Financial Education Solutions Group
The core of the infinite banking concept is a participating whole life insurance policy. Once such a policy is in place, it is possible to lend yourself money using the cash value of the whole life insurance policy as collateral. That avoids paying interest to lending institutions since a policyholder has his/her own mini bank. It allows very fast access to extra funds, which are just a phone call away.
Typically, a participating whole life insurance policy is used for the infinite banking concept. Participating life insurance means that a policy pays dividends, which allow contribution towards the cash value of the policy or to pay a part of insurance premiums.
Whole life insurance policies are non-correlated assets. This is why they work so well as the financial foundation of Infinite Banking. Regardless of what happens in the market (stock, real estate, or otherwise), your insurance policy retains its worth.
Too many individuals are missing this essential volatility buffer that helps protect and grow wealth, instead splitting their money into two buckets: bank accounts and investments. The problem with this approach is that, while money in a bank account is safe, it offers a very low rate of return. Market-based investments grow wealth much faster but are exposed to market fluctuations, making them inherently risky. What if there were a third bucket that offered safety but also moderate, guaranteed returns? Whole life insurance is that third bucket.
Regardless of how diversified you think your portfolio may be, at the end of the day, a market-based investment is a market-based investment. In the event of a market downturn, you lose money. Maybe a lot. Maybe a little. Maybe your value doesn’t decrease but your returns do. With Infinite Banking using properly structured whole life insurance, your returns are guaranteed and your cash value won’t decrease.
Not only is the rate of return on your whole life insurance policy guaranteed, your death benefit and premiums are also guaranteed. These certainties are another reason why properly structured whole life insurance is the ideal tool for Infinite Banking.
Consider other assets, like those associated with your 401(k) or IRA. In the event you pass away with money left in either of these qualified plans, the remaining funds will be passed onto your beneficiary—but first it will be taxed. You can guarantee your beneficiary will receive something but you can’t be certain how much, due to future tax rates.
While there are other types of permanent life insurance, whole life insurance is guaranteed to have the same premium for the duration of the policy. You can be certain your premium won’t increase as you get older. This is invaluable when it comes to setting and achieving your financial goals.
Many individuals rely on Infinite Banking for a tax-free retirement. Because insurance policies are paid for with after-tax dollars, you don’t have to worry about your future tax rate like you would with a 401(k). So long as you utilize the policy loan feature of your whole life policy, you don’t have to pay taxes on the growth of your cash value. Simply fund your retirement with policy loans and your insurance company deducts the outstanding loan from the death benefit after you pass away.
When your retirement funds are linked to market-based investments, running out of money in retirement is a very real and valid concern for millions of Americans. Infinite Banking using properly structured whole life insurance can ensure you won’t run out of money in retirement, because your cash flow won’t be at risk if the market experiences a downturn. For this reason, some individuals opt to stop funding qualified plans like 401(k)s or IRAs all together and rely solely on the Infinite Banking strategy for retirement. goals.
Arguably the single most beneficial aspect of Infinite Banking is that it improves your cash flow. You don’t need to go through the hoops of a traditional bank to get a loan; simply request a policy loan from your insurer and funds will be made available to you. Whole life insurance is an extremely liquid asset compared to other assets like real estate, stocks, bonds, or qualified plans like your 401(k) or IRA.
Because whole life insurance is liquid, it can make up a valuable part of your financial foundation, acting as your emergency savings. Whether you run into unforeseen medical bills, job loss or costly home repairs, policy loans offer peace of mind. You can even use your insurance policy to pay yourself an income if you decide to go on sabbatical, return to school or take time off work to care for loved ones.
Infinite Banking with whole life insurance is a proven method for building generational wealth, in part because the death benefit is tax-free and generally not subject to estate taxes.
In the case of large estates where federal or state estate taxes may kick in, it’s possible to utilize Infinite Banking inside of an Irrevocable Life Insurance Trust (ILIT). By naming the trust as the policyholder of your whole life insurance policies, even the largest of estates can be eligible for tax advantages that provide significantly more wealth to future generations.
Dividend-paying whole life insurance is very low risk and offers you, the policyholder, a great deal of control. The control that Infinite Banking offers can best be grouped into two categories: tax advantages and asset protections.
When you use whole life insurance for Infinite Banking, you enter into a private contract between you and your insurance company. This privacy offers certain asset protections not found in other financial vehicles. Although these protections may vary from state to state, they can include protection from asset searches and seizures, protection from judgements and protection from creditors. Plus, any policy loans you utilize won’t affect your credit score.
One of the reasons whole life insurance is ideal for Infinite Banking is how it’s taxed. In addition to tax-free policy loans and tax-free growth of interest and dividends inside your whole life insurance policy, the death benefit of a whole life policy is tax-free to your beneficiary and often is exempt from estate taxes as well.
Infinite Banking isn’t a one-size-fits-all strategy. It’s highly customizable and its effectiveness depends largely on your financial goals. Here are some aspects of Infinite Banking to consider when deciding if it’s right for you:
Because Infinite Banking uses whole life insurance as its “bank”, it isn’t an option for everyone. You must be able to qualify for a life insurance policy. Qualification is based on your health and age. While it’s recommended to apply for a policy when you’re young and healthy, it’s possible to get insured even in retirement—you’re never “too old” to pursue the Infinite Banking strategy. (You can also get insurance on others with an insured interest, for example: spouse, kids, grandkids, and business partners)
Compared to term life insurance, the premiums for whole life insurance are significantly higher. Keep in mind that you’re not just paying for insurance; you’re effectively committing to contribute a set amount into “savings” inside your insurance policy to be used by you whenever you choose while still earning a guaranteed interest rate and potential dividends(tax-free growth)
Remember, when you utilize the Infinite Banking strategy using whole life insurance, your insurance policy’s primary purpose isn’t the death benefit, it’s the living benefits. Your main goal isn’t protecting your loved ones financially if something were to happen to you—that’s an added bonus. What you’re really protecting is your income. You’re shielding your wealth against bank interest rates and financing, market volatility, creditors, and taxes.
Infinite Banking is a proven concept for growing and protecting wealth, but it’s not mainstream. You need to be comfortable with taking your financial future into your own hands and have a clear outline of your financial goals. You also have to be a good banker!(We will custom make your bank and provide guidance).
There are multiple aspects to consider when choosing the right company/policy.
First of all, it must be whole life insurance to ensure that the policy has both an insurance and cash accumulation component. It is against this cash accumulation component (cash value) that can lend money in future.
Secondly, it should be participating whole life insurance, meaning that you want it to pay regular dividends that will help your cash value to grow faster and/or you can use the dividends to pay a part of your insurance premium.
Thirdly, it is advisable to use a life insurance policy from a mutual company. That means that policy holders become company owners. For example, Guardian, Mass Mutual, etc have paid dividend consistently for over 100 years.
Fourth, you want to determine the right size of a whole life insurance policy (coverage amount, etc.) based on your needs and on resulting life insurance premiums. That involves an understanding of the maximum amount that you are able to contribute to a life insurance policy on a regular basis.
We recommend working with an experienced life insurance broker who understands the concept of infinite banking and has extensive experience with customized infinite banking policies and whole life products.
Just about any insurance agent will happily sell you a whole life policy, but not all whole life policies grow the same way. While any will provide a guaranteed rate of return, only participating whole life policies earn dividends. A participating whole life policy is one issued by a mutual insurance company. These types of insurance companies prioritize their policyholders and pay out non-guaranteed dividends in addition to a guaranteed rate of return.
The mutual insurance companies we work with at FESG have historically paid out dividends for over 100 years. What’s more, dividends are usually tax-free and can be used to pay your insurance premium or even buy additional insurance in the form of paid-up additions.
A Wealth Accumulation Policy takes infinite banking concepts, with whole life insurance, a few steps further than a typical whole life insurance policy.
First, Wealth Accumulation Policy utilize participating whole life policies from mutually funded insurance companies. Mutual insurance companies work in the best interest of the policyholders. When the company is profitable, it extends these profits to policyholders in the form of dividends. So when you use a participating whole life insurance policy from a mutually funded insurance company you not only earn a guaranteed rate of return, you also have the potential to earn dividends—further growing wealth and supporting a robust infinite banking system. The mutual insurance companies we work with at FESG have historically paid out dividends for over 100 years.
Second, Wealth Accumulation Policy are designed with paid-up additions (PUA) riders that create instant liquidity. A paid-up additions rider allows the policyholder to “overfund” their policy in its early years to maximize growth and supercharge the policy’s earnings over the life of the account. Infinite banking is becoming increasingly popular among American families as people look for ways to diversify wealth away from the stock market and reduce exposure to market volatility. Cash value whole life insurance is a proven strategy for growing and protecting wealth, and one that has been used by banks and corporations for decades.
Yes. The strategy behind Infinite Banking—using dividend-paying whole life insurance as your own personal bank for growing and protecting wealth—is proven to work, and has been used by families for hundreds of years. As with any financial tool, the benefits are largely dependent upon how the tool is used and requires clearly outlined goals to measure success.
For the fastest growth and optimal benefits, it’s recommended to pair dividend-paying whole life insurance with supplemental insurance called a Paid-Up Additions rider (PUAR).
A PUAR allows you to “overfund” your insurance policy right up to line of it becoming a Modified Endowment Contract (MEC). When you use a PUAR, you rapidly increase your cash value (and your death benefit), thereby increasing the power of your “bank”. Further, the more cash value you have, the greater your interest and dividend payments from your insurance company will be. You can then reinvest those dividends to purchase more Paid-Up Additions.
By adding a PUAR to your whole life insurance policy, you front load it to maximize its potential over the course of your lifetime.
Permanent life insurance, whole life included, features a unique asset that term life insurance doesn’t offer. When you buy permanent life insurance, a portion of your annual premium is reflected in a built-in savings account called cash value. You can withdraw your cash value during your lifetime, or you can borrow it from your insurance company tax-free.
In addition to your premium payment, your cash value also earns a rate of return. Depending on the type of permanent insurance you buy, this rate of return may be calculated based on sub-accounts or market indexes (like with universal life insurance), or it can be a guaranteed rate set by your insurance company (like with whole life insurance). The reason whole life insurance is preferred for an infinite banking system is that a guaranteed rate of return helps protect your cash flow from market volatility and promises steady growth.
Insurance riders are supplemental insurance that help customize your policy to deliver maximum lifetime benefits based on your financial goals and your insurance needs. When you start infinite banking, one of your priorities should be to grow the cash value in your “bank” as quickly and exponentially as possible. The paid-up additions rider allows you to do that.
In the early years of your policy, it allows you to buy additional insurance with premium payments that go directly toward cash value. Once you earn sufficient dividends with your participating whole life policy, they can be used to pay for your paid-up additions. This feature is ultimately what allows an infinite banking strategy to work so well that its growth is comparable to gains from mutual funds or qualified retirement plans after their associated taxes and fees. When your policy is structured with a paid-up additions rider, it functions more like a wealth building strategy and less like life insurance.
The paid-up additions rider allows you to supercharge your policy for rapid growth and maximum wealth over the life of the policy. It’s crucial to the success of an infinite banking strategy, so it’s imperative that you work with an insurance agent who is familiar with this type of insurance rider.
You can access the cash value of your whole life insurance policy at any time, for any reason, including real estate purchases, tuition, other investment opportunities, business capital, emergency expenses… you name it. But to take full advantage of the Infinite Banking concept, it’s best to use your cash value in the form of a policy loan rather than a withdrawal.
When you utilize the policy loan feature of your whole life insurance policy, your cash value continues to grow in spite of the loan. Every dollar you borrow still earns interest and potential dividends. When you pay back your policy loan, you recapture the interest—not a bank. This is the backbone of the Infinite Banking concept; your wealth continues to grow, even as you borrow against it. You are basically borrowing from yourself. This is how you use IBC concepts to make money work for you in multiple places.
Additionally, policy loans are tax-free. You can use the interest and dividends you’ve earned without paying taxes on that money. Comparatively, if you withdraw your cash value, any amount over your basis—the amount you’ve contributed in insurance premiums—will be taxed.
In terms of paying back your policy loans, you function as your own banker and get to decide the payment schedule. Any unpaid loans will be deducted from your death benefit.
Although participating whole life insurance is the preferred vehicle of a successful infinite banking system, it’s important to understand your primary goal isn’t the policy’s death benefit. Yes, you’re buying insurance, but the idea is to purchase the smallest death benefit possible while contributing the maximum-allowed amount by the IRS and retain tax advantages. You’re using insurance as your bank first and as an insurance policy second.
Whole life insurance is substantially more expensive than term life insurance of the same face value, but with whole life insurance, only a portion of your premium is going toward paying for the death benefit. The rest is in your “bank” as cash value, earning interest and dividends. Plus, where term insurance is a “use it or lose it” financial tool, participating whole life insurance provides lifetime guarantees.
A Wealth Accumulation Policy functions as your financial foundation. Instead of cash sitting in a bank, it will be in an account that earns a greater rate of return. Unlike a qualified retirement plan, it retains liquidity and you won’t be penalized for accessing your cash value, regardless of your age or how much wealth you’ve accumulated. If you need to borrow against your insurance policy to take advantage of a purchase or investment opportunity, it comes with a guaranteed loan provision, of which you determine the pay-back schedule. And when you pass away, there is a death benefit payout.
A Wealth Accumulation Policy by itself won’t make you wealthy. But when you factor in the benefits, including tax benefits, low costs, liquidity, rate of return, protection from market volatility, protection from creditors and no limit to yearly contribution amounts (like with a 401k), it’s easy to see why executives, banks, corporations, and wealthy individuals rely on the infinite banking system to help grow and protect their wealth.