why, really. The 90/10 split means 90% of your premium dollars are being shuttled into a term rider or paid-up additions rider, and the remaining 10% of your premium goes to the base premium. I guess newbie policyholders love it because it shows very high early-year cash values, and the “break even” point comes on in years 3-5.

However, long-term cash value performance tends to suffer, as does the ability to put in premium dollars down the road. The other thing I don’t personally like about this approach is there’s entirely too much focus on the illustration and illustrated performance.

Any whole life policy designed for short-term cash value accumulation tends to be the worst long-term performers. Keep that in mind. Unfortunately, these short-term policy designs also tend to be the most common because insurance agents are selling the illustrated rates of the policy, and gearing their marketing to consumers who are accustomed to thinking about investments in the short-term.

You Might End Up With The Wrong Cash Value Life Insurance Policy

There are many different types of permanent life insurance and cash value life insurance on the market that aren’t whole life insurance. In fact, whenever an agent uses terms like “cash value life insurance” or even just “permanent life insurance”, just assume it’s some type of universal life insurance, because it almost certainly is. Those are cue words. All these nondescript life policies imply a UL chassis. They usually won’t come right out and say it. But, most of the time, that’s what it is.

“Permanent life insurance” has become synonymous with universal life insurance or indexed universal life sold by stock life insurers. These permanent life insurance policies are, in fact, a combination of term life insurance and a cash value account. It’s a clever way to imply you’re getting a whole life policy without actually giving you a whole life policy, because they superficially look like whole life insurance.

Your policy’s cash grows tax-deferred. You get tax free withdrawals and loans. On the surface of it, it feels just like a whole life policy. But, there’s no guaranteed growth and the insurer can change the internal costs of the policy as and when they need (or want) to. 

Bottom line is everyone in the industry knows whole life is the gold standard. That’s why everyone likes to pretend every other type of cash value life insurance is whole life insurance. 

And if you can make a permanent life insurance policy sound like whole life, while still technically telling the truth about what you’re offering (the best kind of truth, amirite?), well then… at least 2 out of 3 people will be happy about it— the agent and the insurer.

Your Life Insurance Company Might Discourage You From Using The Infinite Banking Concept

MassMutual, and some other companies don’t really like agents selling infinite banking life insurance policies, are threatening to cancel agent contracts if they do, and are even going so far as to discourage policyholders from utilizing their policies for “infinite banking”.

Now, they can’t prevent you from borrowing money against your policy. They can’t tell you what to do with your policy, or cancel your policy, but they can’t strongly discourage you from using it to its full effect. How? Simple. By delaying policy loan requests, drag out the disbursement, “accidentally” misallocating policy loan repayments, and so on.

Now, not all companies are like this. Some companies welcome the infinite banking concept with open arms, will process your policy loan quickly and efficiently, and won’t create problems for you. But, if you choose the wrong company, you’ll be making it harder on yourself.

Final Thoughts About The Infinite Banking Concept

Is infinite banking legitimate?

Yes. 

Does infinite banking work as advertised?

Essentially, yes. Infinite banking works as advertised.

Are there risks with using an infinite banking insurance policy?

Most definitely.

Infinite banking requires the policyholder to be more financially responsible and aware than your average Boobus Americanus. This is big boy/girl stuff. Not for people playing pretend. I mean that. You cannot be a financially irresponsible person and use the infinite banking strategy. It simply will not work. 

Furthermore, you must have an above-average understanding of life insurance, whole life insurance in particular, and a deeper understanding of how loans and loan amortization works. Plus, you need to have the sticktoitiveness, gumption, and that Rogue Spirit Americans used to be known for. It also helps to have a good head on your shoulders and the ability to be patient.

Unfortunately (or fortunately, depending on who you ask), life insurance products today are sold as commodities, and so few people give it the deep thought and attention required to make it really work for them. These products are not mutual funds or retirement accounts, and (in spite of what some of the marketers/promoters tell you) it’s not a bank account or personal bank. Policy loans are not like traditional loans, and your typical financial advisor will probably advise you against doing this (or anything like this) with your money. In fact, the entire personal finance industry is likely going to mock and ridicule you for even thinking about the infinite banking concept.

In that sense, you’re on your own.

With all these cons of infinite banking, why bother with it? 

Great question.

Maybe you shouldn’t.

Look, I’m not going to sit here and pretend that everyone thinks like me. I know they don’t. Personally, I believe everyone can benefit from implementing infinite banking in some way, shape, or form. But, not everyone is in the right frame of mind right now to implement it. I’d go so far as to argue many folks probably need some serious introspection time to sort out personal hangups they have about money.

Anyway, if you’ve made it this far, and still want to know how to implement infinite banking for yourself and your family, go sign up to my email list and read my exclusive daily emails that I never publish to the blog. When you sign up to my email list, you also get free access to The Monegenix App (where I go into even more detail about life insurance and infinite banking).

Infinite Banking policies are premium hungry.

To make this strategy work well, you kinda-sorta have to commit to substantial premiums for many years (think a decade or longer). But what if you don’t have a lot of extra income at the end of the month? How will you fund your infinite banking policy (assuming this is a top priority for you)? 

Time to get creative.

10 Ways To Save Money For Your Infinite Banking Policy

#1: Pay Off Nagging Debts To Fund Your Infinite Banking Policy

If you have a bunch of niggling little debts sucking up all your monthly income, time to pay off those debts. They’re clearly getting in your way of saving money. Infinite banking, and really, any cash value life insurance policy, requires substantial, ongoing premium payments——especially in the early years of the policy. Without these early premium payments, the policy will collapse on itself.

Think of this like starting a new business. These policies are very capital intensive. The more you’re burdened by debt, the less financial stable you are. Get rid of the debts, and fund your policy.

#2: Use Cash Back Rewards To Fund Your Infinite Banking Policy

I wrote extensively about cash back rewards in my book, The 10-Minute Budget. The short version is, if you can sign up for several credit cards with generous sign-up bonuses, plus cash back rewards, you can easily generate between $1,500 and $10,000 per year in extra cash savings. 

I know I just told you to pay off nagging debt. The credit card strategy can (ironically) help you pay off that debt, but it can also help you kickstart your savings, which can then be put into an infinite banking policy. 

They key to this strategy is to use the credit cards to pay for bills you’re already paying right now. For example, did you know you can pay your taxes using a credit card?

You can.

You can also prepay many utilities with a credit card. There are even special services that allow you to pay your mortgage and rent payments with a credit card, insurance premiums, and other bills that you otherwise cannot pay by credit. You pay be charged a fee for this service, but if the sign-up bonus and cash back rewards are generous, it will easily be worth the fee and net you a tidy sum of money.

For example, it’s not unusual for folks to pay 2-3% in fees just to pay their bills via credit cards, but then turn around an net between 5-7% cash back from their credit cards (when done properly according to the strategies outlined in my book). Add in the sign-up bonuses, which can range from $500 to $1,000 or more and you can easily make many thousands of extra dollars each year.

And, as long as you’re paying your bills with this money, the cash back rewards and sign-up bonuses are tax-free (at the time of this writing).

#3: Use Rebate Sites In Conjunction With Credit Cards To Fund Your Infinite Banking Policy

Take the above credit card strat, and add rebate sites to the mix. Here’s a few examples of what I mean:

• Top Cash Back
• Rakuten
• BeFrugal
• Upside
• Ibotta

These aren’t recommendations. They’re examples. 

Each cash back website is going to cater to a certain demographic, or specialize in certain kinds of shopping or shopping experiences. For example, Upside is great for food, gas, and groceries. There’s some limitations with the app, but if you shop with their partner stores, you can save a lot of money every year. 

If you want to know which cash back websites will be best for you, you’re going to have to use a comparison website. The big picture here is to use your cash back card when shopping these websites, and start stacking rewards. Then, cash those rewards in to either pay off your nagging debts or start funding your infinite banking policy. 

This strategy works best when you’re shopping for stuff you have to buy anyway, like food, gas, and so on.

#4: Liquidate Savings Accounts, Bank CDs, Money Markets, and Other Low-Yielding Assets To Fund Your Infinite Banking Policy

Liquidating your savings account is an easy way to fund an infinite banking policy.

I hate the often excessive focus on “rate of return”, but even if that’s your primary concern (which it shouldn’t be), the rate of return on an infinite banking policy is excellent, so why keep long-term savings in short-term investments and accounts?

It just doesn’t make sense. Ditch lower-yielding accounts, and consider liquidating your other accounts, like money markets, bank CDs, and other low-yielding assets. Put this money into a high cash value infinite banking policy instead. 

If it’s a sizable sum, you won’t be able to stuff it all into a whole life policy in the first year. Instead, you might have to use a premium deposit fund or a special annuity contract to pre-fund your infinite banking policy over several years.

#5: Refinance And Consolidate High Interest Debts To Fund Your Infinite Banking Policy

This option isn’t quite as attractive as it once was due to the sky-high rates we’re currently experiencing, but when rates fall again (and they will, eventually), consider refinancing high-interest debts. 

Even today, though, I think there are some instances where refinancing or consolidating debts to fund your infinite banking policy makes sense. Think 24% APR credit cards. Those can potentially be refinanced into a lower rate using a HELOC or something similar. Even an 8% line of credit is going to be better than paying interest on a credit card.

#6: Increase Income To Fund Your Infinite Banking Policy

I don’t know why so many people overlook this one, but just increasing your income will solve a lot of problems and can paper over a lot of financial mistakes. 

Whether that’s getting a second job, or picking up a side hustle, or starting a small business on the side, more income means more money you have to fund a life insurance policy.

#7: Make A Spending Priority List To Fund Your Infinite Banking Policy

A technique I learned for prioritizing important things in my life involves making a list—three lists, actually. The first list is a list of “essentials” or “must haves”. These are things you can’t live without. 

This list has a tendency to become inflated, which is why you make a second list called “negotiables”. These are things in your life you really like, but don’t absolutely have to have. You could take them or leave them. If you’re being honest with yourself, this list will probably be your longest list.

Next is your “don’t need” list. These are things in your life that you’re better off without. Again, if you’re being honest with yourself, this list will be pretty long. It might include a bunch of stuff that initially seems fun and exciting. Long-term, these are things that undermine your happiness, health, and overall wellbeing. 

I’m sure you know what I mean.

Getting rid of the “dead weight” in your life is a great way to free up both time and money so you can make a new life and start funding your infinite banking policy.

#8: Hunt For Deals To Fund Your Infinite Banking Policy

This takes some creativity.

There are usually several different avenues to get what you want. The easiest, most convenient, most straightforward avenue is also usually the most expensive.

So, be willing to go out of your way to save money on things you either must have and even for some of the things on your “negotiables” list.

#9: Use The 10% Rule To Fund Your Infinite Banking Policy

Before you spend any money on anything (even bills), set aside 10% for yourself. That’s money that will go into your life insurance policy. 

Yes, I realize this is easier said than done. But, it’s simple. It’s probably the simplest way in this list to start saving money.

#10: Invent Your Own Money Saving Ideas To Fund Your Infinite Banking Policy

Years ago, I wrote a book titled, Business Economizer. In that book, I write about an exercise you can do at home to build up your brain power and force yourself to become more creative. 

Creativity is a skill. 

You can learn it, and if you need more money so you can start your infinite banking policy, then I’d argue you need this skill. 

Anyway, this exercise allows you to invent your own money-saving ideas. The more you use this exercise, the more creative money saving ideas you’ll come up with.

Budgeting For Infinite Banking

Nothing happens without a budget. So, build your insurance premium right into your monthly budget, and it’ll become just like any other bill you have to pay.

Here’s some very basic things to think about when budgeting for a new insurance premium:

1. Set a realistic budget for an Infinite Banking Policy. Don’t get yourself in over your head. Most policies can be built around any arbitrary number. If you absolutely need a hard number, go with 10% of your net income.
2. Always fund your budget each month with your W-2 or business income. Funding your budget with cash, as you earn it, is the simplest way to make sure those premiums (and everything else) gets paid for, on time.
3. Revise your budget to cut expenses you don’t need, or that are contradictory or counterproductive to your long-term financial goals.

Use Waiver Of Premium Rider On Your Infinite Banking Policy

Waiver of premium rider is a special rider that waives the premium on your policy when you’re disabled. Before you can take advantage of this rider, you:

1. Must be disabled (duh) and;
2. Must meet the other conditions of the rider. Usually, this includes having a licensed doctor affirm you are disabled and then waiting out the black-out period for the rider before it kicks in (i.e. several months). Some insurance companies also have a waiting period that applies to the use of the rider, meaning you might have to wait a year (or longer) before the rider can be activated or used at all.

But, if you’re disabled, and cannot afford to pay your infinite banking policy premiums, this might be an option for you. 

Another option is obviously disability insurance, but that’s a bit more of a financial commitment.

Use Premium Offset or Alternate Pay Options For Your Infinite Banking Policy When You Have Low Funds

Using premium offset on your infinite banking policy might also help if you’re having trouble paying premiums. Premium offset or “alternate pay option” is when the insurance company uses a combination of your current dividends and paid-up additions to pay the current base premium due. 

By doing this, you’re essentially taking from the left hand and put it in the right hand, but at the same time it’s meeting the required premium payment for the policy. 

This option is sometimes used when a policyholder takes out a policy loan, and cannot afford to keep paying for the monthly premium while the loan is outstanding. There’s only so much money to go around, after all. So, making both the loan payment and the normal premium payment might be out of the question. 

Premium offset solves this problem.

Apply For A Better Rate Class On Your Infinite Banking Policy

If you have a substandard rating on your policy, you might be able to get a better rating. 

Might.

It all depends on the reason for the substandard rating. 

Some ratings are simple to change (in theory). For example, if you were a smoker but quit (for at least a year), many insurance companies will rerate you as a non-smoker. Some insurers want to see 2 years nicotine-free before they’ll re-rate you as a non-smoker. Getting your smoker’s rating removed from your policy will save you a truly ridiculous amount of money, and is an easy win——you’re healthier and you save a buttload of money on premiums.

If you initially got a substandard rating due to “build” (too heavy for your height) and you lost a significant amount of weight, you might qualify for a standard or better rating now. This can save you a substantial amount of money in most cases.

Use A Blended Whole Life Policy For Infinite Banking

A blended whole life policy is where the agent blends term insurance into the base whole life policy. It’s a sort of hybrid whole life policy.

These policies have lower required (guaranteed) premiums, and tend to have higher paid-up additions rider (optional) premiums. With the extra flexibility, you can reduce the premium when needed without losing your policy.

The old school Infinite Banking practitioners never used blended whole life policies. They believed them to be either too risky or unnecessary. Instead, they used a combination of base premium plus paid-up additions. This made the policy more rigid and less flexible. In some cases, it made the policy more stable, too. But, in many other cases, it simply increased the risk of lapse if a policyholder couldn’t afford the higher base premiums.

Start With A Convertible Term Life Policy For Infinite Banking

If you simply can’t afford the higher premiums of whole life insurance, don’t sweat it. Start with a convertible term insurance policy with one of the major mutuals. 

Mutual companies sell convertible term insurance that can later be converted (clue is in the name) to dividend-paying whole life.

Prioritize Your Infinite Banking Policy

Sometimes, it just comes down to prioritizing your Infinite Banking policy over other expenses. You might not be able to afford to do everything you want to do this year. You’ll have to pick and choose what you can (or want to) afford. If spending money is a higher priority for you right now, then Infinite Banking isn’t for you. 

If saving money is a priority, then it’ll be easier to get rid of unnecessary expenses, or expenses that are getting in the way of funding your new policy. By prioritizing your Infinite Banking policy, you’re providing capital for your future, and building real, long-term financial security for yourself and your family.

Get to it.