Infinite Banking: Using Life Insurance as a Source of Liquidity
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Infinite banking involves “overfunding” a cash value life insurance policy and treating it as a line of credit.
Policyholders borrow against their life insurance policies rather than taking out loans from traditional lenders.
Contributing 10% of your income toward the policy is common.
The term “infinite banking” has been making waves on social media, but it’s not a new concept. With this strategy, permanent life insurance policyholders essentially become their own bankers: They take advantage of the cash value growth and borrow against that money.
Infinite banking is promoted as a way to sidestep traditional banks and lenders and create wealth, but it’s more complicated than social media makes it out to be.
What is infinite banking?
Infinite banking involves using permanent coverage, typically whole life insurance, as a personal line of credit. Whole life policies earn cash value at a guaranteed rate over time. Once you’ve accumulated enough, you can begin to borrow against your life insurance policy.
The infinite banking concept encourages people to contribute extra money to their cash value to boost growth and take out loans against the value rather than relying on traditional lenders or dipping into savings accounts to pay for large purchases. It’s touted as a way to lower the amount of interest you pay to financial institutions through traditional loans.
The concept was introduced by an insurance agent, Nelson Nash, in the 1980s and further explained in his 2000 book, "Becoming Your Own Banker: Unlock the Infinite Banking Concept."
How does infinite banking work?
Infinite banking is a strategy, not a type of life insurance. It’s often used with whole life policies, which have cash value components and usually last your entire life.
The cash value in whole life policies grows at a guaranteed rate of return set by the insurer. Participating whole life policies may also pay a dividend. When the policy has earned enough cash value to begin borrowing against, policyholders can contact their life insurance company and request a cash value loan. Because of these features, Nash referred to the cash value within whole life insurance policies as “equity.”
Like most other loans, cash value loans are subject to interest. But they’re unique in that policyholders don’t have to qualify for a loan in the same way they do for traditional loans. Under infinite banking, the life insurance policy is collateral for the loan: You could lose your coverage if you borrow too much and there’s not enough money to cover the cost of your insurance. You are borrowing your own money and paying loan interest on the amount borrowed.
Policyholders don’t have to pay back the money from cash value loans. However, not repaying the loan can have consequences — for instance, it might reduce the amount of money the life insurance beneficiaries get when the policyholder dies.
While cash value life insurance has perks, it also has limitations. Using a whole life policy as a vehicle for infinite banking can be risky, especially if you don’t monitor your cash value carefully.
Pros of infinite banking
Buying life insurance as an investment and a vehicle for infinite banking has some advantages in specific situations.
Permanent life insurance has tax benefits
The cash value within a permanent life insurance policy generally grows tax-free, and loans against that cash value aren’t taxed. Life insurance payouts typically aren’t taxable, either.
Whole life insurance offers guaranteed returns
Unlike with some other permanent policies, the cash value growth of whole life policies isn’t tied to the market — instead, the returns are fixed at a rate set by the insurer. If your policy is with a mutual life insurer, you might also earn annual dividends based on the company’s financial performance.
Cash value policies can make it easier to get a loan
Personal loans offered by traditional lenders tend to involve applications, credit checks and set repayment dates. In comparison, once whole life policies have built up sufficient cash value, policyholders are entitled to borrow against it without offering an explanation or meeting credit score requirements, because they're borrowing their own money. This liquidity can improve cash flow and allow policyholders to secure the funds they need for unexpected expenses, like medical bills.
There’s flexibility with repayments
You don’t need to pay back a cash value loan by a specific date — or at all (if you’re not concerned about maintaining your life insurance coverage). This might be appealing if you want to repay a loan at your own pace. Keep in mind that you will be paying interest on the loan, and this interest is not tax-deductible.
Cons of infinite banking
Banking on yourself can be a pricey and complex way to manage your wealth. Factor in these downsides before diving in.
Whole life insurance is expensive
The cost of whole life insurance is high because of the cash value component as well as the fact it typically offers lifelong coverage.
A healthy, nonsmoking 40-year-old man can expect to pay $7,440 per year for a $500,000 whole life policy, according to Covr Financial Technologies. A woman might pay slightly less: $6,512. If you commit to infinite banking, you would need to pay high premiums for the long term. To compare, a 40-year-old man in excellent health would pay an average of $334 per year for a 20-year, $500,000 term life insurance policy. A woman could pay $282 — significantly less than the cost of whole life insurance.
Term life insurance is sufficient for most people. It provides coverage for a set period of time, like 10, 15 or 20 years, and pays out if you die before your policy expires.
» MORE: Average life insurance rates
Cash value takes a long time to build
Because cash value takes a long time to grow, it typically takes 10 years or more to build up the amount you need to take out a loan. Unless you have a lot of discretionary funds to pour into your policy’s cash value, infinite banking isn’t a quick way to create wealth. The primary purpose of whole life insurance is to leave a death benefit to your beneficiaries, not build an investment.
Overfunding a policy can be costly
You’ll need to contribute a hefty sum of money to your policy’s cash value for infinite banking to work. You do this by overfunding your policy — paying more than your required premiums. It’s common to allocate around 10% of your income to the policy every month, which may not be within your budget.
Infinite banking is complicated
Using life insurance as an investment and source of liquidity is nuanced. If you want to ensure you maintain your life insurance coverage, you’ll need to be disciplined and carefully monitor any fluctuations in your policy’s cash value. It’s important to speak to a fee-based life insurance advisor to learn whether infinite banking suits your goals, needs and budget.
Alternatives to infinite banking
“Banking on yourself” isn’t the best path for everyone. If you need life insurance, consider these tips:
Look into term life insurance. These policies are designed to cover you during the years when you have the most financial obligations — such as a mortgage, student loans or young children to care for. Compare life insurance quotes from a handful of companies to lock in the lowest possible price.
Contribute money to other tax-advantaged accounts. If you decide to buy term life insurance instead of whole life, think about investing the difference you’d be paying in premiums to your 401(k) or Roth IRA. These accounts can help to fund your retirement while allowing you to maintain life insurance coverage for as long as you and your family need it.
Funnel money into an emergency fund. An emergency fund should be a priority over following an infinite banking strategy. Aim to open a high-yield savings account, and build the account to the point where it covers three months of living expenses. The 50/30/20 budget may be a good starting point.
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