The infinite banking system is a wealth strategy that utilizes dividend-paying whole life insurance as an alternative to saving and borrowing with a traditional bank. While there are several benefits to using a whole life insurance policy as your private bank, perhaps the two biggest draws are its tax advantages and guaranteed growth compared to a bank savings account, CD, or share certificate. Namely, you can often expect a greater rate of return—plus potential dividends—and you can access this growth without owing taxes.
If it sounds too good to be true, it could be. Most whole life insurance policies aren’t structured to support an infinite banking system, meaning they grow wealth incredibly slowly. The slower your policy accumulates wealth, the less advantageous it is and the longer it takes before you can use your policy to fund purchases, investments, or your retirement. However, with a properly structured policy, reducing reliance on traditional banks and protecting your wealth from market volatility can happen sooner than you think.
So what’s the secret to a successful infinite banking system? A Wealth Maximization Account™.
In this article, we’ll explain the difference between your average whole life insurance policy and properly structured whole life insurance in a Wealth Maximization Account, or WMA.
Learn more: Understanding the Basics of Infinite Banking
WHY WHOLE LIFE INSURANCE?
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.
THE WEALTH MAXIMIZATION ACCOUNT
A Wealth Maximization Account takes infinite banking with whole life insurance two steps further than a typical whole life insurance policy.
First, Wealth Maximization Accounts 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 Paradigm Life have historically paid out dividends for over 100 years.
Second, Wealth Maximization Accounts 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. The design of the policy, specifically how much PUA can be added, adheres to the Internal Revenue Code Section 7702, which defines maximum contribution level of a life insurance policy without the growth being taxed. (A Wealth Maximization Account is also known as a 7702 Account or a 770 Account.)
Since 1983, all life insurance policies have had a requirement called the 7-pay test. The 7-pay test measures the amount of money paid into a policy over the course of seven years, relative to the amount of insurance coverage or death benefit. If a policy passes the 7-pay test, the cash value grows tax-deferred and can be accessed tax-free. If it doesn’t pass the 7-pay text, it is classified as a modified endowment contract (MEC).
Wealth Maximization Accounts tow the line just below MEC classification, far outperforming traditional whole life insurance in terms of growth while still receiving the same tax advantages.
FUNDING AN INFINITE BANKING SYSTEM
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 Maximization Account 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 Maximization Account 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.
INFINITE BANKING WITH PARADIGM LIFE
The expert Wealth Strategists at Paradigm Life not only understand how infinite banking with a Wealth Maximization Account works, they own WMAs themselves and have first-hand experience using whole life insurance as a financial foundation. They’ve worked with thousands of clients to set up participating whole life policies properly structured to help them reach their financial goals.
Now it’s your turn.