Infinite banking offers a way for ordinary people to take charge of their finances and grow their wealth. Popularized by R. Nelson Nash in his book “Becoming Your Own Banker,” this unique concept encourages you to become your own financial institution.
Borrowing from a bank means paying interest. Apart from paying back the original sum you borrowed (the principal), an extra amount (the interest) will leave your bank account every month to fill the bank's coffers.
Imagine you could just put those interest payments back in your own pocket. Now imagine if those interest payments and the original principal all continued to compound for you and build your wealth. Sound too good to be true? That is the power of infinite banking… and it's available to the average person!
This post will discuss how infinite banking works. We'll weigh up the pros and cons and answer some frequently asked questions. 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?
It goes by many names (the ‘perpetual wealth code', ‘cashflow banking', or the ‘money multiplier), but infinite banking involves borrowing against yourself using a participating whole life insurance policy. (You don't have to have a whole life policy, but it's the best one to use).
Whole life insurance has a cash surrender value. This is the amount of money the insurance company transfers to you if you 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. The fact that your cash value grows continually over time gives it a compounding effect. Combine this with the guaranteed interest rate, and you've got a wealth-building vehicle.
Not a bad start, right? But how do you ‘become your own bank'?
This is the fun part. Insurance companies let you use your policy as collateral and borrow from your cash value. This means that you're borrowing your own money from yourself! The craziest part is that your cash value doesn't decrease when you do this. 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. This means you'll have a vehicle to grow your money tax-free at 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 research exactly how it will affect you. This section will briefly overview some of the advantages and disadvantages of infinite banking.
Infinite banking enables uninterrupted compounding. Imagine if you were to pay in cash every few years to buy a new car or make real estate investments. You can make purchases like cars and houses with infinite banking, but leave your cash value to continue growing. Over the long run, this makes a big difference to your net worth.
Another pro of infinite banking is cash flow improvement. If you lose your job, for instance, you can finance some things with your whole life insurance policy rather than going to the bank. This provides you with a second source of income.
With infinite banking, you can also 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. Another benefit is that these self-issued loans are not considered regular income, so they are tax-free. Talk about the benefits of being your own banker!
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. You also have guaranteed protections when you participate in a whole life insurance policy. Of course, nothing is risk-free, but infinite banking can be extremely low-risk if done right.
Finally, infinite banking is an uncorrelated asset. Your insurance policy earns its guaranteed interest rates + dividends, which do not correlate with the stock market. So you need not fear what a repeat of 2008 or 2000 could do to your finances! If the stock market crashes, your little “bank” won't be affected at all.
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 starting out, you won't have a very high cash value that you can borrow from. This means infinite banking won't help much if you require money immediately. It's a long-term strategy.
Another downside is that it might be unaffordable 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 many people, that amount of money going out of their pockets every year isn't sustainable. Before diving into infinite banking, be sure to do your own research beyond what life insurance agents tell you.
The final big con to infinite banking is the opportunity cost. 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% yearly (mutual funds historically don't beat the market). Suppose you're looking to build massive amounts of wealth through investing. In that case, you're losing 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. Though you should do extra research before diving in, here are answers to some frequently asked questions about infinite banking.
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 one month into your insurance policy.
How Do I Pay the Loan Back?
Since the money is technically yours, there is no repayment structure. You determine your own loan repayment schedule. You can pay the money back however you like and at whatever pace. (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. Many individuals 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. Some whole life insurance policies 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 regarding which policies to choose if you're to take full advantage of infinite banking.
The Infinite Banking Concept Conclusion
Infinite banking concept is a great 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 cash flow 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've invested in an asset that is uncorrelated with the stock market
Some 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. If done correctly, infinite banking could potentially help you achieve financial freedom sooner and build generational wealth for your family.