Infinite banking is a concept created by Nelson Nash where you “Become Your Own Banker” using a properly designed dividend paying whole life insurance policy focused on cash value growth and accumulation.
The basic premise of the Infinite Banking Concept is the whole life insurance policy acts as your own personal bank. And for any large purchases or investments, you use the cash value in your policy as a way to fund your investment or purchase.
You then pay yourself back, i.e. your “Bank,” by putting money aside to go towards your life insurance policy, based on a payback schedule that you create.
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Ideally, you want to pay back the money from your policy that you either withdrew or borrowed against, with interest.
An Infinite Banking Example
For example, if you borrowed $25,000 from your policy to finance a new car purchase, you would then decide on a repayment plan. Perhaps you decide to pay yourself back over five years, at a 5% interest rate.
So your payment would be $472 a month. Over the 5 years your total payments would be $28,307. You have now recaptured your own interest, but as the bank, of $3,307 over the 5 years.
But here is the kicker.
Not only did you capture the interest, but your cash value in your policy is still growing via compound interest simultaneously. So, you are essentially making your money work for you in two places at once.
Nelson Nash wrote his book many years ago, with subsequent editions. The book, Becoming Your Own Banker: Unlock the Infinite Banking Concept , is now in it’s 6th Edition.
Whole Life vs Term Life
There are some similarities and many difference when you consider term life vs whole life insurance.
The best vehicle for implementing infinite banking is a properly designed dividend paying whole life insurance policy that focuses on cash value growth versus death benefit protection.
Whole life insurance lasts your entire life, hence the name “whole life.”
In contrast, term insurance lasts for a period of time, i.e. “the term” of the policy. Once term life insurance ends, the coverage stops. It usually can be renewed annually, but at increasing premiums.
Term life is a great option when you simply need coverage to pay off debts or to replace lost income.
However, it is not always the wisest choice to follow the popular mantra of “Buy term and invest the rest” spouted by many of today’s financial entertainers.
Infinite Banking Pros
To list the many benefits of infinite banking would be to list many of the benefits of whole life insurance.
However, what most infinite banking reviews fail to do is list the benefits of infinite banking beyond whole life.
So, our goal here will be to do both.
1. Guarantees
The primary reason for using whole life insurance to fund your “bank” is because of the guarantees it offers.
Whole life insurance offers 3 primary benefits in the form of guarantees.
The first is a guaranteed death benefit. As long as you make your premium payments, the insurance company guarantees that your death benefit will be paid.
The second is guaranteed cash value growth. Once again, as long as you pay your premium, the insurer guarantees a certain amount of cash value growth.
The third guarantee is a fixed premium payment. The insurer locks in your premium payment for the life of the policy. This is great because you don’t have to worry about your premium increasing as you age.
2. Tax Benefits
Life insurance enjoys some great tax benefits.
The most known tax benefit of life insurance is the death benefit is not taxed to the beneficiary. In rare circumstances the death benefit may be taxed against the deceased’s estate, but the beneficiary receives the death benefit payout income tax free.
Further, cash value growth in the policy is tax deferred. You can withdraw up to the basis in the policy with no tax ramifications.
You can also borrow against the cash value and the life insurance loan is not taxed.
Also, dividend received from the insurance company are considered a return of premium, and are similarly not taxable.
3. Compound Interest
The cash value in your policy grows with true compaound interest. What we mean by “true” is that the cash value grows without any interruption.
As mentioned above, your cash value growth is tax deferred, so long as you do not withdraw above your basis, you will not be taxed on any gains.
Further, even when you borrow against the cash value in your policy, the cash value continues to grow in your policy.
As an example of this, if you borrow $50,000, you are taking a loan from the insurance company. The company is using your cash value as collateral.
But the cash value still remains in your policy, and still earns interest, plus any dividends.
So, even when you are using your cash value elsewhere, compound interest is till doing its magic in your policy.
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4. Leverage
Life insurance offers a unique characteristic that most assets do not offer, a death benefit.
And the initial death benefit is often many times greater than your premium payment.
For example, if you get a policy with a $150,000 death benefit, your premium might be $12,000 a year or $1,000 a month.
Now, if you die after making only 1 payment into your policy, the insurance company will pay out a $150,000 death benefit to your beneficiary, or 150X more that you paid into the policy.
Overtime the leverage benefit will diminish, but that means you are still alive, so that in itself is a big win.
5. Asset Protection
Life insurance enjoys some great asset protection laws. Depending on what state you live in, life insurance may enjoy both creditor protection and bankruptcy protection.
Now, this benefit largely depends on your state. Some states offer much better creditor protection than others.
As an example, Florida offers an unlimited amount of protection for your life insurance policy’s cash value. In contrast, California only provides for protection of up to $15,650 worth of cash value.
You can go to the following to view a list of life insurance creditor protection by State.
6. Living Benefits
Life insurance offers living benefits. A living benefit is something beneficial for you in life, as opposed to simply a death benefit upon your passing.
Some notable living benefits offered with life insurance include an accelerated death benefit and chronic illness rider.
The accelerated death benefit allows the insured to access up to a specified amount of the death benefit if the insured is diagnosed as terminally ill and given a one or two year window to live.
Likewise, the chronic illness rider pays out a percentage of the death benefit to the insured if they suffer a qualifying chronic illness.
7. Mindset
Probably the greatest benefit of infinite banking is the accompanying mindset it brings.
Infinite banking has supplied countless people with an entirely new vocabulary, such as cash flow, velocity of money, and recapturing debt.
Life insurance is a valuable asset when used in conjunction with the infinite banking concept. It provides empowerment for anyone looking for a way to do things different than the status quo.
Infinite Banking Cons
1. Nash’s book is not the easiest read.
Nash’s book is a bit dated. The concepts he uses in his book are tough to follow in today’s numbers.
His writing style can be difficult to follow. He tells a lot of stories that loses a lot of people’s attention.
His book may be confusing and hard to follow for some.
The result is many dismiss infinite banking as a sales tactic from an insurance salesman, or worse yet, as a scam.
This is not true, of course, as we have laid out the many benefits of infinite banking above. But it is a definite drawback to the concept for some.
2. Requires Discipline
Practicing infinite banking requires discipline. You must fund your bank, which requires years of planning and patience.
Further, you must pay your bank back when you take out a loan against the cash value in your policy.
3. Must Qualify
Life insurance is not something anyone can simply go out and buy. It must be qualified for.
A potential work around some people take that can’t qualify for life insurance themselves is to get a policy on a loved one, such as a spouse.
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