The “Infinite Banking” hashtag has been viewed over 100 million times on Tik Tok and counting. Internet users have taken it upon themselves to learn more about this concept rather than relying on Insurance agents and brokers on TikTok. Unsurprisingly, Google Trends shows that interest in the term “infinite banking concept” has grown by 200%.
In the 1980s, Nelson Nash came up with the idea of infinite banking. Known for his expertise in finance, Nash was also an adherent of the Austrian school of economics, which argues that factors other than supply and demand affect the value of goods. People instead give different amounts of value to goods and money based on their socioeconomic status, needs, and resources. Nash's idea of people acting as their bankers to help them meet their specific financial objectives grew out of this line of thinking.
Infinite Banking Basics
Infinite banking is a way to manage your own money by using a permanent life insurance policy as a “personal bank” by borrowing against the policy and collecting additional dividends. It advocates privatized banking that channels that money back to the individual.
The St. Louis Federal Reserve reports that 9.58 percent of Americans' discretionary income goes toward monthly debt payments. Similarly, according to credit bureau Experian, the average consumer had $96,371 in debt in 2021, up more than $3,000 from 2020.
As the Fed tries to stop soaring inflation, borrowing money is getting more complex and expensive. So, people may be attracted to the “infinite banking” concept, which lets them build up cash value in a well-structured whole life insurance policy. Then, use that value as collateral for loans to pay for anything from big purchases to unexpected medical bills to good investment opportunities. Infinite banking provides these three basic things:
Life-long life insurance with a fixed monthly cost where, with careful planning, the death benefit and the cash value both rise annually
The capacity to borrow money affordably, regardless of age, thanks to good gains that offset interest costs and are repaid by the (increasing) death benefit amount.
Cash value grows slowly at first and more quickly as you get older to supplement your retirement.
Advantages of Infinite Banking
Reroutes the money you would have spent on interest to a third party to an entity you manage instead.
Creates your own source of funding for personal and business expenditures.
Develops a secure financial base by setting aside money in a fixed, guaranteed account.
Gives you full say over your financial situation. Your funds are available for withdrawal anytime and as often as you like.
It enables you to increase your assets and long-term profits by making multiple uses of a single dollar saved without incurring an opportunity cost or sacrificing potential earnings.
Allows you to increase your retirement income without incurring any additional tax liability.
It's Not All Hunky-Dory
Even with access to infinite banking, the average person will be unable to use it as a silver bullet to wealth. Due to the high cost, you'll need to keep making payments on your life insurance policy. Also, you will not be able to access funds until you have saved up a certain minimum amount. It's a strategy only the very wealthy can afford to pursue.
While it pays off in the long run, it requires a hefty outlay initially. Like all cash-value insurance policies, the return on your cash value will be negative for some time. Paid-up additions are the only option for reaching profitability and growing your cash value in less time than is required.
Regarding this, John Madison, CPA, MSPFP, a personal financial counselor at Dayspring Financial Ministry, says, “Generally, I've never seen a scenario where the administrative costs, fees, and cost of insurance within a whole life policy make using one a proper path to follow (except in a few narrow situations). Plus, such a policy takes a lot of contributions to build up sufficient cash value for meaningful uses elsewhere, and typically high ongoing premiums, making it an impractical vehicle for most people.”
Even though you receive a slightly higher interest rate on your cash after a few years and possibly on some assets, your money is still denominated in dollars and subject to inflation. It is invested in the insurance company's general fund, which invests primarily in bonds such as U.S. Treasury bonds; periods of high inflation will undermine their returns.
Additionally, it is essential to consider wash loans. The interest rate on a non-direct recognition loan, where dividends are paid on borrowed funds, is identical to the dividend rate on the policy. Therefore, the interest you pay on loan is entirely offset by the dividend you receive. The procedure is comparable to withdrawing funds from a bank account. Not only are there no penalties for withdrawing funds, but there is also no interest accrued on those funds.
Michael Ashley Schulman, founding partner and chief investment officer at Running Point Capital Advisors, admits that infinite banking has yet to become mainstream because of some shortcomings and complexities that individuals would face trying to do infinite banking on their own.
He points out that, unlike many financial products or services that are easy to understand, set up, and run (like a 401K) or that can be managed by a financial fiduciary (like an investment account), setting up, optimizing, and maintaining infinite banking requires solid financial self-discipline. Schulman also says that one is limited by the investment choices and fees provided by the whole life insurance policy.
Therefore, one's investment might not have the opportunity to grow as well as it would in a less fee-intensive account.
Can Consumers Be Successful With Infinite Banking?
For infinite banking to be successful, one must have both a high-quality permanent life insurance policy and a comprehensive long-term financial strategy for the foreseeable future. Don't wait until you need the money to start saving, even if you don't think you'll need the loan for a while. The cost of buying whole life insurance is less when you're young. You can save more money for future expenses like a down payment on a home or tuition for a child's college if you start paying into your policy early.