Infinite Banking Concept Explained:
Whole Life Insurance as Your Own Banking System
(Clickable) Table of Contents
What is Infinite Banking?
Infinite Banking is a cash flow management system using the cash value in a life insurance policy rather than traditional bank accounts. Instead of saving up and spending cash in banks, IBC practitioners instead overfund a Whole Life policy and borrow against it to maintain compound interest.
- built-in tax-sheltering
- steady growth as a noncorrelated asset
- various protection benefits (death, disability, & lawsuits possibly)
- continuous compounding of your cash value even while borrowing.
Who Created the Infinite Banking Concept?
IBC was originally created in the 1980s by the late Nelson Nash. Nelson would later popularize IBC with his book The Infinite Banking Concept – Becoming Your Own Banker.
However, it is documented that famous entrepreneurs like J.C. Penney, Ray Kroc, and Walt Disney used Whole Life insurance their own private bank to either start, grow, or save their business long before Nelson Nash’s work was published. As you would expect, lots has changed in terms of insurance products, interest rates, and optimization strategies for infinite banking over time.
I had the pleasure of speaking to Nelson Nash on the telephone early in my career. He revealed how infinite banking system came to him as an epiphany while lying in a hospital bed with heart trouble. Even though I don’t utilize Nelson’s early text as a strict owner’s manual for modern-day IBC tactics, I do honor his work and am inspired by his discovery which has helped myriads of people for over 40-years now.
Does the Infinite Banking Concept Work?
The infinite banking concept can indeed work quite well assuming the following:
- Your Whole Life policy is optimally designed with certain riders
- You max-fund your policy as early and often as is allowable
- You make regular loan payments as often as you can
- You seek to utilize your best loan option available
- You expand the strategy as cash flow allows
Why use Infinite Banking Whole Life Insurance?
Similar to how big banks have both savings and lending capabilities, so too does a participating Whole Life insurance policy. Whatever taxable savings rate big banks pay to their depositors pales in comparison to what they’ll charge you to take a loan for the exact same amount.
At a traditional bank they may call you a customer, but have no illusions. You are the product!
Conversely, mutual insurance companies are actually owned by their whole life policyholders, hence the word mutual. So not only do you become a customer when you buy an infinite banking whole life insurance policy, but you also become part owner of the underlying insurance company.
These Whole Life policies offer guaranteed growth between 2-3% in addition to annual dividend payments, which aren’t guaranteed but have been paid every year for over 150 years by the strongest mutual companies. These dividends from an infinite banking policy often rise with prevailing interest rates you share in the yield of their entire investment portfolio. But underwriting profits from all their other insurance lines contribute to your dividend, which is why Whole Life even outperforms in low-interest eras.
When you elect to roll these higher dividends back into the policy, they become part of a new guaranteed cash value calculation. This would entitle you to a bigger cut of future dividend pools, which increases the future guaranteed cash value, and increases your cut of future Whole Life dividends, and so on. Projections for infinite banking Whole Life insurance today currently projects a long-term internal growth rate of between 4%-5%. Don’t forget that this happens in a tax-exempt environment so that may feel more like 6%-9% depending on your tax bracket.
Infinite banking whole life insurance can benefit greatly from the interest rate volatility we’re experiencing today. In fact, we did an entire study using an actual overfunded Whole Life policy from 1980. The study shows the policy’s initial dividend projections side by side with the actual dividends paid over the last 42-years. What’s interesting is how dividend rates spiked initially and then plummeted far below what was originally illustrated. Nevertheless, the dividends paid during the low-interest era were often more than double what was originally projected thanks to their continuous compounding after that early spike.
One problem with infinite banking is the inability to illustrate what happens to a Whole Life policy in a rising interest environment. However, our deep-dive into the last 42-years can demonstrate how an infinite banking policy responds to fluctuating interest rates for both dividends & loan rates.
Infinite Banking Policy Loans Basics
Let’s discuss an infinite banking “loan”, even though it’s often thought of as a 4-letter word.
Remember how I said that continuous compounding is the most important ingredient of the infinite banking concept? Borrowing against your infinite banking life insurance policy is exactly how you maintain the compounding of your cash flow and liquidity while still funding major expenditures, emergencies, and other investment opportunities.
You see, if you withdraw rather than borrow from your infinite banking Whole Life insurance policy you would be removing assets that could’ve kept compounding on your behalf. The longer you let compounding work for you the better it gets, especially at the upper-right-hand side of the graph. By pulling cash value from your infinite banking policy, you rewind your compound curve to a lower position, not to mention you stunt future growth by receiving a smaller cut of any future dividend pools.
Conversely, if you borrow against your Whole Life’s continuously compounding cash value, you never miss a beat on that steepening compound curve while maintaining your place in line for those bigger future dividends.
Regardless of all the gimmicky rhetoric you’ll read/hear on how infinite banking works, this is the true scientific explanation of how infinite banking works.
Are there certain products, features, and ancillary strategies which can further optimize IBC’s compounding effect? Sure, but make no mistake about it, maintaining continuous compounding is by far the most important factor in how the infinite banking concept works.
I realize this probably leaves you with all kinds of detailed questions about how infinite banking loans work. If you want to get deep into the pros and cons of infinite banking paying interest, you should definitely check out our detailed study exploring the last 42-years of Whole Life loan vs. dividend rates.
We also discuss the different infinite banking loan options in more detail below in this article.
Is the Infinite Banking Concept Legit or a Scam?
The infinite banking concept is indeed legit. IBC is not a scam. However, many people feel as though they have been scammed after buying a poorly-designed Whole Life insurance policy to act as the engine for their own private family bank.
To be clear, the infinite banking concept is not even something you can buy. It’s simply a methodology of redeploying dormant savings accounts plus ongoing cash flows through a life insurance policy to create continuous compounding on these funds even if they’re borrowed.
So even if you do buy a lackluster Whole Life policy (which hopefully you don’t), IBC will still work, only you want to have as much access to capital early on, and the positive compounding will take longer to kick in. But make no mistake about it, borrowing against your cash flow and liquidity to keep it continuously compounding rather than having it be spent and lost forever is NOT a scam.
Since you are always in control of your policy’s cash value equity, the only way to really get scammed would be if you borrowed against your policy to make a bad investment, but that would be a problem with your investment choices and not a problem with the infinite banking concept itself.
Again, how their infinite banking policy is designed often determines whether people they got scammed or not. Click to download The Ultimate Guide to Whole Life for IBC on PDF so you can be knowledgeable about how best to design infinite banking Whole Life as your own private bank regardless of who you work with.
Infinite Banking Pros and Cons
The pros and cons of infinite banking are littered around the internet from either:
- IBC agents trying to sell a Whole Life policy
- Other “financial professionals” competing for the same dollars when selling their wares
Pros of Infinite Banking
⟡ Growth on Borrowed Money
⟡ Guaranteed Loan Options
⟡ Whole Life’s Tax-Exemption
⟡ Built-In Protection Benefits
Cons of Infinite Banking
⟡ Limited Liquity in Early Years
⟡ Mandatory Annual Payments
⟡ Health & Financial Qualifying
⟡ Ongoing Discipline Required
The pros and cons of infinite banking are littered around the internet from either:
- IBC agents trying to sell a Whole Life policy
- Other “financial professionals” competing for the same dollars when selling their wares
Benefits & Pros of Infinite Banking
Benefits & Pros of Infinite Banking
One of the biggest benefits or pros of infinite banking is the ability to earn continuous compounding on borrowed funds.
Having a liquid dollar wear multiple hats with your wealth-building efforts while continuing to compound safely within your infinite banking Whole Life policy is by far the most powerful component of IBC.
Guaranteed Loan Provision (while still growing inside an IBC policy)
Another huge pro or benefit of infinite banking is the ability to to convert your compounding asset into cash on short notice.
Sure, you can also borrow against your brokerage account, real estate, or 401k but none of these are guaranteed to be available to you when you may need them the most. If the sky is falling and buying opportunities abound, stocks often lose value eroding your margin borrowing power, home equity lenders revoke their lines, and you may get laid off which would trigger a 401k loan repayment request due in 90 days.
Also, none of these assets are guaranteed to keep growing while you’re borrowing for IBC, which is exactly why the amount you can borrow from these other sources is far less than the 95% loan to value ratio allowed with an infinite banking life insurance policy. Understand how infinite banking policy loans differ from other types of loans including 401k loans.
Guaranteed Growth + Dividends of an Infinite Banking Whole Life Policy
Non-correlated growth is another huge benefit of the infinite banking concept. How a properly-designed Whole Life insurance policy grows is probably one of the most popular pros of infinite banking, and there’s actually 2 distinct ways this happens.
Whole Life insurance provides a contractual guaranteed growth rate as well as an interest-sensitive annual dividend (which is not guaranteed). However, the oldest and most solvent true mutual companies can boast they have paid a dividend for the last 150+ years through depressions, recessions, inflation, deflation, and world wars. A couple of the oldest mutual companies were even around to pay Whole Life dividends during the Civil War!
Most everyone seems conditioned to voluntarily forgo any kind of growth rate as long as banks will preserve their liquid capital. Meanwhile, many of the biggest banking institutions keep a large chunk of their Tier 1 capital reserves inside life insurance policies taken out on the lives of their key employees. That’s why our tagline here at BankingTruths.com is “Don’t do what banks say…do what they do!” Check out our 4-minute video examining the balance sheets of America’s 2 biggest banks to see how much life insurance they bought and why.
Tax-Exempt Status of IBC Insurance
The tax benefits of infinite banking really depend on how high your tax bracket is.
The 2nd reason why major banks park billions of their Tier 1 capital into corporate-owned life insurance is the tax-exempt nature of the growth. Think of it as an IBC yield-enhancer of sorts because it’s not about what kind of interest you make, but what you can ultimately keep.
Let’s say for the moment your infinite banking life insurance policy only ever provided a long-term growth rate of 4.5%, but your combined state and federal marginal tax rate is 33%. Assuming you could earn 4.5% from another yield-bearing account, you’d be left with around 3% net after paying your taxes. Put another way, you’d need to earn over 6.7% to net the same 4.5% you got from your IBC whole life insurance policy.
I understand you can find distressed junk bonds or private money loans that may earn more than 6.7%, but do they have a similar risk profile or available liquidity that Whole Life insurance has? I think not. Try this on for size…what if you funneled your cash through an IBC life insurance policy first before borrowing against it to do higher-yielding private money lending? That is the spirit of the infinite banking concept.
Furthermore, as tax rates continue to rise with our swelling national debt, an IBC insurance policy can help you optimize your other assets in retirement by better managing a dynamic distribution strategy. Check out our detailed video on how a properly structured infinite banking concept life insurance policy can act as a tax buffer in retirement.
As our national debt continues swelling, the tax benefits of infinite banking may end being one of the biggest pros of infinite banking there is.
Death Benefit Utility of Infinite Banking Life Insurance
A Whole Life’s death benefit is probably one of the most overlooked pros of infinite banking.
It’s funny how many prospective clients initially tell me they don’t care about the death benefit of their IBC Whole Life policy, yet they also get sad when we illustrate reducing the death benefit in later years to enhance their cash value performance of their infinite banking life insurance. Thankfully you can take a wait-and-see approach with this reduction option since it doesn’t need to be decided at the onset of the policy.
However, the more cash you plan on pumping through your own private family bank, the more death benefit the IRS will require to maintain the tax-exempt status of your infinite banking life insurance policy.
If you also need death benefit to protect your family’s financial situation, you may be able to cancel, reduce, or “refinance” your term insurance policies after implementing an IBC Whole Life policy. Unlike Whole Life, term insurance is a straight cost with zero equity or growth. So if you’re able to recoup these lost dollars don’t forget to add that to the total return of your own infinite banking strategy.
What if you could even tap into your tax-free death benefit even while you were living?
Well, certain Whole Life companies have a provision allowing tax-free access to your death benefit if you are deemed too sick or hurt to keep functioning in the world without assistance. Obviously, nobody wants this, but bad things happen to good people without killing them. Certain insurance companies offer this pre-death access to the tax-free death benefit by utilizing the same tax code provisions that a long-term-care policy provides. Depending on the insurance company, this can be a paid option or sometimes even a free rider on the policy. Most clients wouldn’t normally purchase a long-term-care insurance policy (even though they probably should), but they nonetheless appreciate this added layer of protection.
Creditor Protection With Infinite Banking Life Insurance?
This particular pro of the infinite banking concept will vary depending on which state your policy is written in.
Another protection that is often touted for the infinite banking concept life insurance is protection from creditors in the case of lawsuits. It’s worth noting that this is not determined by the life insurance company or any special IBC company you choose, but rather by the jurisdiction. Certain states provide full immunity from lawsuits for your life insurance cash value and death benefits, while some offer partial or no protection. Some states even offer protection from bankruptcy.
Creditor protection specialists will often tell you this arena is more art than science, and that the more layers of the onion you have the better chance you have of protecting your assets from creditors & predators. Needless to say, we are not attorneys, so if you are seriously concerned about the specifics regarding the creditor protection of life insurance, you should seek competent legal counsel.
That said, we compiled a state-by-state guide for the creditor protection of life insurance. We do not guarantee its accuracy today since it hasn’t been updated in 5 years, but major movements in this area don’t happen very often.
Regardless, these state-specific statutes are listed clearly, and perhaps they can act as a starting place for you to do your own legal research if you are in the DIY camp.
Ultimate Privacy using IBC
One of the biggest pros of infinite banking is hidden in plain sight…literally.
Some folks very much enjoy the privacy aspect of using Whole Life insurance for infinite banking. Unlike banks, brokerage accounts, and even LLC interests that show up on an asset search, Whole Life insurance does not since it’s considered a protection product primarily.
Also, any policy loans you take won’t show up on your credit report. Even certain outside lenders who offer turnkey line of credit programs tied to Whole Life policies for IBC consider it a cash-secured loan and therefore don’t report your balances to the credit bureaus.
Ok, enough about all the pros of infinite banking. What about the cons of infinite banking, its downsides, and the fine print not everybody will tell you about?
Cons & Problems with Infinite Banking
Limited Early Liquidity with Infinite Banking Life Insurance
For most people, the biggest problem with the infinite banking concept is that initial hit to early liquidity.
Although this con of infinite banking can be minimized with proper policy design, the first years are always the worst years of any Whole Life policy. You see, Whole Life is a bundled product and insurance companies recover their expenses with front-loaded cost structures. This is mainly because according to decades of LIMRA studies the average holding period of permanent life insurance has consistently been less than 9 years. As a result, Whole life companies have stacked their products to benefit those who stick with them.
There will be an early hit to liquidity when starting an infinite banking life insurance policy. Normally you will only have access to 66%-85% of your first premium payment after 30-days. However, there are certain infinite banking life insurance policies designed primarily for high early cash value, but these will often substantially lag the best performing Whole Life policies in later years.
It’s interesting to me that this single problem with the infinite banking concept often keeps people from reaping the stacked longer-term benefits of IBC. Isn’t there a similar delayed-gratification phenomenon when acquiring investment property or starting a business? You inherently understand that you’ll endure some early costs and lack of liquidity for the extremely valued longer-term rewards.
Isn’t it ironic then that only Whole Life insurance is guaranteed to be a profitable venture and provide guaranteed liquidity all along the way despite the fact that consumers hold a higher level of scrutiny towards its temporary limitations in the early years.
Regardless, we find that it’s common for clients starting an infinite banking Whole Life policy to also have some kind of savings account that’s been sitting dormant for years possibly even decades. I’ll often ask them when the last time they’ve depleted more than 70% of this savings account, only to occasionally find out it’s been several years, but more often than not the answer is “never”.
That being said, we find that this hindered early liquidity problem with infinite banking is more mental than anything else once thoroughly explored. This is especially true since their policy will have sufficient liquidity after 30 days not to mention most clients have enough ongoing cash flow coming from work income or investment property to replenish their low-yielding savings accounts.