Infinite Banking – We Need to Talk About It

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There’s no doubt infinite banking is an interesting concept. It requires that you know exactly what you’re doing, thus we set out to do just that. After some digging into this concept of becoming your own banker, we’ve come to our own honest conclusion as to whether infinite banking works, and if so, for who exactly?

If you don’t know what infinite banking is, no worries. We are here to explain it and get you familiar with how it works. Once you start to truly understand it, you can then start to make some of your own opinions about it.

What is the infinite banking concept (IBC)?

Infinite banking is a term that was concocted by Nelson Nash, an insurance agent. Before that, there have been examples of the concept being used by businesses, including Walt Disney, to serve as a private company bank.

It is a concept that has been modified and adapted many times over the years and goes by several other names, including:

  • Banking On Yourself
  • Becoming Your Own Banker
  • Family Banking Concept
  • Perpetual Wealth Strategy
  • 7702 Life Insurance

The term infinite banking is used to describe the concept of being able to bank with yourself using life insurance policies, thereby effectively allowing you to get money whenever you need to make a down payment on a house, pay off car purchases, pay for home repairs, invest in some stocks, etc. The idea is that instead of paying interest to a bank for their services, you’re paying yourself back, as anyone who holds mutual life insurance is also a part-owner of that insurance company.

How does the infinite banking system with life insurance work?

The infinite banking system is a strategy that allows you to take money out from your life insurance policies rather than through bank loans. As long as your life insurance offers a cash value account, you can make it work. The cash value accounts serve several purposes:

  • It allows you to have forced savings
  • It allows the cash value in the account to grow tax-free
  • It allows you to borrow against the cash value in the future
  • You get a better interest rate than if you took a bank loan
  • The compounding effect in your account doesn’t get interrupted if you borrow against it

However, in order to grow your cash value accounts, you have to pay more than what the premium requires. For example, if your premium is $100 per month, you’ll need to pay $150 towards the monthly to get $50 into the cash value account. The accumulated cash is called excess cash value. Once you’ve paid into it for a few years (depending on your insurance terms), you can start to tap into it.

Who can be an infinite banker?

Anyone can bank on themselves and become an infinite banker. This is in part possible because becoming an infinite banker does not require that you go through traditional processes to get approved as you would with a bank. In order to get a traditional bank loan, you need to apply and have the bank run a credit pull on you. This not only creates a barrier to entry, but it can also hurt your credit score when a hard pull is made.

Another important point to make is that you’ll need cash flow to make this work. If you’re living paycheck to paycheck or close to it, you won’t be able to make any additional payments for the life insurance policy premium without creating a strain on your current finances.

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Can you do infinite banking without life insurance?

No, you must do infinite banking with life insurance. It is specifically the policies and characteristics of life insurance that makes infinite banking work.

However, within the category of life insurance, there are several types of life insurance products you can work with. Each one has their own set of policies to it. Let’s run through them:

1. Whole Life Insurance

You get everything we’ve talked about above, including guaranteed cash value accounts, fixed costs, death benefits, and dividends based on your insurance company’s performance on an annual basis.

2. Indexed Universal Life Insurance (IUL)

You get interest rates that are tied to an index of the companies choosing, usually a broad market index. It’s possible that growth in this type of product could exceed whole life insurance growth. However, it isn’t guaranteed.

3. Standard Universal Life Insurance

Interest rates aren’t tied to anything, and you usually get bottom of the barrel rates.

4. Variable Universal Life Insurance

In this one, the rates are tied to certain financial product performances, which is up to the companies. This can perform better or worse than the indexed life insurance rates, depending on how the accounts do in comparison to the broad market.

Best life insurance policy for infinite banking

The best life insurance policy for infinite banking is undoubtedly whole life insurance. Some may argue that Indexed Universal Life Insurance can come at a close second, but whole life insurance has guaranteed growth and fixed costs, which you’d be giving up if you went with IUL for the possibility of a higher return on investment in the long run.

Is infinite banking a scam?

Infinite banking is not a scam. Nobody is trying to pitch it as a get-rich-quick scheme. However, it does not benefit everyone equally in my opinion. The largest entry to barrier in this is that you need a lot of cashflow to keep this infinite banking concept going. Furthermore, if you don’t know what you’re doing or you don’t have the right life insurance product in place, you could be paying way more than you need to be, offsetting any benefits that infinite banking might give you in the long run. You really need to understand it, and that’s the hardest part that can screw the average Joe over.

In conclusion

Infinite banking as a concept can make sense, but whether you should do it is a whole different story. The main determinant in whether it’ll work for you or not is whether the policy that you and your insurance agent design is properly put together for the benefit of you as the policyholder and not solely for the benefit of the agent. This is extremely important and cannot be understated as it provides the framework for a potentially long-term commitment that you undoubtedly want to pay off a handsome amount in return.

As such, for the average Joe, you’ll need to be putting in tons of time and effort into researching what an effective and correct policy looks like. We’re talking to the tune of weeks to months, and only then are you ready to work with an insurance agent in designing a policy to make sure that it benefits you to the max.

If you’re competent and ready to do just that, infinite banking could work for you. For the rest of you who can’t put in the full time and effort needed to make the policy rock-solid, or don’t have the cashflow needed to make full use of it, I’d recommend you stay away from infinite banking. However great it might sound, it’s not worth FOMO’ing into.

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