Called many different names including the perpetual wealth code, cashflow banking, and the money multiplier, infinite banking involves borrowing against yourself using a participating whole life insurance policy.
To go more in-depth, whole life insurance has a cash surrender value AKA a cash value. This value is the amount of money that the insurance company makes available to you if you choose to cancel the policy. With participating whole life insurance policies, your cash value goes up every time the company pays dividends.
Even though it doesn’t sound like a big deal, these dividends add up over time. Combine this with the guaranteed interest rate and you’ve got a wealth-building vehicle. The fact that your cash value grows continually over time gives it a compounding effect.
Insurance companies let you use your policy as collateral and borrow money from your cash value. This means that you’re borrowing your own money from yourself! The craziest part is that when you do this, your cash value doesn’t take a hit at all. So your money continues to compound uninterrupted!
Your bank basically consists of the premium payments by you + the dividends paid by the life insurance company + the guaranteed interest rate. As a policy owner, you can borrow against yourself and become your very own bank.
One of the main cons of infinite banking is that it takes time to build up a sufficient nest egg that you can borrow from. If you’re just starting out, you won’t have a very high cash value that you can borrow from.