What is infinite banking?

The infinite banking concept is designed around a whole life insurance policy that experiences a guaranteed rate of growth, plus potential dividends as the insured makes their premium payments.

The policyholder can borrow from the “cash value” that their whole life insurance policy has accrued and enter into a private contract with their insurance company that will allow them to take out a policy loan. The cash value is able to grow through various investments in stocks bonds or mutual funds. If you decide to pay back the policy loan, it is then repaid back to the policy, avoiding many of the fees, checks and taxes of traditional loans.

Note that if you overborrow, you may lose coverage when there isn’t enough money to pay for the full amount of your premium. Additionally, not repaying the loan amount, which is allowed, may reduce the beneficiary’s payout when the policyholder dies. Because of this, infinite banking requires close monitoring of cash value to offset the inherent risk of a life insurance policy lapsing.

Infinite banking can be a useful financial strategy for people looking to build wealth and reduce the amount of money spent on third-party fees and taxes. Here are some benefits of the strategy.

Cash value can be used as a self-loan

Compared to traditional loans that typically come with applications and other requirements, borrowing money from the cash value of your policy has far fewer hurdles. And repayment can be set up with more flexibility than with a traditional loan agreement. This can be advantageous when it comes to unexpected expenses.

Tax advantages

Infinite banking also has tax benefits. Policy loans are traditionally tax-free. On top of this, whole life insurance policies enjoy tax-free interest growth. Additionally, the death benefit is granted to your beneficiary tax-free and is often exempt from estate taxes, explains CB Insights.

Asset protection

The policyholder will need to enter into a private contract between them and their insurance company. The privacy of that agreement often comes with benefits for the policyholder such as protection from creditors, judgements, search and seizures. Plus, this won’t impact your credit score.

Cash value loans can be easier to obtain

Traditional loans often entail credit checks and set payment schedules. You can borrow without explanations or credit checks and interest rates are generally lower than a traditional loan, allowing you to pay back at your own pace.

Non-correlated assets

A non-correlated asset is an asset not tied to the stock market, says Gridline. Cash value policies are non-correlated assets, which means you don’t have to worry about the unwieldy fluctuations of the stock market. Note that non-correlated policies as tied specifically to whole life or universal life policies, as opposed to variable or index life policies.

Though infinite banking can be a useful strategy for building wealth, it’s not necessarily for everyone. Here are some things to consider when weighing if the infinite banking concept is right for you.

Qualifying for the right whole life policy

Not all whole life policies are the same. To make the most use of the infinite banking concept, you should look for a policy that can help contribute to the cash value of the policy or help pay your premiums.

For the strategy to work, you must qualify for an appropriate insurance plan. If not, the strategy may not work for your circumstances, explains the CFI.

Cost of funding the policy

Whole life insurance policies are often more expensive than term life insurance. It requires the individual to be financially responsible enough to be their own banker. Make sure you can afford these higher premiums because if you fail to pay your premiums your policy can lapse. This strategy may be better for those who are younger and healthier that can meet the financial obligations over a long period of time.

Misinformation and confusion

The infinite banking concept can be confusing at first. Because of this, there’s more misunderstandings about how this financial strategy works and when it’s beneficial for individuals. That’s why it’s important to do your research and double check your findings with an insurance professional, or a qualified tax or legal advisor.

It takes time

A whole life insurance policy’s cash value may not build for the first couple years, according to CNBC – and building high cash value may take decades. The reason is that your premium will initially go toward administrative costs and fees before you even begin building cash value.

Complications if you don’t pay back the loan

Remember, if you don’t pay back your loan, your policy can lapse. And even if it doesn’t lapse, whatever you don’t pay back may be deducted from the payout for the death benefit. While infinite banking has many advantages, it’s important to stay on top of payments if you decide to use it.

You might be wondering where to get started with infinite banking. Here are some recommendations on where you can begin.

Do your research

Research is vital in familiarizing yourself with the general concept of infinite banking. Local laws may change the way infinite banking works with your policy. The specific insurance company and policy type may also have an impact on the specifics of your contract.

Understanding the nuances will allow you to make an informed decision about how to move forward with your personal infinite banking strategy. It is important that you first determine if this strategy is appropriate, and you may wish to consult with a qualified tax or legal advisor who can help you make the choice that is best for your specific needs.

Analyze your current finances

Once you’ve done your research on infinite banking, you should then consider your own financial situation. Infinite banking is a long-term investment, and premium prices for whole life insurance policies are usually higher than term life insurance. All of this should be taken into account when deciding to move forward with implementing an infinite banking strategy.

Contact a qualified insurance professional

Whether you are looking for information or would like to start building towards infinite banking, you can always contact your insurance company to answer questions or help you get started in putting infinite banking to work for you.