Infinite Banking: Unlocking Wealth with Whole Life Insurance

Louis LopesWritten by Louis Lopes, CLU ChFC
Clifford PendellReviewed by Clifford Pendell

Infinite banking is an investment strategy that involves leveraging whole life insurance to capitalize on tax-free growth and accumulate cash overtime, empowering the policyholder to essentially 'become their own bank.'

If set-up correctly, a whole life insurance policy can generate substantial wealth that can be accessed in the future. However its essential to understand that infinite banking is not a quick path to wealth. It requires time and excess capital to build a significant cah value.

In this article, we've outlines how the infinite banking strategy works, the type of life insurance policy needed for it, and provided an overview of the various loan options available when accessing your funds. Additionally, we've discussed the pros and cons of infinite banking to assist you making an informed decision.

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What Is Infinite Banking?

Infinite Banking is a strategy centered around funding a carefully designed cash-value life insurance policy to its maximum. Typically, this involves a whole life plan from a mutual life insurance company with a strong dividend-paying history.

The cash value within the policy can then be borrowed to finance major purchases, such as investments, a home, or business equipment, while still allowing the cash value to grow and compound. The concept resembles buying a house outright and then borrowing against its equity to invest elsewhere.

While the strategy can be effective, success hinges on meeting certain criteria, which we've explained below:

Policy Requirements

For infinite banking to be successful, the whole life insurance policy must be structured to minimize death benefit, expenses, and commissions relative to premiums, while also avoiding becoming a Modified Endowment Contract (MEC) to maintain its tax-deferred status.

Rather than focusing on the minimum premium for a specific death benefit, the aim is to maximize contributions within tax guidelines. A well-designed policy typically includes a minimal base whole-life plan, a paid-up additions rider for additional contributions, and a term rider to prevent MEC status.

Paid-up additions involve a one-time payment for additional death benefit, with commissions and expenses significantly lower than the base policy and term insurance.

For Example: A $1,000 purchase of a paid-up addition may purchase a $4,000 death benefit for a 40-year-old male. No more premiums are due on the $4.000 policy. The $1,000 becomes the guaranteed cash value of the $4,000 policy. The $4,000 policy will reduce the term insurance needed to prevent the MEC by $4,000.

Over time, the cash value compounds, and non-guaranteed dividends purchase more paid-up additions, enhancing the policy's cash value and reducing the need for term insurance.

To make Infinite Banking work, you must utilize the best loan options. There are several alternatives explained in the following section:

1. Policy Loans

The cash value of life insurance grows tax deferred. By borrowing against the policy, you can withdraw the money tax-free, like borrowing against the equity in your home. You can typically borrow up to 95% of the cash value, providing a liquid source of funds.

What sets policy loans apart for is their flexibilty because these loans do not have a repayment schedule or term, and they're not reported to the credit bureaus. So long as you have enough cash value collateral to support the loan, no payments are technically due. The loan is repaid at death.

However, paying at least the interest charged on the loan is wise to keep the loan balance from compounding while earning compound interest on your increasing cash value balance. Paying down additional principal will only increase your borrowing capacity in the future.

2. Direct Recognition vs Non-Direct Recognition Loans

All insurance companies charge interest on policy loans. The loan can also affect the dividend paid on the policy, depending on whether the company uses a direct recognition or non-direct recognition method of crediting dividends. A direct-recognition company has separate dividend rates for borrowed and unborrowed cash value.

A non-direct recognition company credits all whole life policies with an equal dividend rate, whether there is a loan on the policy or not. Many advocates of Infinite Banking argue that you should only use a non-direct insurance company. The argument is that you can collect perpetual positive arbitrage.

At first glance, this might seem correct, but it is more complicated than it first appears. Whenever there is a disparity between the total return and the loan interest rate, the non-direct life insurance company must subsidize the difference from the other non-borrowing policyholders or raise their loan interest rate.

In fact, if all policyholders were to borrow, the insurance company would have no other choice. They would have to raise loan rates. Even if there are non-borrowing policyholders, mutual companies will raise rates to treat all policyholders fairly.

Direct recognition companies operate differently. They employ distinct dividend rates for cash with a loan. This adjusted dividend can vary, depending on factors such as the whole life dividend rate and the direct recognition loan rate.

If the loan rate exceeds the dividend rate, the direct recognition company will provide an enhanced dividend to any cash value associated with a direct recognition loan. This practice ensures fairness among all policyholders, reflecting the mutual nature of the company.

3. Wash Loans

Regardless of whether from direct recognition or non-direct recognition, carriers structure loan and dividend rates to maintain a slight positive difference between the loan rate and the dividend rate.

Certain companies may provide a preferred loan option after a specified policy tenure, often around ten years. In a wash loan scenario, the loan interest rate matches the dividend interest rate. There is no positive arbitrage in this scenario. As previously discussed, positive arbitrage cannot last with mutual companies.

4. Cash Value Lines of Credit

If you're aiming for positive arbitrage, consider leveraging a Cash Value Line of Credit (CVLOC) from a reputable bank. These credit lines are tailored to fully collateralize your life insurance policy, providing a seamless solution.

Similar to non-direct recognition policy loans, your policy's dividend remains unaffected as the bank operates independently from your insurance company. Moreover, they may offer lower loan rates, typically 1 to 2% annually.

However, there are instances where utilizing your policy's non-direct recognition loan rate might be preferable, such as:

  1. A low credit score preventing qualification for the CVLOC program.
  2. Needing absolute privacy, with no credit reporting. 
  3. Inabilty to make monthly payments, necessitating a self-sustaining loan.

Yet, even these circumstances may not disqualify you from the CVLOC program. Some lenders are flexible with credit score requirements, while others refrain from reporting "cash-secured loans" to credit bureaus. Additionally, with recent interest rate fluctuations, the CVLOC rate may surpass the policy loan rate. In such cases, it's simple to settle the entire balance with a policy loan by contacting the CVLOC lender.

5. Other Outside Loans

There are other potential sources of outside loans, including:

  • Home Equity Line of Credit
  • Intra-Family Loan
  • Business Line of Credit
  • Long-Term Balance Transfer Offers
  • Car Loans
  • Securities-Backed Lines of Credit
  • Mortgage
  • Student Loan

The Right Loan Type

Achieving financial success requires careful consideration of all available loan options. While a policy loan may seem viable, external loans from alternative sources may offer more favorable interest rates. For instance, why pay a 5.5% policy loan rate for a car purchase when an auto loan rate of 4% is available?

When making significant purchases or investments, it's crucial to consider the following factors:

  1. Where can I secure the lowest loan rate, and can I manage the monthly payments effectively?
  2. How much convenience is essential in the loan process?
  3. Do I prioritize privacy or improving my credit score through the loan?
  4. Will I need flexibility in payment terms?
  5. Can I safely utilize other less-liquid assets (such as cars, property, or stocks) as collateral?
  6. Will there be a need for borrowing in the near future?

Guaranteed Tax-Deferred Growth Plus Dividends

It is crucial to use a whole life policy from one of the most solvent mutual life insurance companies to ensure the success of the infinite banking program. These companies have consistently paid dividends throughout history, even during depression, recession, inflationary periods, and World Wars.

The dividend rate paid is determined by the rate of return of the carrier's underlying portfolio, primarily consisting of bonds and mortgages. Life insurance dividends are also supplemented by the profits from the carrier's other lines of business. After considering mortality cost, the rate of return can be thought of as approximating the corporate bond rate.

Unlike liquid accounts such as savings accounts, money market accounts, and CDs, the cash value of a whole life plan provides the liquidity of a savings account and the return of a corporate bond without the bond's interest rate risk. The tax-deferred nature of life insurance drives performance over time.

By keeping the dollars that would have been paid in taxes on savings or money market accounts, the cash value in the life insurance policy compounds and outperforms comparable liquid, riskless alternatives.

To illustrate, consider a 45-year-old man with $100,000 in savings set aside for emergencies and opportunities:

Assume he gets a 5% interest rate and maintains that rate into the future. Assume his whole life plan pays the current rate, even though the dividend rate would undoubtedly increase if short-term rates remain at 5%.

Operating in a 32% tax bracket, encompassing both state and federal taxes, he has no interest in life insurance, so we won't subtract the cost of a term policy from his savings. Let's delve into the scenario where he transfers $10,000 annually to the optimally designed policy.

Savings Account

Savings and Life Insurance

Year

BOY Saving

Interest earned

Tax

EOY Saving

BOY Saving

Interest earned

Tax

EOY Saving

Cash Value

Cash Value & Saving

1

$100,000

$5,000

$1,600

$103,400

$90,000

$4,500

$1,440

$93,060

$7,087

$100,147

2

$103,400

$5,170

$1,654

$106,916

$83,060

$4,153

$1,329

$85,884

$14,987

$100,871

3

$106,916

$5,346

$1,711

$110,551

$75,884

$3,794

$1,214

$78,464

$24,708

$103,172

4

$110,551

$5,528

$1,769

$114,309

$68,464

$3,423

$1,095

$70,792

$35,277

$106,069

5

$114,309

$5,715

$1,829

$118,196

$60,792

$3,040

$973

$62,859

$46,913

$109,772

6

$118,196

$5,910

$1,891

$122,215

$52,859

$2,643

$846

$54,656

$58,915

$113,571

7

$122,215

$6,111

$1,955

$126,370

$44,656

$2,233

$714

$46,174

$71,621

$117,795

8

$126,370

$6,318

$2,022

$130,667

$36,174

$1,809

$579

$37,404

$85,027

$122,431

9

$130,667

$6,533

$2,091

$135,109

$27,404

$1,370

$438

$28,336

$99,177

$127,513

10

$135,109

$6,755

$2,162

$139,703

$18,336

$917

$293

$18,959

$114,111

$133,070

11

$139,703

$6,985

$2,235

$144,453

$18,959

$948

$303

$19,604

$122,712

$142,316

12

$144,453

$7,223

$2,311

$149,364

$19,604

$980

$314

$20,271

$131,772

$152,043

13

$149,364

$7,468

$2,390

$154,443

$20,271

$1,014

$324

$20,960

$141,311

$162,271

14

$154,443

$7,722

$2,471

$159,694

$20,960

$1,048

$335

$21,672

$151,355

$173,027

15

$159,694

$7,985

$2,555

$165,123

$21,672

$1,084

$347

$22,409

$161,919

$184,328

16

$165,123

$8,256

$2,642

$170,737

$22,409

$1,120

$359

$23,171

$172,827

$195,998

17

$170,737

$8,537

$2,732

$176,542

$23,171

$1,159

$371

$23,959

$184,282

$208,241

18

$176,542

$8,827

$2,825

$182,545

$23,959

$1,198

$383

$24,774

$196,319

$221,093

19

$182,545

$9,127

$2,921

$188,751

$24,774

$1,239

$396

$25,616

$208,985

$234,601

20

$188,751

$9,438

$3,020

$195,169

$25,616

$1,281

$410

$26,487

$222,305

$248,792

21

$195,169

$9,758

$3,123

$201,805

$26,487

$1,324

$424

$27,387

$236,308

$263,695

22

$201,805

$10,090

$3,229

$208,666

$27,387

$1,369

$438

$28,319

$250,995

$279,314

23

$208,666

$10,433

$3,339

$215,761

$28,319

$1,416

$453

$29,281

$266,394

$295,675

24

$215,761

$10,788

$3,452

$223,097

$29,281

$1,464

$469

$30,277

$282,544

$312,821

25

$223,097

$11,155

$3,570

$230,682

$30,277

$1,514

$484

$31,306

$299,479

$330,785

During the initial years, having a savings account is more advantageous than having life insurance, but only by a maximum of $9,000. The savings account will have the advantage if you need to tap your entire savings account balance. However, it's uncommon for individuals to deplete their savings entirely.

Over time, the tax savings accrued through life insurance utilization begin to compound significantly. As a result, after 25 years, life insurance will hold a $100,000 advantage, even if savings rates remain high and the savings aren't utilized to cover term insurance premiums.

Advantages of Infinite Banking

Tax Deferred Growth - The tax-deferred feature of whole life insurance stands out as its most significant advantage. Allowing the dollars saved on taxes to compound exponentially is a remarkable benefit. Albert Einstein called the power of compound interest the world's eighth wonder. “He who understands it earns it, he who doesn’t pays it.”

The Compounding of Borrowed Funds in a Whole Life Policy - When you borrow against a life insurance policy, just as when borrowing on home equity, you can avoid paying taxes. The tax dollars saved continue to compound.

Guaranteed Loan Provisions - Another huge benefit is the ability to convert your compounding asset into cash on short notice. Loans are private and flexible.

Built-in Protection Benefits - A whole life’s death benefit is probably one of the most overlooked pros of infinite banking. If you also need death benefits to protect your family, you may be able to reduce your term insurance cost.

Downsides of Infinite Banking

Limited Early Liquidity - The limited liquidity in the early years presents the biggest challenge with infinite banking. The first years are always the worst years of any whole life plan. It’s similar to the problem when acquiring an investment property or starting a business; you have to wait for long-term rewards.

That’s why it’s common for clients starting an infinite banking program to have some existing savings from which funds they can transfer funds to the policy. Even if clients have the cash flow from earned income or investments to replenish their savings accounts, they are often more comfortable transferring funds.

Mandatory Annual Payments - Another mental hurdle for many individuals with infinite banking is the fear of commitment. While a whole life policy can be designed to be somewhat flexible, there will be a minimum annual payment due for the first five to seven years.

Though the minimum needed to start a plan may only be 20-30 % of the maximum allowable premium, maximizing the payment within IRS limits is advisable to leverage the long-term tax-deferred compound return.

Qualification Requirements - Purchasing a life insurance policy is much more complicated than walking into your local bank with cash to deposit. Qualifying for a policy will depend on your health history, age, lifestyle, and financial situation.

Even if you have a complicated history, you shouldn’t disqualify yourself. The experienced agents at JRC Insurance Group can find the most suitable carrier for your situation.

The Required Discipline - Despite the lower returns, many people are more comfortable with traditional banks. Transitioning to a different option can be challenging, and for some, the concept of overfunding a policy and then borrowing against it when funds are needed might be difficult to comprehend or accept. Change is never easy.

However, we are here to anwer your questions and provide an educational approach, enabling clients to weigh the benefits of the infinite banking concept against its potential drawbacks and make an informed decision.

How We Can Help 

JRC is a no-fee brokerage that represents 63 top-rated life insurance providers. By asking you a few questions about your health and coverage needs, our experts can quickly match you with the best whole life insurance policy available. Our comparative shopping services are completely free and there is no cost to apply for coverage. 

To learn more information about infinite banking, or to obtain an accurate whole life insurance quote, call us directly at 855-247-9555. We're licensed in every state and we work with the best mutual whole life insurance providers including Penn Mutual, Guardian, and Mass Mutual. 

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Written by:

Louis Lopes

Louis Lopes, CLU ChFC

Chartered Life Underwriter, Licensed Life and Health Agent

Louis has been in the insurance business for over 30 years. He specializes in “high risk” cases as well as more complex coverages for long term care, disability, and estate planning.

Expert reviewed by:

Clifford Pendell

Clifford Pendell

Managing Partner and Co-founder

Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.

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