What are the top pros and cons of infinite banking? If you’re curious about this proven wealth strategy and whether or not it’s right for you, read this article to learn the benefits of using a cash value insurance policy to grow and protect wealth, plus find out barriers to infinite banking and what actions you can take to secure your financial future.
WHAT IS INFINITE BANKING
If you’re reading this article, chances are you already have a basic understanding of the infinite banking strategy. To recap, infinite banking is a concept developed by Nelson Nash in the 1980s. A finance expert, Nash determined that by using the cash value of whole life insurance as your own personal line of credit, you could reduce reliance on banks and third party lenders, have more control over your wealth, and recapture interest costs.
Let’s look at infinite banking pros and cons using cash value whole life insurance.
Read more: Understanding the Basics of Infinite Banking
INFINITE BANKING PROS
By utilizing a cash value whole life insurance policy backed by a mutual life insurance company, you’re guaranteed a rate or return, fixed premium payments, a death benefit and certain tax advantages. You also earn non-guaranteed dividends. All in all, these benefits securely grow and protect wealth without exposing yourself to market volatility. Here’s a closer look at infinite banking pros:
A Guaranteed Rate of Return
The primary reason whole life insurance is the preferred tool for infinite banking is because it offers a guaranteed rate of return, whereas other types of permanent insurance offer fluctuating returns based on market factors. With a guaranteed rate, you know exactly how much your cash value will grow every year.
Fixed Premium Payments
Some types of permanent life insurance offer flexible premiums. While it might seem appealing to be able to adjust the amount you pay in any given payment, especially if you’re experiencing financial hardship, what you might not know is that these types of policies are subject to increasing premiums at your insurance company’s discretion. Fixed premiums allow you to budget and know exactly how much your policy costs. What’s more, whole life policies can be structured to be paid-up by a certain age, like when you reach retirement, and you can use your cash value or dividends to cover premium costs.
Guaranteed Death Benefit
Another plus of using whole life insurance for infinite banking is that it offers a guaranteed death benefit, which can be distributed to your spouse or children, donated to charitable funds, used to cover estate taxes or put into a trust to build generational wealth. From a business perspective, you can use your death benefit as a business succession plan. The death benefit of your policy is tax-free.
Speaking of tax-free, infinite banking offers key tax advantages. Because you fund a policy with after-tax dollars, you’re only charged taxes on the growth of your cash value. Even then, taxes only apply if you withdraw funds from your cash value beyond your basis—the amount you’ve paid in premiums. If you opt to use a policy loan instead of a withdrawal, policy loans are tax-free, even if you tap into your earned interest. Dividends paid out by your insurance company are also usually tax-free.
Insurance policies are private contracts between you and your insurance company, so when you use whole life insurance as your bank in an infinite banking strategy, it usually it’s subject to judgements, creditors, lawsuits or asset searches. It also acts as a volatility buffer against market downturn. In fact, infinite banking is a great strategy in retirement because you can use the cash value of your insurance policy for retirement cash flow in years following a market downturn, allowing your 401(k) to regain value instead of continuing to take distributions. To learn more, check out our volatility buffer toolkit.
INFINITE BANKING CONS
Infinite banking is a proven wealth strategy, but it isn’t a get-rich-quick strategy. It offers modest returns and may or may not be appropriate for you, depending on your appetite for risk, financial goals and income. What’s more, you also need to be able to qualify for life insurance. Here’s a closer look at the barriers to infinite banking:
There is an important distinction between the growth of a typical whole life insurance policy vs. a mutually funded whole life insurance policy structured for infinite banking. The former offers notoriously slow growth. The latter grows faster than typical whole life insurance but slower than most market-based investment options—but it also offers much less risk. At Paradigm Life, we structure policies for infinite banking with paid-up additions riders that allow you to “supercharge” your policy for growth, but it’s important to look at your policy illustrations before you purchase your policy so that you have realistic expectations for growth.
Might Not Be Right for Your Financial Goals
There are no such things as good financial goals or bad financial goals, but it’s important to understand where you’re at financially and what financial success looks like to you. An infinite banking strategy is ideal if you want increased cash flow in retirement, if you’re looking for ways to fund your children’s education, if you want to invest in real estate or you need to generate business capital. But if your goal is to simply use life insurance for the sake of life insurance (to replace lost income if you pass away), infinite banking is a complex strategy that might be too robust for your needs.
Whole life insurance policies for infinite banking are significantly more expensive than term life insurance, and although the liquidity of whole life insurance means you can access the majority of what you pay into the policy at any time—recouping costs either in withdrawals, policy loans or death benefit payout—you do need to be able to commit a sufficient amount to this investment strategy, especially in the first several years. If you’re just starting out in your career, don’t have reliable income or have significant debt, you may need to get a bit more established before you can take advantage of infinite banking.
Qualifying for Insurance
The younger and healthier you are, the better chances you’ll qualify for life insurance and lock in a lower premium. But that’s not to say older individuals and those in retirement can take advantage of an infinite banking strategy. At Paradigm Life, we work with clients of all ages to help them achieve a more secure financial future. And we work with the nation’s top-rated mutual insurance companies, so if you’ve been denied insurance before, we may still be able to help find a policy for you.
FINDING A POLICY
Now that you know the infinite banking pros and cons, check out this article to take learn about the next step, then give us a call to schedule your free consultation with a Wealth Strategist. With nearly 15 years of experience in infinite banking, we’ve helped thousands of people across the U.S. and Canada. We also offer free continuing financial education and annual reviews to make sure your policy continues to work to help you achieve your financial goals.