Let's first understand why we put our money into banks in the first place. We utilize banks to safely store our money to be able to have access to it later so that we can pay our bills and make purchases.
Banks are a safe place to store money. We have quick access to retrieve our money when we need it but there is little to no growth of our money as it sits in our account. On a interest bearing account, most are averaging less than a percent of interest.
That's how the banks make tremendous amounts of money! The bank takes in your daily deposits and give us, for this moment let us say that we are getting 2% interest on our account, but when they lend out our deposits to others or even ourselves for a loan, they lend us the money at an typical interest rate of 6% and higher. The banks simply make money off of the deposits we give them to safely store our money.
Realizing that putting our money in banks provides us with very little interest on our money, we may think of investments as the key to growing our money. Investments are surely a better option for potential growth of our money but the reality is that it's purely potential for growth. It's not guaranteed because as much potential for upside growth is present, there is a equal amount of potential for downside loss. So that means that unlike banks, investments are not safe places to place money and once your money is in an investment, you typically don't have quick access to that money right away if you needed to pull some money out.
So we find ourselves in a place where we need a place that is safe like a bank but provides, not potential growth like an investment, but guaranteed growth. At the same time we need the money to be easily accessible like a bank. Would it hurt if the growth on your money and the disbursement of your money were done tax free?
Infinite banking is a personal finance strategy that leverages a whole life policy as a “personal bank”. This includes taking loans against the policy and growing cash flow through the insurance’s dividends.
The concept of Infinite Banking was created by Nelson Nash in the 1980s. Nash was a finance expert and follower of the Austrian school of economics, which advocates that the value of goods aren’t explicitly the result of traditional economic structures like supply and demand. Rather, individuals value money and goods differently based on their economic status and needs. Out of this thought, Nash developed the idea of individuals becoming their own bankers to better achieve their own unique, individual financial goals.
One of the pitfalls of traditional banking, according to Nash, was high-interest rates on loans. Too many people, himself included, got into financial trouble due to reliance on banking institutions. So long as banks set the interest rates and loan terms, individuals didn’t have control over their own wealth.
Becoming your own banker, Nash determined, would put you in control over your financial future. But in order for Infinite Banking to work, you need your own bank.
Nash determined that the best financial tool for Infinite Banking is whole life insurance.
Infinite Banking is NOT whole life insurance. But the Infinite Banking concept works best when the banker—you—utilizes properly structured whole life insurance as your bank.
Using whole life insurance as a financial tool for building wealth wasn’t a new concept in the 1980s. Business moguls like John Rockefeller built fortunes using whole life insurance and used their insurance policies to pass on wealth that has lasted for generations. Large companies hold millions of dollars in whole life insurance to help fund business expenses and earn favorable tax advantages. Even banks use whole life insurance as Tier 1 assets.
In fact, whole life insurance was even taught as a college course at the Wharton School in Pennsylvania. The curriculum? How to use the cash value of insurance policies to fund business expenses, entrepreneurial ventures, investment opportunities, get out of debt, purchase real estate, and more.
The core of the infinite banking concept is a participating whole life insurance policy. Once such a policy is in place, it is possible to lend yourself money using the cash value of the whole life insurance policy as collateral. That avoids paying interest to lending institutions since a policyholder has his/her own mini bank. It allows very fast access to extra funds, which are just an insurance company call away.
Participating life insurance means that a policy pays dividends, which allow contribution towards the cash value of the policy or to pay a part of insurance premiums.
If you use a participating whole life insurance policy for Infinite Banking, your cash value increases every time the insurance company pays dividends. It also increases when you pay policy premiums and earns a guaranteed interest rate.
Essentially your “bank” consists of a portion of premiums paid (money from you) + guaranteed interest earned + potential dividends (money from your insurance company).
Instead of storing your savings in a traditional bank account with minimal returns, you save inside of your dividend-paying whole life insurance policy, where it grows tax-free with a higher rate of return.
You can access the cash value of your whole life insurance policy at any time, for any reason, including real estate purchases, tuition, other investment opportunities, business capital, emergency expenses… you name it. But to take full advantage of the Infinite Banking concept, it’s best to use your cash value in the form of a policy loan rather than a withdrawal.
When you utilize the policy loan feature of your whole life insurance policy, your cash value continues to grow in spite of the loan. Every dollar you borrow still earns interest and potential dividends. When you pay back your policy loan, you recapture the interest—not a bank. This is the backbone of the Infinite Banking concept; your wealth continues to grow, even as you borrow against it. You are basically borrowing from yourself.
Additionally, policy loans are tax-free. You can use the interest and dividends you’ve earned without paying taxes on that money.
In terms of paying back your policy loans, you function as your own banker and get to decide the payment schedule. Any unpaid loans will be deducted from your death benefit.
Infinite Banking is not a rapid money making scheme. Infinite Banking in its truest form is control over your money and the elimination of unnecessary money leaks from your own personal economy, so that you can utilize your money to grow and increase your assets.
Infinite Banking requires you to take responsibility for your own financial future, and for the goal-oriented individual it can be one of the best financial tools you’ll ever find.
This concept offers a range of potential benefits including:
Becoming your own banker means you can:
Each time you loan your money out to either yourself, your family, your business, or whoever, you are charging interest. As you recoup the money with interest, you are adding more money into your bank (policy) than you started with. The result is that over your lifetime you have amassed wealth beyond what you ever believed was possible.
And don’t forget about the death benefit
The life insurance death benefit is not the main focus when implementing the concept of infinite banking but it does provide a leveraged death benefit payout in the early years should you die prematurely.
Having a lump sum death benefit provides peace of mind knowing that your loved ones are taken care of if you die young.
For those that choose to fund a 401k plan or IRA, there is no death benefit and there is a 10% penalty for taking out money prior to 59 and a half years old. A beneficiary family gets 401k or IRA as is, minus any income tax owed, which is taxed as ordinary income (the highest taxed type of income). In contrast, with life insurance, the death benefit is tax free and you can access your cash value at anytime with out penalty due to age.
Creditor Protection For Cash Value Life Insurance
There are many states that provide creditor protection for life insurance. So, if you are faced with some financial strife, your cash value may be sheltered from creditors. Additionally, if you are sued, your money in your policy may be protected from a judgment.
Unlike other financial products that can be initiated with a simple point & click transaction, buying an optimally-designed Whole Life policy for infinite banking is a much more involved process. The extra time needed to acquire the product may be a good thing because properly executing the infinite banking strategy often requires a major shift in adapting your mindset and financial behaviors.
Here at Family For Life Insurance, we specialize in helping educate and properly structure your Infinite Banking policy specifically for your needs and goals. Contact us today for your free consultation.