What is Infinite Banking?
Infinite banking refers to a process where an individual becomes his or her own banker. The infinite banking concept is promoted by Nelson Nash. In his book, “Becoming Your Own Banker,” Nash explains the use of whole life insurance policies that distribute dividends. By owning such policies, individuals can systematically borrow against the cash value from their own policies. As a result, they can dictate the cash flow in their lives by borrowing from themselves. Nash promotes that using this strategy can eliminate the need to depend on banks or lenders for loans.
What is the Infinite Banking Concept?
The term Infinite Banking is relatively recent but the concept has been around for much longer. Supporters of the concept promote it as a way to become your own banker. You can achieve this using the dividend-paying portion of a whole life insurance policy. When you pay premiums on a whole life policy, you build up a cash value that can be borrowed against. You can borrow against this cash value from your own policy for big purchases like a car or even a home. The idea behind Infinite Banking is to use your own assets for cash requirements instead of loans from a bank or other creditors.
When you borrow from your insurance policy, your cash value is used as collateral on the loan. There is no need to use any other assets to secure the loan. Rates on cash value loans are typically lower than other types of loans. This is because the insurance company knows it already holds your cash as collateral. It can quickly and easily reimburse itself from your policy if you don’t make payments. Also, you won’t have to worry about your car or home being repossessed like with other types of collateralized loans.
Infinite Banking Concept – A Closer Look
At the heart of the infinite banking concept, is a whole life insurance policy paying dividends. Moreover, the cash surrender value of that whole life insurance policy is used as collateral for loans. The policyholder simply needs to call the insurance company and ask to take out a policy loan.
A whole life insurance policy is meant to cover the entirety of an individual’s life. It is not simply designed to assist family or loved ones in the event of the individual’s death. Infinite banking is based on whole life policies that are eligible to pay out dividends. In turn, these dividends generate a form of income that increases the cash value of the policy over time. As soon as the policy is active, it possesses value and can be borrowed against. The individual can take money out of the policy as a loan using the policy as collateral. These loans can be used for handling unexpected or significant expenses that occur during the individual’s life. They can also eliminate the need to seek loans from traditional sources, such as banks or mortgage companies.
Advantages of Infinite Banking
The most outstanding positive of the infinite banking concept or process is the sheer improvement in liquidity or cash flow. The value of a whole life insurance policy acting as collateral is far more liquid than, for example, equity in real estate, because the loan can be taken out more quickly and the individual can secure cash in hand faster and usually at lower interest rates than those available from traditional lenders.
The improvement to an individual’s cash flow can be significant, especially in times of financial hardship or unforeseen expenses, such as medical bills or the need to buy a new car. An insurance policy loan can also come in handy if an individual happens to be without work for a time, whether due to health issues, a death in the family, or simply the loss of a job. Because whole life insurance policies are non-correlated assets – meaning they’re not tied to the whims of the stock market – they are set to retain their worth.
Pros of Infinite Banking
- Low Interest Rates – Interest rates on a loan against your life insurance policy are usually much lower than other types of loans.
- No Credit Check or Inquiry – There are no credit checks when taking out a loan against the cash value of an insurance policy that you own.
- No Additional Collateral Required – Your home or car is not placed as collateral so you don’t have to worry about repossession
- Fast Loan Approval – Applications and approval for an infinite banking loan are generally faster than other loans
- Tax Advantages – The dividend you earn from your policy is tax-free as are loans and death benefits.
- Value not tied to Stock Market – Whether the stock market is up or down doesn’t affect the dividends you earn.
Disadvantages of Infinite Banking
Infinite banking is not without its drawbacks. First, an individual must qualify for a whole life insurance policy. Also, once the individual qualifies, the financial burden is significant. The monthly premiums for a whole life policy can be stifling. It’s common and recommended practice for an individual to put at least 10% of their regular income into their whole life policy. For many families, that large a financial commitment simply isn’t an option. Yes, if the policyholder falls on difficult times they can take out a loan against their policy. However, they run the risk of being unable to make adequate payments on it, later on, to catch up.
The infinite banking concept and practice are not for individuals without financial discipline and conviction. They must remain steadfast, think clearly, and see the process through, regardless of circumstances. The concept requires an individual who is financially sound, and who is willing and able to make a long-term financial play. It’s important to consider all of these factors before becoming your own banker.
Cons of Infinite Banking
- You must qualify – You first need to qualify for a whole life policy and build up the cash reserve which can take several years
- Whole Life Policies are Expensive – Whole life policies are more expensive than term life insurance, usually several thousand more a month than term life
- Low-Interest Rates for Earnings – The cash you build up in a whole life policy is probably only earning a 3% or 4% return which is less than many dividend stocks.
Fiduciary Vs. Salesman
RED FLAG #1 Life insurance agents (the folks selling you these policies) aren’t fiduciaries. They’re salespeople who earn money off commissions. It’s in their best interest to sell you an expensive policy because they’ll make more money. There’s a conflict of interest when the person selling you something is commission-based. You must know precisely what you’re setting up to use the IBC; otherwise, you might end up getting taken for a ride.
RED FLAG #2 Nelson Nash, the guy who coined the term Infinite Banking and author of Becoming Your Own Banker in the ‘80s, said in his book he made a fortune and tripled his income selling whole life policies with the IBC. If using the IBC as your only financial vehicle, 100% of your money is tied to your life insurance policy. This breaks the first law of investing 101 – diversify. Setting up a policy is expensive. I can’t imagine someone earning $50,000 a year shoveling $10,000 of their income into a whole life. Proceed with caution. (Source:listenmoneymatters.com)
Does Infinite Banking Work?
There are many investment options out there such as real estate, stocks, bonds, etc. They all provide a way to increase your wealth, and there are risks involved.
Infinite Banking is a safe way to increase your wealth with less risk and no loss provisions. Infinite Banking, and whole life insurance, offer a safe investment alternative that grows at a slow but competitive rate. It is not a magic bullet, and it will not make you a millionaire overnight. Infinite Banking utilizes tax advantages, safety, death benefit, and growth to create an investment strategy that works. It appeals to those who want to minimize losses that can come from the stock market or mutual fund investments. The Infinite Banking Concept requires strict discipline and must be implemented for a long period of time to see worthwhile results. It will not work as a short-term investment, or a get rich option.
Infinite Banking, like any investment, has its good and bad elements. It is easy enough to implement, but it will not work to meet everyone’s needs and goals. Setting your own goals, and then finding the best solution for those goals is the smartest way to approach investing. If you do not have specific goals, how can you determine if an investment option meets your needs?
Final Thoughts
There are some legitimate reasons to add the infinite banking concept as an additional layer to a portfolio. Who wouldn’t want to enjoy tax-free growth and virtually 0% loan interest-rates? Simple solutions are often easier to implement and follow than complex ones. However, others disagree:
I wouldn’t suggest the IBC as your financial foundation. It might make sense for more affluent individuals looking to seize some serious tax breaks. If I were on a tight budget, I couldn’t justify paying $800 a month in premiums. Also, I’m turned off by the complexity of it all. If I can’t explain it to a five-year-old, then it’s probably not worth it. Sounds like a marketing gimmick on the part of Nelson Nash. He just branded it ‘infinite banking.’ Who wouldn’t want to be their own banker? He did say his income increased when he started selling whole life policies with the IBC as a strategy. It’s like what Dave Asprey did with the Bulletproof Diet. It’s essentially the ketogenic diet that only rebranded with a cool name. But the most important question to ask is: Would you feel comfortable recommending this to your mom? I wouldn’t. (Source:listenmoneymatters.com)
Always study any investment alternative thoroughly before making a final decision regarding your long-term investment strategy. If you’re thinking about using the Infinite Banking concept, make sure you understand the high cost and low return of the whole life insurance policy. Many people are well served with a less expensive term life policy and then just investing the difference in an account on a stock platform.
Up Next: Working Capital Formula – How to Calculate Working Capital (Guide)
The working capital formula tells you the short-term liquid assets available after short-term liabilities have been paid off. It measures a company’s short-term liquidity. It is important for financial analysis, financial modeling, and managing cash flow. Working capital represents a company’s ability to pay its current liabilities with its current assets. It is an important measure of financial health. Creditors can use the working capital formula to measure a company’s ability to pay off its debts within a year. Attention should be paid to the proper category of assets and liabilities on a corporate balance sheet. Working capital is an additional tool for determining the overall health of a firm and its ability to meet short-term commitments.
