The infinite banking concept describes a way for everyday individuals to take charge of their finances and grow their wealth. Popularized by R. Nelson Nash in his book “Becoming Your Own Banker”, this concept essentially lets you become your own financial institution.
When you borrow money from a traditional bank, they will charge you interest on it. Every month, some money will leave your bank account to pay for that purchase (on top of the purchase price) and you permanently lose that capital
Now imagine if you could somehow find a way to put those interest payments back in your pocket. Better yet, imagine if those interest payments and original purchase price all continued to compound FOR you and build your wealth. That is the power of infinite banking… and it’s available to the average person!
This post will discuss how exactly infinite banking works, some pros and cons of infinite banking, and answer some frequently asked questions about it. Ready to improve the cash flow in your life while still building a nest egg to leave behind? Let’s dive right in.
How Does Infinite Banking Work?
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. (You don’t need a whole life policy but it’s the best vehicle to use).
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.
“Ok that’s great… but how does this let me become my own bank.” Hold your horses because this is where it gets really interesting. 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. This means you’ll have a vehicle where you can grow your money tax-free with a higher rate of return than traditional banks.
Pros and Cons of Infinite Banking
As with all things in life, infinite banking has its pros and cons. Before putting money anywhere it’s important to do research about exactly how it will affect you. This section will provide a brief overview of some of the advantages and disadvantages of infinite banking.
One of the biggest pros to the infinite banking concept is that your compounding goes uninterrupted. Imagine if you were to pay in cash every few years to buy a new car or make real estate investments. Because of this, even if you DO have a great investment vehicle, compounding gets interrupted continually… With infinite banking, you can make purchases like cars and houses, but leave your compounding uninterrupted. Over the long run, this makes a big difference in your net worth.
Another pro of infinite banking is cash flow improvement. IF something were to happen like you lost your job, you can finance certain things with your whole life insurance policy rather than go to the bank. This provides you with almost a second source of income.
With infinite banking, you also get to pay whatever rates you want on your money since it’s yours. You determine how long it will take for you to pay back your loan and the payment schedule. An added benefit is that the loans you take out are not treated as regular income so they are tax-free… talk about the benefits of being your own banker!
When you participate in a whole life insurance policy, you also have guaranteed protections. Of course, nothing is risk-free but infinite banking can be extremely low-risk if done right. Your death benefit is guaranteed which means that you can borrow money and use it while you’re alive while still protecting your loved ones after you pass away.
Finally, infinite banking is an uncorrelated asset. Your insurance policy earns its guaranteed interest rates + dividends which do NOT correlate with the stock market. For example, if the stock market crashes, your mini “bank” won’t be affected by it…. No more fear of 2008 or 2000 happening to your finances!
Though it may sound magical, the infinite banking concept is not for everyone. 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. This means that infinite banking isn’t for you if you’re in need of money right now. It’s for people who want to build long-term wealth and bolster their personal finance.
Another con of infinite banking is that it might not be affordable for some families. A financial advisor would recommend that 10% of your yearly income go into whole life insurance policies if you’re to take advantage of infinite banking. For a lot of people, that amount of money going out of their pockets every year isn’t sustainable. Be sure to do your own research beyond what life insurance agents tell you before diving into infinite banking.
The final big con to infinite banking is the opportunity cost. Yes, infinite banking is an uncorrelated asset but that also means that you might miss out on some gains from other investment vehicles. Historically the S&P500 has returned around 8% per year.
With a whole life insurance policy, you’re looking at around 3-6% a year (mutual funds historically don’t beat the market). If you’re looking to build massive amounts of wealth through investing, you’re going to lose out a bit with infinite banking and are better off looking at other financial products/investment opportunities.
Questions About Infinite Banking
We’ve covered a lot in this post, but you may still have questions about the infinite banking system. Though you should definitely do extra research before diving in, here are some frequently asked questions about infinite banking answered.
How Do I Take Out Policy Loans?
You can take out a loan from yourself by calling your insurance company and asking for a check to be issued. Though you may not have a lot of cash value built up, some sources report that you can take out a loan starting as early as 1 month into your insurance policy.
How Do I Pay the Loan Back?
Because the money is “technically” yours, there is no repayment structure. You can pay the money back however you like and at whatever pace you like. You determine your own loan repayment schedule. (And you can write off the interest if you happen to loan to your own business).
What Happens If I Die With a Loan?
If you die with a loan, your beneficiaries will receive the full value of the insurance policy minus the amount of money that you owe. For example, if the insurance policy is worth $1 million, but you owe $100,000 to yourself, when you die, your beneficiaries will receive $900,000. There are lots of individuals who actually take out loans from themselves knowing that they won’t pay it back (and instead want to enjoy the money while they are alive).
Do I Have to Pay For the Whole Life Policy For My Whole Life?
No you do not. There are some whole life insurance policies that only require you to pay premiums for 10-20 years. Even if you don’t get one of these, once you build your cash value high enough, you can use your dividends to pay for your premiums. As soon as your dividends exceed your premium, the life insurance policy is “free” and you don’t need to pay for it.
Is There a Weakness or Vulnerability to This System?
The one weakness of the infinite banking concept is that it requires a lot of long-term discipline to execute. Infinite banking is not a get-rich-quick scheme and takes time for users to get the most out of it. Also, you do need to know what you’re doing in regards to which policies to choose and execution if you’re to take full advantage of infinite banking.
The Infinite Banking Concept Conclusion
The infinite banking concept is the best way to build long-term wealth while maintaining financial liquidity. It involves making your whole life insurance policy serve a banking function and helps you become your own banker. As a quick recap, the pros of infinite banking are:
- It allows for your wealth to compound uninterrupted
- Your cashflow improves significantly
- You get to decide what rates you want to pay on your loans
- Your money has guaranteed protections sitting with the insurance company
- You’re invested in an asset which is uncorrelated with the stock market
Some of its cons are:
- It takes time to build up a sufficient cash value (or nest egg) before you can “bank with yourself”
- Some people may not be able to afford whole life insurance premiums
- There is an opportunity cost as some other assets could outperform the guaranteed interest + dividends of your policy
It’s always best to do your own research before allocating any money. That being said, if done right, infinite banking could help you achieve financial freedom sooner and also build generational wealth for your family.