Becoming Your Own Banker
The infinite banking concept (IBC) uses whole life insurance policies, also known as permanent life insurance policies, that allow a person to be their own bank.
This concept was created by R. Nelson Nash, a financial expert and insurance agent. In his book Becoming Your Own Banker, Nash explains how people are able to become their own banks. Using this strategy, people can take loans out from themselves rather than relying on banks or other lenders.
Using this technique, one can save their money using a whole life insurance policy rather than a bank account. As a result, this money will grow in value due to earning interest. In some cases, the insurance company pays dividends to the policyholder.
It also has significant tax benefits. For example, one can take out tax-free loans. In addition, the money saved in the policy also grows through interest and dividends tax-free. Finally, as a life insurance policy, its beneficiaries would receive the money in the event of their death without paying taxes on them.
In essence, an infinite banking strategy allows people to avoid high-interest rate loans from banks and other lenders by being their own lenders. It also allows them to keep money in an account with a whole life insurance policy that pays interest and dividends. This leads to an appreciation in the value of the account over time.
The strategy also has tax advantages and can help pass on greater wealth to a person’s beneficiary. It is an excellent way for people to gain greater independence with their finances and offers some great benefits.
There are two types of life insurance:
- Term life insurance
- Whole life insurance
Term life insurance is the most common type of life insurance. It usually includes a death benefit that is paid out to beneficiaries in the event of a premature death.
Whole life insurance is the kind that is used within the infinite banking concept. It involves higher premiums, but, as the name suggests, covers the policyholder for their whole life.
They accumulate a death benefit and cash balance that they can borrow from/against over their whole life as long as they pay their premiums. While there are many different types of whole life insurance policy plans, there are two main categories.
The participating whole life insurance policy is where the insurance company pays dividends to its shareholders. This is offered by mutual life insurance companies, in which the policyholders are considered shareholders.
These dividends happen to be tax-free because they are considered a refund of the insurance policy’s premium under U.S. law. A policyholder can also use these dividends to expand their insurance coverage.
The non-participating whole life insurance policy does not generate dividends for policyholders. This type of policy does not view policyholders as shareholders and does not share the company’s revenue with them. Stock insurance companies usually offer it. These do not consider policyholders shareholders, rather external investors.
Infinite banking uses whole life insurance policies to store money and grow wealth. In addition, it can be used as an avenue for lending outside of banks and other institutions.
Whole life insurance policies are notable because they do not just apply to people at the time of their death. They are meant to take care of people for their whole life, hence the name. In addition, people can borrow money from themselves due to their policy’s cash value and death benefit.
This value is derived from a portion of the premium paid into the policy and any other money a person decides to put into their account.
Often the premiums are offered at a fixed rate, so they never increase. The value of this account also grows from the benefit of interest on the account. Sometimes it also pays dividends that the insurance provider pays to its policyholders.
People are eligible to borrow from their policy's cash value by taking out a loan. This eligibility is allowed as long as the policyholder pays their premiums consistently and on time. The repayment of the loan withdrawal is also scheduled by the policyholder themselves, as they are technically their own bank.
If a person does not repay their loans before the time of their death, the debt is passed onto the beneficiary. The amount owed is deducted from the cash balance. People may borrow money for a range of reasons.
Uses for this money could be:
- Investment in real estate
- Investment in business
- Funds for unemployment
There are many advantages to pursuing an infinite banking strategy. The most obvious of these benefits is the ability to be your own banker, which allows people to avoid high-can quickly become burdensome.
The process to withdraw loans from the account is also relatively easy, and one can do it almost any time. This makes the account largely liquid as one has easy and quick access to their money.
One of the most significant advantages of these low-interest rate loans is that the money borrowed still generates interest and dividends. This is because one is technically borrowing from the insurance company and using the account's value as collateral. The money borrowed remains in the policyholder’s account, where it continues to grow.
There are numerous tax benefits that the infinite banking concept offers. A significant advantage of this banking strategy is that both the money contributed and borrowed from the account is tax-free. In addition, the death benefit collected at the time of the policyholder’s death is tax-free to the beneficiaries unless it exceeds the estate tax exemption, which in 2021 was $11.7 million.
Another advantage of IBC that is often cited is its constant returns and fixed premiums. Most whole life insurance companies offer plans with fixed premiums. This means that the cost of maintaining an account never increases throughout a person’s life.
Even better, the profits made on the account are guaranteed, unlike the stock market or other investments, which can be volatile. Conversely, the returns on the policy are unwavering and can give significant peace of mind to policyholders. However, the returns on this account are also less than the returns one can potentially earn in other investments.
Real World Example
The IBC is also helpful for applying to financial aid for colleges. For example, in the application for student loans from the Free Application for Federal Student Aid (FAFSA), parents need not report their life insurance cash balance.
In yet another protection of assets, ex-spouses cannot claim life insurance value as a marital asset. This means they cannot take a share of the money in the account in the event of a divorce.
In addition to all of these benefits, a whole life insurance policy fulfills its position as a life insurance policy. This means that beneficiaries, whoever that may be, are able to receive a substantial death benefit at the time of the policyholder’s death. Moreover, as mentioned above, this death benefit is also tax-free below a certain balance.
While there are numerous benefits to this concept, there are also a few disadvantages in practice.
The largest difficulty with this strategy is its cost. Whole life insurance policies charge very high premiums, much higher than typical life insurance policies. This can price lower-income earners out of this strategy, as it may cause more financial struggle than benefits.
In addition, whole life insurance policies are often very complicated. To set up correctly and choose the right policy, candidates often need to hire third parties better suited to navigate this space. This again costs more and can be an arduous process.
This process is also a serious commitment as it can take a long time for the cash value of an account to accumulate. As a result, one might not see large financial gains from interest and dividends until there is a substantial balance.
After choosing a whole life insurance policy, insurance companies do not allow customers to close their accounts for 5-10 years without facing heavy fines and penalties. Those who wish to pursue this strategy need to understand its pros and cons before getting involved. It is something that requires serious dedication in order to reap the benefits.
Lastly, while the tax benefits are great, one can lose them if they do not use their account correctly. This is another reason why candidates typically need professionals to assist them in setting up and managing their accounts.
People who use infinite banking enjoy the independent income and spending power that come with it. They control their own finances and aren’t at the mercy of banks or other lending institutions. So this strategy is really for people who wish to be independent of banks and take control of their finances.
Nelson Nash would advocate for everyone to use the IBC. He says that people in any socio-economic class can benefit from infinite banking. Additionally, it’s not just for the rich; average, middle-class Americans also enjoy this method.
In reality, this strategy can be difficult for those with lower income to pursue. While it is not impossible, people should understand exactly what they are getting into.
They should weigh all the advantages and disadvantages of their particular situation. In addition, young people are much more likely to benefit from this concept than older people. Older people have less time to accumulate their cash value and may struggle to contribute enough to see tangible benefits before their death.
This method may be more practical for wealthy people. This class can reap serious benefits from this strategy and have the capital to make the cost worth it. This strategy can be extremely rewarding for this class and offers many benefits if done correctly.