Disclaimer: The following article talks about both the infinite banking concept and bank on yourself. TermLife2go and TL2G Insurance Services, LLC is independent of and is not affiliated with, sponsored by, or endorsed by Infinite Banking Concepts, LLC or by The Hayward-Yellen 100 Limited Partnership.
Also, please note. The following concept involves a properly structured whole life policy in combination with a strategically focused disciplined mind. It is not for everyone. However, if you believe it may be for you, please contact us today using the contact form below to speak to an advanced markets professional.
What is infinite banking?
Infinite banking is a concept or strategy utilizing permanent life insurance as a personal money storehouse made popular by Nelson Nash in his book Becoming Your Own Banker, published in 2000. The Infinite Banking Concept® is a registered trademark of Infinite Banking Concepts, LLC.
The concept uses generally available whole life policies and riders. This is not some “secret” or exclusive product only available to the rich and famous. It is available for anyone who is lucky enough to stumble upon and take the time to grasp this fantastic concept.
It is also not about actually starting your own bank, and all the rules and regulations that accompany such an undertaking. The idea of becoming your own banker is referring to the fact that you are now wearing two hats. One hat is you as the borrower and the other hat is you as the banker or financier. Some people may even progress into wearing three hats, banker, borrower and business owner.
What is Bank on Yourself?
Bank on Yourself is a system made popular by Pamela Yellen that uses many of the principles of infinite banking. Bank On Yourself® is a registered trademark owned by The Hayward-Yellen 100 Limited Partnership.
Once again, Yellen is not introducing some “secret” product only available to the rich and famous. The concept uses generally available whole life policies and riders. It is available for anyone who desires to take charge of their financial future through the infinite banking strategy.
Is Infinite Banking or Bank on Yourself a scam?
No, infinite banking is not a scam. The concept of infinite banking has been around for at least a few generations, dating back to at least the turn of the nineteenth century. The main thrust of the concept is using the cash value in participating whole life insurance from a mutual company that practices non-direct recognition as financing for paying off debt (such as credit cards or student loans), purchasing products (such as vehicles), or purchasing investments (such as stocks or real estate).
Infinite Banking in a Nutshell
Infinite banking is a concept or strategy that utilizes the cash value of a participating whole life insurance policy from a mutual company as a means of self-financing. The “banking” policy’s cash account is over funded up to the limits allowed without becoming a modified endowment contract through the use of a paid up additions rider.
The owner of the policy uses his or her cash value as collateral for a policy loan to purchase products, pay off debt, or invest with. Policy loans are guaranteed and provide excellent liquidity. The money borrowed against is then repaid, with interest, back to the insurer, who credits it back to your policy’s cash account.
It is this “recapturing” of interest that truly sets the infinite banking strategy of self-banking apart from ordinary life insurance.
An Example of Infinite Banking in Practice
Probably the most widespread example you will see when researching infinite banking strategies is buying a vehicle every five years. Under this example, the cash value in the banking policy is used to purchase a vehicle. The policy loan is repaid by you, the borrower, to you, the banker. But you don’t just repay the loan, you repay the loan with interest.
How this looks is, you borrow $25,000 from the insurer and are charged interest by the carrier, say at 5%. Certain carriers that are ideal for infinite banking or bank on yourself strategies continue to credit your full cash value account at the guaranteed rate plus potential dividends. This may be around 6-8% interest with certain companies in our current environment. That means your $25,000 in your cash account acting as collateral is getting positive arbitrage of around 1-3%.
As you repay your loan, you choose what interest rate you pay your “bank”, i.e. your policy, back at. Ideally, you want to charge yourself more interest than the insurer, so you charge yourself 7-10% interest. This creates a huge benefit for you as you are now using the power of interest for you, instead of against you.
Are you familiar with the acronyms BOLI and COLI? Perhaps you should familiarize yourself with these terms as the implications of them are quite eye opening.
BOLI stands for Bank Owned Life Insurance. Grab the balance sheet of any major bank and find the heading “life insurance assets”. You will discover that banks own quite a lot of assets in the form of life insurance. Now, do you consider life insurance to be an asset? Banks do.
COLI stands for Company Owned Life Insurance. It is similar to BOLI.
Most, if not all, major companies and banks have BOLI or COLI on the life of key employees in the form of key man insurance.
Banks and companies gain two distinct advantages with life insurance assets: tax deferred income and tax free death benefits.
The reason we list this as a benefit of infinite banking is that if banks and companies, i.e. the people with money, are buying life insurance as an asset, then maybe we should as well.
So let’s dig a little deeper into what the infinite banking strategy entails.
- Forced Savings vehicle
One of the benefits of using whole life insurance as a vehicle towards wealth building is that it is a forced savings vehicle. You need to make your premium payments. The idea is that you should be paying yourself first, that is, before Uncle Sam or your creditors. By consistently putting money away into a forced saving vehicle, i.e. your policy, you will begin to build your future pool of financing, i.e. your “bank”.
- Borrow From the Insurer via Policy Loans
Once you have accumulated money in your policy, the cash can be borrowed against. Essentially, you as the policyholder borrow money from the mutual company. The mutual company uses your cash in your policy as collateral against your policy loan. When you borrow money from your policy there are no taxes. This is the preferred method to accessing your money for financing in contrast to taking policy withdrawals.
The problem with cash value withdrawals
If you withdraw money from your policy you are depleting your policy of its cash value, cash value that is growing with compounding interest. Further, you may be taxed if the withdrawn amount exceeds your basis (i.e. how much you contributed) in the policy.
- Using your Cash Value as Financing
Utilizing an infinite banking strategy requires that you use your cash value to finance your purchases in the form of policy loans. Policy loans are guaranteed and provide excellent liquidity. Purchases include:
Paying off existing debt:
pay off high interest credit cards, business loans, or student loans.
Purchasing investment assets:
Some possible investments to purchase would be:
Investing in real estate assets can create passive income streams.
Depressed stocks may pose a great investment opportunity, especially stocks with high dividend yields.
You can also use policy loans to make your own loans:
Loans to others:
Peer-to peer lending may provide a great avenue for increasing your cash flow.
Loans to your business:
You can even loan to your business. This might be a great way to finance your business and provide potential tax write offs or deductions. Consult a tax advisor for more information.
Recapture Your Debt
One of the KEY components of infinite banking is that you pay back your loan and do it all again. Most people stuck in the rat race are there because their outflow is greater than their inflow. That is, the money they spend is higher than the money they take in. And if they do save, the money saved cannot keep up with the pace of inflation so they end up working harder and harder but getting further and further behind.
Rather, one benefit of practicing the infinite banking strategy and help you regain control of your finances is through recapturing your interest. A great example is the purchase of a vehicle.
When you purchase a vehicle you have three choices: bank finance, pay cash, or self finance.
When you bank finance, you owe the bank the principle plus interest. You are essentially going into the negative on your finances. Paying interest to anyone else but you will only contribute to the problem of putting you further into a financial hole.
What about paying cash for the vehicle? The problem with this option is you go from having cash to zero cash. You just lost out on the opportunity cost of your money. Further, you are declaring that your money is not worth as much to you as it would be to a bank. You see, a bank would recoup that money through interest. However, if you buy a vehicle and don’t collect interest on your money, you are DEVALUING your own money.
The third option would be to self-finance your vehicle. The advantage with self-financing is you are acting as the bank, charging yourself interest on your purchase. You get to choose the interest rate, but it is your money so hopefully you VALUE your money higher than a bank would. As you recapture the debt in the form of interest payment to yourself (back into your policy via the insurer) you policy is growing exponentially due to compound interest.
Your Money is Working for You-TWICE
It is important to understand that if you use a non-direct recognition company for your policy, your money in your cash account is accruing interest all the while you are using it for investing or purchases.
For example, if you have $100,000 in your cash account and you borrow $25,000 to buy a car, the $75,000 that remains still grows at the guaranteed rate plus dividends. However, your $25,000 also still grows, although at a smaller rate of return. But as you repay your loan, every dollar you replace reverts to the guaranteed return plus dividend rate, creating a snowball effect of true compounding growth in your policy.
II. Mutual Insurance Companies – profits to policyholders, not stockholders
Another benefit of using whole life insurance through a mutual company as a type of self-banking policy is that the company is looking out for the best interest of its policyholders, rather than stockholders.
These “banking” policies are purchased from mutual companies. The companies are not publicly traded on the stock exchange. The board of directors are not swayed by investors but rather look out for the interest of policyholders, the true owners of the mutual company.
In today’s world where it seems everyone on Wall Street is out to get theirs, it is nice to know that there are still companies that have the policyholders’ best interest in mind.
III. Dividend – tax free; ROP
With a participating whole life insurance policy you receive annual dividends. The dividends from mutual companies that offer these types of “self-banking” policies have been consistently paid for over 100 years, even during the Great Depression. So even though dividends are not guaranteed, there is a very high likelihood that you will receive a return of premium in the form of dividends. However, as a caveat, we must mention that past performance is no guarantee of future results.
IV. Cash Value Accumulation
The cash value in your policy accumulates on a tax deferred basis. You have a guarantee rate and a dividend that will further increase your cash value year in and year out. As time passes, your cash account becomes more and more efficient, i.e. it grows faster and faster. And the best part is the cash value can be borrowed against tax free* at any time and for any reason.
*Under current tax laws, a policy loan is not taxable. The only way that the policy loan can be taxed is if you have an outstanding policy loan and the policy lapses. If that happens, you can be taxed on the amount of cash value above your basis in the policy.
V. Guaranteed Tax Free Death Benefit
Under current law, the death benefit from your life insurance is not taxed. This is a huge benefit and makes life insurance one of the greatest investments available. Many people like to compare whole life insurance to other investments, such as IRAs and 401k Plans. However, without even getting into how much superior whole life can be when used as a self-banking strategy, you also have to figure in the death benefit. IRAs and 401ks do not come with a death benefit. This alone makes investing in whole life heads and shoulders above its competition.
And with a properly structured banking policy, your death benefit continues to grow and grow as you age. That way your life insurance beneficiaries reap the maximum reward of your policy upon your death, long after most term life policies have expired.
VI. Tax Deferred Growth
The growth in your cash account is tax deferred. Abiding by the principle of the infinite banking concept will allow you to maximize your cash value and avoid paying taxes on your policy. Generally, you do not have to pay any taxes on your cash accumulation unless a taxable event occurs. A taxable event could occur by withdrawing more money than you put in or having a policy lapse with outstanding loans above your basis. Both of these scenarios are easily avoided if you are paying attention.
Using tax deferred growth in retirement
Upon reaching the age of retirement, you can use your policy’s cash value as retirement income. The best way to do this is through policy loans. If your policy is properly funded using the concepts advocated by infinite banking you can use your policy loans to supplement your retirement income without depleting the policy or lowering the death benefit.
VII. Tax Free Policy Loans
Policy loans are guaranteed and provide excellent liquidity. Taking out policy loans tax free and using the money to finance other pursuits, such as buying vehicles, paying off debt, or investing in other assets is an amazing benefit. Not only are your policies tax free, but the money in your policy’s cash account continues to grow at a guaranteed crediting rate. So your cash value, through tax free policy loans, is actually working in two places at once. One, in the policy via your guaranteed crediting rate, and two, in your investments you are utilizing the policy loan for.
And further, as you recapture your interest and pay back your policy loan, with interest, you are growing your policy’s cash value exponentially, while simultaneously increasing your death benefit.
VIII. Tax Free Withdrawals (up to basis)
The money in your cash account is yours to withdraw if you need it. You can withdraw up to your basis (i.e. premiums paid) in the account without being taxed. However, this is not the recommended method under infinite banking, but it is nice to know you can take out your money penalty free if you so desire.
IX. Paid Up Additions
The primary vehicle that allows your infinite banking policy to grow so quickly is the paid up additions rider. This rider allows you to purchase paid up life insurance. You death benefit increases, as does your cash value, dollar for dollar. This allows many self-banking policies cash value to be accessed in just a short period of time, compared with many years on a typical whole life policy where the main perk is the death benefit.
X. Non Direct Recognition
A non-direct recognition life insurance company pays a guaranteed crediting rate plus dividends on the entire cash value, rather than paying only on the cash not currently borrowed against. This is a huge benefit to a self-banking policy utilizing the concept of infinite banking because your money is essentially working in two places at once: in the policy and in your investment.
The cash account is still credited your guaranteed rate plus dividends. The mutual company will loan you money at an interest rate typically below your total return in your cash account. That way, you still earn interest on your entire cash account, although at a lower rate on the amount held as collateral due to the policy loan.
A “true” infinite banking concept policy or Bank on Yourself policy require the company practice non-direct recognition. However, direct recognition companies can offer similar results and need not be automatically ruled out as a viable option to any self-banking strategy.
If you were to pin us down and ask us what we recommend, it would be a non-direct recognition company. It just makes more sense for a banking policy, since you plan to use your money not have it sit idle in your policy.
We have touched on a lot of the pros of infinite banking. However, no review of the concept would be complete without also touching upon the cons of infinite banking.
Infinite Banking Cons
To get the most out of a banking policy it is best to use the concept of infinite banking in conjunction with permanent coverage, preferably whole life. Front-loaded fees are the primary arguments raised in opposition to whole life by financial pundits. Of course, these same financial “gurus” fail to mention that your 401k plan, your IRA, and your mutual funds all have fees that may exceed any fees in a whole life policy over the long term. Here is a 20 page document from the Department of Labor on all the fees in a typical 401k plan.
Nash’s book was written in 2000. The content is outdated. However, the concept itself is sound. In fact, Nash only went so far with the concept. We believe there are ways to implement the infinite banking concept that go beyond what Nash is offering his readers.
Additional Info on Using Infinite Banking
Consider this: You put your money in a bank and receive a small return (.004%) and then take out a loan (for credit cards, small business loans, car loans, student loans, etc.) at a much higher interest rate. Why not fund a whole life insurance policy and take out a policy loan where your remaining cash is getting a guaranteed return and the borrowed cash is still getting a small return, in addition to whatever your investment returns?
Here is how banks work:
A bank will take your deposit and give you a small amount of interest for you to park your money with them. The bank will then use your money to gain much higher interest loaning it out to others, or even back to you. Further, due to our fractional reserve banking system, a bank can leverage out the money it has on deposit 10-1.
A bank makes a great deal of money through interest. If it is paying you a half percent of interest on your money and loaning your money out at 5% interest, the bank is not making a small 4.5% return on your money. Rather, the bank is making a colossal 10 times more return* on your money! Instead, shouldn’t those gains be going into your pocket?
*Think about it like this. If you get a half percent return on $1,000, your interest gained would be $5. If the bank gets 5% interest on $1,000, the bank earns $50. The bank earned 10 times your return. That is amazing. And to make it even better for the bank, it can loan out with 10-1 leverage on your deposit, or $10,000. So the bank would actually make $500 on your $1,000 deposit, if it only charged 5% interest!
And if we compare a self-banking policy to a Roth IRA, we can see that whole life is superior to a Roth IRA due to:
- Whole life also offers a death benefit (no death benefit for a Roth IRA).
- Whole life has no contribution limits.
- Whole life policy loans and withdrawals can be taken anytime without penalties.
- Whole life has no required minimum distribution at age 70 1/2.
- You receive “true” compounding growth of your whole life cash value, even if you have outstanding policy loans. Where else can you receive “true” compound growth, except in a policy where you never need to withdraw the funds, but where you simply borrow against your cash value?
And if you compare whole life using IBC to 401k plan withdrawals the outcome is even more favorable to IBC.
Is Whole Life Insurance a Good Investment?
Many financial entertainers (Dave Ramsey, Suze Orman) trash whole life as a bad investment. They talk about how you can earn 12% or more in stocks and how everyone should buy term and invest the difference. Now apart from the fact that 12% returns in the stock market is a myth, there are several reasons why whole life insurance is a good investment, especially when you employ an infinite banking strategy.
Using an infinite banking strategy to create an asset (your life insurance policy) and then using that asset to fund the purchase of another asset has an amazing compounding effect. You can then use the proceeds from your new asset to repay your policy loan.
From there, you can use your cash value as collateral for another loan and purchase another asset. Repeat the process. At the same time, your old asset may also be used as collateral to purchase another asset. And on and on it goes into infinity.
Some Cash Flow Asset Ideas
As you continue to fund your banking policy you will continue to have a greater pool of assets to draw from. This in turn will allow you to make more and more investments.
Here are some cash flow ideas that may or may not be ideal for you:
Whether it be single family residences or apartment buildings, the tax breaks from real estate investing are certainly worth looking into. You may also want to consider companies that allow you to invest via crowd funding of larger commercial real estate properties.
Oil and Gas:
Purchasing assets in oil and gas where you actually own the production of oil and gas can be a far superior way to invest in oil and gas.
Lending Club and other sites like it are a great way to create cash flow.
Infinite banking and bank on yourself strategies are an excellent way to maximize your money. Plus, it opens the door for all kinds of opportunities down the road. For anyone seeking financial freedom and escape from the rat race, taking the time to investigate this awesome concept will produce dividends far beyond what you could imagine. You owe it to yourself and your family to take the next step. Please contact us today using the contact form below to speak to an advanced markets professional.