The Infinite Banking Concept Explained

What is IBC?

The infinite banking concept (IBC) is a system whereby one becomes their own banker by growing their liquid cash value inside a properly-designed whole life insurance policy while borrowing against it to fund major expenditures, emergencies, and outside investment opportunities. 

The infinite banking concept is a strategy to use Whole Life insurance to become your own banker

Utilizing the infinite banking concept rather than traditional banks provides competitive safe growth rates, tax-sheltering, various protection benefits, and most importantly the continuous compounding of their liquid assets even while they’re being borrowed.

(Clickable) Table of Contents

Who created the Infinite Banking Concept? – History of IBC

IBC was originally laid out by the late Nelson Nash in the very first infinite banking concept book The Infinite Banking Concept – Becoming Your Own Banker. I had the pleasure of speaking to Nelson early in my career on the telephone. He revealed how the IBC came to him as an epiphany while lying in a hospital bed with heart trouble. Nelson later published several iterations of his original infinite banking concept book and became a prophet of sorts with a massive following of infinite banking life insurance agents and consumers.

However, it is documented that famous entrepreneurs like J.C. Penney, Ray Kroc, and Walt Disney used Whole Life insurance as a private bank to either start, grow, or save their business decades before Nelson Nash’s work was published. As you would expect, the insurance products, prevailing interest rates, and adaptation strategies to optimize infinite banking have morphed and evolved over time.

The infinite banking concept was practiced by Walt Disney and JC Penney long before Nelson Nash wrote about it in his book "The Infinite Banking Concept - Becoming Your Own Banker"

Regardless, I personally credit Nelson Nash for articulating this complex privatized banking strategy in a way that was understandable and actionable for the masses (both consumers and industry professionals alike). Even though I don’t use Nelson’s early text as a strict owner’s manual for the most modern IBC tactics, I honor his work and see the value in understanding the early impetus behind using Whole Life insurance as your own bank to take better greater control of your finances.

How Does the Infinite Banking Concept Work?

Yes, the infinite banking concept does indeed work quite well assuming you have a properly structured Whole Life insurance policy and execute the strategy correctly. Similar to how big banks have both savings and lending capabilities, so too does a participating Whole Life insurance policy from a mutual insurance company.

Banks offer Synthetic Non Direct Recognition for those looking to maximize Infinite Banking

However, unlike how banks offer low-yielding savings accounts, mutual insurance companies offer guaranteed growth between 2-3% in addition to non-guaranteed annual dividend payments. You see, mutual insurance companies are actually owned by their whole life policyholders, hence the word mutual.  

Projections in today’s low-interest rate environment produce a long-term internal growth rate of around 4.5%. However, unlike buying a bond or a CD today where you would lock in a low growth rate, future higher interest rates can equate to future higher dividends from a properly-structured Whole Life policy. 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 increase the future guaranteed cash value, and increases your cut of future Whole Life dividends, and so on.

A Whole Life policy for the Infinite Banking Concept is issued by a mutual insurance company so that it pays dividends to the Whole Life policyholder

Click to watch how dividends from an actual Whole Life policy from 1980 compounded to be far bigger than expected from an initial spike in rates even though the dividend rate plummeted far lower than originally illustrated. Enhancing and maintaining compound interest within the infinite banking life insurance policy is the key factor of its success, despite the gimmicky pitches you’ll hear about IBC.

One last feature of a Whole Life policy’s savings component is the fact that it is tax-free as long as you keep your infinite banking life insurance active until a death claim is paid. Don’t get me wrong, you can utilize your Whole Life cash value all throughout your life. You can even withdraw everything you put in without paying any tax, but in order to access the excess growth tax-free, you must borrow it.  

This is a great time to discuss Whole Life’s “loan” component, even though it’s thought of as a 4-letter word. But remember how I said that 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 safe and liquid assets while still using them to fund major expenditures, emergencies, and other investment opportunities.

You see, if you withdraw rather than borrow from your infinite banking Whole Life 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 Whole Life insurance 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 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. Becoming your own bank with Whole Life insurance loans can even beat paying cash.

Click to watch a simple 6-minute video visually explaining the infinite banking concept’s key ingredient of compounding.

Regardless of all the gimmicky rhetoric you’ll read/hear on how infinite banking works, this is the true scientific answer. 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 the most important factor in how the infinite banking concept works.

Is IBC Legit or is the Infinite Banking Concept 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, the methodology of harvesting competitive compounding traditional low-interest savings accounts not to mention outgoing cash flows that would otherwise be lost forever is NOT a scam. 

Click to download The Ultimate Guide to Whole Life for IBC on PDF so you can be knowledgeable about how best to design Whole Life as your own private bank regardless of who you work with.

IBC Ultimate Guide to Whole Life for Infinite Banking PDF

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 on you not a problem with the infinite banking concept.

Pros & Cons of the Infinite Banking Concept

Like any other financial strategy, there are pros and cons to the infinite banking concept. I went to great lengths to painstakingly curate all the IBC pros and cons I could find on the internet while adding balanced context to each.

It’s no accident our group is called Banking Truths. Although our job is selling Whole Life policies customized for each client, we pride ourselves on taking an educational approach while letting clients sell themselves on what’s best for their families. The main benefit to having a daily flow of clients coming from the internet is the lack of urgency we feel to pressure anybody, sugar coat things, or mislead people into thinking the infinite banking concept is too good to be true.

So here is a detailed account of the infinite banking pros and cons with our added educational context:

Pros of the Infinite Banking Concept

Compounding of Borrowed Funds in an IBC Whole Life Policy

The ability to earn continuous compounding on borrowed funds is the biggest differentiator of the infinite banking concept compared to other wealth-building strategies. Having a liquid dollar wear multiple hats with your wealth-building efforts while continuing to compound safely within your policy is by far the most powerful component of this IBC.

Earning compound interest inside premium financed life insurance while paying simple interest on your premium financing loan.

Guaranteed Loan Provision (while growing inside an IBC policy)

Sure, you can 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

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.

Become Your Own Banker with the Infinite Banking Concept rather than use traditional banks

The main reason is that these policies provide big banks with a safe yield on their own liquid reserves backed by the oldest and most solvent financial institutions in America. It’s documented that many of these well-capitalized mutual insurance companies were a major force in bailing out banks during the great depression long before FDIC insurance even existed.

Tax-Exempt Status of IBC Insurance

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.

IBC can be tax-free since Whole Life cash value grows tax-sheltered and you use tax-exempt loans when becoming your own banker

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.

Death Benefit Utility of Infinite Banking Life Insurance

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.

Whole Life's death benefit makes all infinite banking loans tax-free

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?

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. 

Your Whole Life policy for the infinite banking concept can sometimes be protected from creditors and lawsuits depending on what state you are in

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

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 the pros of infinite banking in large print. What about the cons of infinite banking, its downsides, and the fine print not everybody will tell you about?

Cons of Infinite Banking

Limited Early Liquidity with Infinite Banking Life Insurance

The first years are always the worst years of any Whole Life policy, regardless of how optimally it is designed. 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.

Infinite Banking life insurance should have high early cash value

It’s interesting to me that this lack of immediate gratification often keeps people from reaping the stacked longer-term benefits of an IBC Whole Life policy. 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.

Infinite Banking life insurance will naturally have a hit to early liquidity like starting a business or buying real estate

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 drawback to 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.

Mandatory Annual Payments Due With Whole Life Insurance

Although a Whole Life policy for infinite banking can be designed to be somewhat flexible, there will still be some level of minimum annual or monthly premium payment due for at least the first 5-7-years. We will discuss different workarounds and bands of flexibility available, but there is no getting around the fact that a minimum premium commitment is the only way you achieve the time-tested and stalwart guarantees of Whole Life policy for IBC.

Whole Life's guarantees make the infinite banking concept so appealing

We’ve found that this mental fear of commitment often keeps prospective clients from exploring their payment options further. If they did, they would find out that the minimum mandatory premium payment due is only about 20%-30% of the maximum allowable premium. Keep in mind that in order to maximize both early and long-term cash value performance of an IBC policy, you will want to pay as much premium as the IRS allows especially in the early years. Once clients understand this, they usually structure a policy to where they know they’ll be able to easily cover the minimum under any circumstances as well as most likely being able to hit the IRS’s maximum allowable limit under normal circumstances.

Indexed Universal Life (IUL) for retirement is ideal. This is because IUL allows for tax-free withdrawals up to basis and tax-exempt policy loans.

Keep in mind that in your worst-case scenarios, all Whole Life policies have a built-in feature called APL or automatic premium loan. That way, if for some crazy reason you couldn’t at least pay your IBC policy’s minimum premium then the policy will automatically borrow against its cash value to pay it for you. Not coincidentally this increases the cash value of your infinite banking life insurance, which of course increases the amount you could borrow against in the future. See where I’m going with this?

Qualification Hurdles of an Infinite Banking Whole Life Policy

Unlike most financial products where you can simply point and click to purchase them or just show up at your local branch, acquiring infinite banking life insurance can be much more complicated. Favorably qualifying for an IBC policy will depend on your financial situation, your age, your hobbies, your driving history, your health, and even your immediate family’s health. Before 5 years ago, there was literally no other product or transaction more complex and intrusive than buying life insurance. What other vendor wants your blood and urine before patronizing their business?

Thankfully some of these stodgy old mutual insurance companies are starting to adopt advanced technology making the entire underwriting process quicker, simpler, and less intrusive. Most IBC life insurance companies have migrated to at least some sort of an electronic interface in their underwriting process. Some companies even have ultra-simple point-and-click underwriting where you securely enter your basic data into DocuSign while their artificial intelligence network scours multiple online databases. This process often precludes the need for a lengthy paper application, not to mention a 20-question call-center phone interview, or the literal poking and prodding of a paramedical exam.

These hybrid life insurance policies can also protect against long term care concerns

To be clear, even the most technologically advanced insurance company still reserves the right to revert to traditional underwriting if they don’t like what they find online. But many of our clients with clean health histories often pass A.I. underwriting with flying colors after just a few clicks. We’ve even had their ideal infinite banking life insurance policy fully issued with the highest rating in as little as 24 hours later.

As far as our clients with more complex issues and health challenges, I can tell you these 2 things:

  1. Don’t disqualify yourself: remember with infinite banking we’re always trying to shrink wrap the least amount of death benefit around whatever cash contribution you’re comfortable with. Even if your health rating comes back sub-optimal, the IRS will allow us to use much less death benefit than someone who is younger and healthier.
  2. Don’t over-exaggerate or over-complicate your situation. It’s true that it’s not as simple as buying a stock online, but this shouldn’t stop you from maximizing a lifetime’s worth of growth on your safe and liquid assets. It may be more work for the agent to help you navigate an acceptable rating, but a savvy group of infinite banking agents (like the Banking Truths Team) can anonymously shop a complex fact pattern to multiple insurance companies who may be willing to unofficially compete for your business before subjecting you to traditional underwriting.

Book a call with an infinite banking agent to discuss Whole Life as your own bank

Learning and Maintaining the Discipline Needed for IBC

It’s human nature to get attached to old patterns of behavior and the status quo. So it can be difficult for some people to adopt the process of overfunding an insurance policy only to subsequently borrow against it whenever funds are needed. Also, it can be downright counterintuitive to think of your annual insurance premium as anything other than a pesky bill for a necessary evil cost rather than a limited privilege allowed by the IRS to shelter your savings from taxation while it’s safely growing to increase your future purchasing power capacity.

Change is never easy when it’s new. However, we find like with many other valuable processes in your life, once you get into the swing of things it becomes second nature especially as you start to reap the benefits and see the power of infinite banking along the way.

Whole Life Insurance and IBC

The specifics of why Whole Life insurance is the ultimate vehicle for infinite banking and how best to design a policy could be the subject of an entire site, and it is in fact… you’re actually on it right now. But we at BankingTruths.com specialize in simplifying very complex financial concepts so I’ll do my best to give you the answer below.

These 7 features are why Whole Life is touted as the preferred vehicle for the infinite banking concept:

  1. Guaranteed safety of principal
  2. Guaranteed annual growth (plus fluctuating dividends)
  3. The best loan-to-value ratio for maximum access (95% LTV)
  4. All growth & loans are tax-sheltered (throughout the life of the policy)
  5. A locked-in cost structure that is guaranteed not to increase
  6. Backed by the oldest & most solvent insurance companies
  7. The issuing companies are owned by their Whole Life policyholders

This combination of benefits can’t be replicated by any other financial product in existence, nor can it be cobbled together by pairing two traditional investment options like say bonds and a Roth IRA.

It’s worth noting that Whole Life insurance is commonly thought of as an expensive rip-off. To be quite frank with you, Whole Life insurance can be a bad deal the way it’s often sold to consumers. This is because the majority of Whole Life’s internal costs and agent commissions are based not as much on how big your premium is, but rather how much death benefit you’re paying for.  

Infinite banking life insurance can be optimized by shrink-wrapping the least amount of death benefit possible around your Whole Life cash value

Most of the exorbitant costs you hear about can be mitigated by your infinite banking life insurance agent shrink-wrapping the least amount of allowable death benefit around your desired premium contribution (according to the prescribed IRS limits).

Furthermore, substituting as much of that necessary death benefit with a term insurance rider can not only bring down the overall cost structure (and agent commissions), but also allows for the maximum amount of premium overfunding going to the paid-up additions (PUA) rider. This rider acts as a cash value turbo-charger of sorts since somewhere between 90-95% of your PUA premium goes straight to cash value while only 5-10% goes to a one-time load to buy the fully paid-up death benefit needed to support this premium overpayment.

Paid-Up Additions stack onto a base whole life insurance policy

So don’t accept at face value any opinions you hear about Whole Life, whether it be from blowhard media pundits dogging Whole Life or even biased insurance agents pitching it with rhetoric while short on supporting data.

We recently published a 10-page Ultimate Guide to Understanding Whole life for Infinite Banking. It boils down 15 years of industry secrets into a single PDF. Whether you end up working with us or not it’s everything you don’t even know that you need to know about choosing the right insurance agent, Whole Life company, and combination of riders to make sure you’re getting the optimal infinite banking life insurance policy. You can download the comprehensive PDF below or keep scrolling to understand at a high level why Whole Life is the preferred banking vehicle.

Do I Have to Pay For My Whole Life Policy For My Entire Life?

No, despite its namesake you do not need to pay premiums towards your whole life for any Whole Life policy. To be clear, most Whole Life policies are structured to pay premiums until age 100, although others have accelerated payment schedules like a 10-pay policy, 20-pay, or Whole Life Paid Up at Age 65. Regardless of what type of you decide on for your infinite banking strategy, every Whole Life product from every single company has a contractual right to elect the Reduced Paid-Up non-forfeiture option (RPU). If you elect for this Reduced Paid-Up status, the insurance company will actuarially determine what fraction of your total death benefit would be considered fully paid-up given how much premium you’ve paid.

Once you choose RPU, you can no longer pay additional premiums, but your now smaller Whole Life policy is then devoid of mortality charges and the cash value is still guaranteed to grow every year from that point onward.

Another option to stop paying premiums is to do what’s called a “premium offset” or “vanishing premiums” where you maintain your full death benefit and have your policy pay its own base premium through dividends and possibly by sacrificing paid-up additions.

You do not need to decide on doing RPU vs. Premium offset when you start your policy. This can be a game-time decision that can be made whenever you are ready to stop paying premiums. 

With infinite banking life insurance you can do reduced paid up or premium offset

Click here for more information on Reduced Paid-Up vs. Premium Offset and when to choose one versus the other.

Can Indexed Universal Life (IUL) work with IBC

Indexed Universal Life or IUL as it’s known is often a point of contention amongst infinite banking agents. Most will adamantly insist that Whole Life is absolutely the only product that can work for IBC. I used to blindly subscribe to this popular opinion out of fear of being shamed by my peers. However, after genuine curiosity and thorough analysis a decade ago, I determined that Indexed Universal Life (IUL) can work for infinite banking simply because:

  • IUL is still considered a fixed insurance product, not a security
  • Indexed crediting is paid from the insurance company’s general account
  • There is a floor of 0% during bad market years (minus the cost of insurance)
  • You can often borrow somewhere between 80-90% of your IUL cash value

To be clear though, you would be sacrificing the certainty of Whole Life’s guaranteed growth and locked cost structure for the potential of higher long-term returns with IUL.

Indexed Universal Life can safely grow your liquid reserves on your way to retirement

There have been periods where this has worked out very well for IUL policyholders and other periods where it hasn’t. And thankfully none of the top IUL companies have raised their cost structure above what was originally illustrated to clients. However, unlike with Whole Life, IUL companies reserve the right to increase mortality costs at any time which can put your entire infinite banking strategy at risk.

Truth be told the potential growth of IUL used to be a lot higher than what you could earn from Whole Life just 5 years ago when IUL caps were much higher. Most IUL policy caps were between 12%-13.5% while tracking the S&P 500 index with a floor of 0% (less the cost of insurance) in bad years. Nowadays you’re lucky to have a cap of 9.5%, which obviously won’t get hit every year.

Yes, interest rates are starting to rise again which will increase the budget an IUL company has to buy S&P 500 options supporting higher caps, BUT interest rates aren’t the only determinant of options pricing. So too is market volatility. If the stock market is expected to be volatile for some time, this will increase the price of the options, which will put pressure on the possibility of substantially higher IUL caps despite rising interest rates.

Most Indexed Universal Life (IUL) policies track the S&P 500 Index on it's way up without realizing any losses from market downturns

What I did personally was start my own infinite banking strategy with a firm foundation of Whole Life and then later added layers of IUL. There were of course double-digit crediting years where I loved my IUL. However, during those bad market years where I actually lost some ground due to IUL’s cost of insurance plus any loan interest. I sure did love the steadiness of my Whole Life insurance for infinite banking during those times.

If you’re still curious about the pros and cons of IUL you can check out our detailed article here.

Infinite Banking Loans

Let’s address the elephant in the room, that dirty little 4-letter word… LOAN.

Are infinite banking loan really debt if they're backed by Whole Life insurance cash value

People naturally have a knee-jerk reaction whenever hearing the words loan, borrow, or especially debt. Keep in mind the word “debt” can be interpreted differently than the words “borrow” or “loan”. To be “in debt” insinuates you have more liabilities owed than assets you own. However, you can take a loan by borrowing against your assets and still be in a positive financial position with the infinite banking concept.

This is especially true if the asset you borrow against is guaranteed to grow every year like Whole Life insurance, and even better if you can get the loan rate to be less than the growth rate of your policy.

With that, let’s discuss 2 distinctly different variations of infinite banking loans:

Using Policy Loan for the Infinite Banking Concept

The contractual loan provision embedded into every Whole Life policy is the most common type of IBC loan popularized by the late Nelson Nash’s book that first publicly explained the infinite banking concept. Nelson brought up that you had more control and privacy with a policy loan than you would using bank financing.

You also have ultimate flexibility with a policy loan since the loan is technically against the IBC policy’s death benefit and there is no loan term where the loan can be called by the insurance company. So long as you have enough cash value collateral to support the loan, no payments are technically due ever. That being said, it is wise to service your IBC loan with at least interest-only to essentially pay simple interest on a flat balance while earning compound interest on the increasing balance of your cash value. This is a recipe for long-term financial success. Obviously paying down additional principal will increase your borrowing capacity in the future.

Premium financing loan rates will certainly rise and fall throughout the life of your premium financed life insurance policy.

The downside of policy loans for infinite banking is that the borrowing process can be somewhat inefficient because you often have to call your agent or the insurance company directly to initiate the borrowing process (although certain carriers are implementing user-friendly technology to cut out this step). Also, if you have multiple family policies it can be cumbersome to request different sums from different policies, not to mention the fragmented repayment schedule of multiple policy loans.

Last, oftentimes the policy loan rates are less competitive than what you can get using outside lenders, which we’ll discuss below.

Cash Value Lines of Credit (CVLOC) Programs for IBC

There are a number of traditional banks that offer a turnkey line of credit program specifically for Whole Life policies from the biggest, oldest, and strongest mutual companies. I understand there is a lot of rhetoric around using IBC to lower your dependence on actual banks.

Think about it though, even if you do take a policy loan the insurance company isn’t going to send you Bitcoin or a briefcase full of small-unmarked bills.

Whole Life insurance companies won't send you cash for infinite banking loans

They’re going to send you a check or an ACH deposit to your bank account. Since banks will still be involved in your infinite banking strategy somehow, why not use them for what they are best at…lending & convenience.

Big banks may not beat Whole Life at the savings game. However, they are often superior when it comes to the lending game since that’s their primary business after all. And part of how big banks justify not paying you a yield on your deposits is to offer you technological conveniences for transferring and tracking your funds. Fine, utilize the services banks offer, but do it as a shallow pass-through account rather than a long-term resting place for your liquid capital.

What advantages do these turnkey CVLOC’s offer for IBC:

  • You can combine multiple family policies into a single line of credit for ease of use.
  • You can borrow up to 95% of your total aggregate cash value from all Whole Life policies
  • Certain CVLOC lenders offer free wires transfers, free ACH to your checking account, and a convenience checkbook
  • CVLOCs have offered rates substantially lower than policy loans for the better part of the last decade.

If at any time the bank rates are not better than the policy rate, you can roll the loan back into your policy loan.

Becoming Your Own Bank uses Whole Life Insurance

Remember the advantages of a policy loan for the infinite banking concept?

  • Privacy
  • No credit checks
  • Ultimate payment flexibility

What if CVLOC vendors allow you the flexibility to roll your interest payment back into your loan rather than make mandatory monthly payments? What if they also considered CVLOC a cash secured loan so your ongoing line didn’t even show up on your credit report? What if you could also request a credit line increase after paying new premiums so you always had access to 95% of your cash value.

Guess what, you can do all 3 with certain vendors. You can learn more about CVLOC programs here.

Again, these cash value line of credit programs are not necessary, but they do provide added convenience for your infinite banking strategy as well as potential rate arbitrage, which can add up to a lot of additional compound interest over time.

Direct vs. Non-Direct Recognition Loans and “Synthetic Non-Direct” with a CVLOC

On another note, using a CVLOC is a way to create your own “synthetic non-direct recognition loan” with a direct recognition policy when they have higher dividends and/or unique policy features you want. The difference between direct and non-direct recognition loans is quite a complex subject beyond the scope of this article, but you can learn more about it on our site at BankingTruths.com/Direct.

Debt Consolidation Using Infinite Banking Life Insurance

Oftentimes the infinite banking concept is pitched as a panacea for helping people get out of debt. Although this can be the case in certain surgical situations, for the most part, we found that starting a Whole Life policy for infinite banking may delay the client’s primary goal which is to knock out the most cancerous of their consumer debt ASAP.

Infinite banking can sometimes be misused with debt consolidation

There’s no getting around the fact that the first year is the worst year when it comes to starting a Whole Life policy for infinite banking. If you could’ve used some of those premium dollars to knock out high-interest non-deductible consumer debt, then you are essentially financing your initial IBC policy acquisition at a very high rate.

On the other hand, if you can see the light near the end of your debt tunnel, and you can fully “refinance” all your egregious debt through your first year’s available cash value then there may be a case for starting some infinite banking life insurance now. Otherwise, you really should just throw all the resources you have into your consumer debt.

If that’s the case, the only insurance recommendation we can make in good conscience would be to possibly start a convertible term policy you can easily convert into a banking policy on a guaranteed basis after the worst of your debt is taken care of. Most people aren’t aware that a convertible term product is even an option where you can lock in your health today for a future banking policy while providing immediate death benefit protection for loved ones.  

On the other side of the debt spectrum, if you have low-interest auto loans, deductible mortgages, HELOCs, and business debts that are deductible, then it can absolutely make mathematical sense to strategically start an infinite banking policy optimal for your situation.

We specialize in helping to engineer these types of advanced cash flow strategies through an optimal policy. Grab a slot on our calendar for a free custom consultation. 

IBC Alternatives Other Than Life Insurance Products

Can other assets work for infinite banking besides life insurance products?

Yes, but no. We discussed the viability of using IUL over Whole Life for IBC in one of the sections above. Here is a grid of some other infinite banking alternatives along with detailed descriptions below:

Infinite banking concept alternatives to Whole Life insurance

Borrowing against Stocks/ETF on margin can be a very management-intensive way to do private banking not to mention risky and with less available liquidity. Normally you can only borrow against 50% of your stock’s value using margin. If your equity value falls below this threshold, then a portion of your stocks will be liquidated at the low point. Also, since your best investment opportunities will often come when markets are down, you ideally want your private banking assets to be non-correlated to equity or real estate markets if possible.

With municipal bonds, you can often borrow up to between 50%-75% of their value. However, bonds, in general, are facing headwinds since they lose market value and available equity as interest rates rise. Why would anyone give you full price locking themselves into your old lower-yielding bonds, when they can buy newly issued bonds paying a higher yield? Did you know that even some of the safest of bonds (which don’t yield much) have been known to lose value when the stock market tanks since people fear repayment risk by the issuer? Even though this drastic loss of value may only be temporary as fear pervades in the marketplace, these periods are again your best opportunities to use your own private family bank for other investment opportunities.

A home equity line of credit (HELOC) is NOT guaranteed to be available like a life insurance policy loan. In fact, I personally had a home equity line of credit revoked from under me in 2009 when global credit markets tightened. Counting on a HELOC as an emergency fund or hoping to leverage it into other real estate when prices are falling can be downright unreliable.

A 401k loan is not even in the same ballpark as infinite banking because you are no longer borrowing against steadily compounding assets. You actually must remove your mutual funds from the market to borrow those funds from your retirement. So again, when markets are down you must liquidate assets at a low point to buy discounted stocks or real estate using a 401k loan.

Premium finance life insurance agents can help you get a favorable approval.

Also, there is no payment flexibility because you technically must pay yourself back monthly with interest over 5 years. Keep in mind too that when you pay this interest you must pay with after-tax dollars back into the 401k where they will be taxed again when withdrawn in retirement. To make matters worse, if you lose your job during the normal 5-year loan period then the entire loan would come due within 90-days, or else you’ll be taxed along with a 10% tax penalty for an early distribution.

To be clear, a 401k loan can be useful as the ultimate backstop emergency account. IUL loans and margin loans can also present an interesting opportunity when pairing them with life insurance loans as your main banking hub for more complex infinite banking strategies. However, as a stand-alone loan option, the 401k does not measure up to using Whole Life loans for the infinite banking concept.

Infinite Banking Concept Example

This infinite banking concept video below gives a detailed mathematical example of taking IBC loans from a Whole Life policy vs. saving and withdrawing from an unrealistically high-yielding savings/investing rate. This IBC example video shows continuous borrowing and recycling of premium dollars over decades. Both the embedded policy loan as well as the turnkey cash value line of credit program (CVLOC) can be seen and compared in our infinite banking concept example.

Obviously, the most relevant example would be to book your own banking custom consult so you can see one using your own true-to-life policy design and premium numbers. However, this infinite banking example will give you some idea of how the numbers of IBC can look.

Best Practices for the Infinite Banking Concept

First off, you should schedule a call with an infinite banking specialist to fill in any educational gaps so you can get comfortable with the strategy, products, and mindset. We can also suggest more efficient cash flow architecture and asset restructuring for banking premium possibilities you didn’t even know you had. Even though this is your first time down this road, we have guided thousands of folks in similar situations.

Clients sometimes erroneously feel that stacking policies on younger family members would be more financially efficient when designing a policy or a portfolio of family policies as their infinite banking engine. However, we often disprove this myth as you can see in this video about Whole Life for kids vs. their parents. If the performance difference is negligible then we feel much more comfortable starting with a policy on the breadwinner(s) first as well as non-working spouses, especially if their absence would cause a family disruption. Then we proceed with ancillary policies on kids and/or key employees to expand your infinite banking strategy.

For many reasons we strongly believe in choosing the biggest, oldest, and most solvent mutual companies for your infinite banking strategy. For one, these Whole Life companies can boast the longest history of paying dividends throughout the various types of financial hardships that have plagued our nation throughout its history.

Mutual insurance companies offer the type of Whole Life insurance you need to be your own bank

Also, many of the newer and lesser-known mutual holding companies aren’t approved for the turnkey CVLOC programs. Not to mention that these mutual holding companies are structurally one step away from selling out and losing their mutual status (this actually happened to a major player a couple of years back). Lastly, the old true mutuals often perform the best (not surprisingly because their agent commission rates are usually the lowest).

Concurrent to applying for your Whole Life policy, do learn about the CVLOC program so you can implement it once your policies are seasoned with enough cash value to qualify. This way you have added convenience and oftentimes rate arbitrage when making a policy loan for emergencies, investment opportunities, and/or major expenditures.

How To Start An Infinite Banking Policy

Unlike other financial products that can be initiated with a simple point & click transaction, buying an optimally-designed Whole Life policy for infinite banking is a much more involved process. The extra time needed to acquire the product may be a good thing because properly executing the infinite banking strategy often requires a major shift in adapting your mindset and financial behaviors.

We’ve summarized the different onboarding phases below so you understand what you’re getting into.

[This summary is taken from our comprehensive “Ultimate Guide to Whole Life for IBC”. Downloading this thorough PDF guide will certainly help you be more knowledgeable regardless of who you end up working with.]

Researching Phase [Solo]

Banking newbs often scour the internet sifting through opinions to see if this strategy is really worth their time and energy. They’re grasping for some sort of clarity, but often feel scattered, confused, & overwhelmed during this phase.

Co-Educating Phase [Together]

Together we ascend your learning journey by answering questions and filling in knowledge gaps on how the infinite banking concept really works. Clients then educate us about their situation so we can cement their conceptual learning with their own true-to-life numbers. Clients get AHA’s feeling excitement and relief as light bulbs go on.

Designing Phase

Our team puts together multiple custom proposals from top insurance companies reflecting the details you shared with us in the prior meeting. Subtle and distinct differences in performance and features now become clearer for clients.

Underwriting Phase

Armed with your newfound knowledge, the first decision point is simply determining which insurance company(ies) you feel will best support your unique banking strategy.

(To be clear, underwriting is neither a contract nor an obligation. It’s simply an official request to the insurance company for a health rating so you can see accurate proposals.)

Refining Phase

Since insurance companies take time to provide an accurate health rating we have time to concurrently educate and model different policy sizes and what-if scenarios for you. Thankfully your comprehension of the infinite banking concept has progressed tremendously, so you are finally at a point to fully understand what cash flow sources you have to funnel through an infinite banking life insurance policy.

Funding Phase

Once the insurance company declares a health rating, we meet to do final custom fitting to the policy you actually want to have issued. 24-72 hours after deciding the policy gets issued electronically where you can consummate the contract through the insurance company’s secure online portal.

Once the contract takes effect, clients often feel a rush of excitement to embark on this new course of financial control with a tinge of nervousness since it’s new.

Utilization Phase

Our team is here to support you.

Whether it’s updating payment schedules, requesting loans or withdrawals, updating beneficiaries, even transferring ownership (yes a policy is a piece of property), we are always just an email or a phone call away from a meeting. Plus we provide ongoing premium reminders and other financial strategy content that may help you expand your infinite banking strategy.

Our clients often feel bold and confident knowing they have a way to safely grow their wealth in a tax-efficient manner while staying liquid and building a unique buffer asset for retirement.

John “Hutch” Hutchinson, ChFC®, CLU®, AEP®, EA Founder of BankingTruths.com
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