What is the Infinite Banking Concept?
Infinite Banking is a method of using a specific type of ultra-safe whole life insurance policies as an alternative to bank financing while simultaneously growing longterm wealth. When done correctly it allows you to harness the power of compound interest while providing significant tax savings.
There's much more to it than this, but at it's most basic level Infinite Banking is about recapturing the interest that is paid to banks and other financing companies for the larger items needed during our lifetimes; cars, home improvement projects, appliances, education, home mortgages, investment opportunities, business equipment, etc. I would also add to this list the interest paid on other types of debt, something I will get into further along in the article.
It's estimated that some .35 cents for every dollar spent in the U.S. is in the form of interest.
This is a huge problem. Fortunately, over time we are able to flip that script with the Infinite Banking Concept.
Through the use of properly designed, participating whole life insurance contracts with certain mutual insurance companies, we create what is in essence a hybrid savings account/line of credit with a death benefit thrown in on top.
A portion of the annual premium paid into each contract (anywhere from 60-80% of the total premium) goes into what's called the cash surrender value (CSV), which has a guaranteed rate of growth anywhere from 2-3.75% and will grow to equal the death benefit at a future time and age (it used to be 100 but is now typically 121 years of age).
The way you access the funds within the CSV is through policy loans from the insurance company that issues the policy.
Instead of taking the money out of the policy, we borrow against it as a tax-free event (loans are not taxable in these contracts). As we'll see, there is tremendous flexibility with these loans. The insurance companies charge a simple interest rate on these loans (typically 4.5 - 6%), never put you on a payment program like typical lenders, and you actually never have to pay them back (though I do coach my clients to do so for a variety of reasons, not least of which is that the whole mechanism works better if you do pay them back).
Additionally, no reason has be given as to what you want the loan for, you simply let them know how much you want and they either send a check or set up a transfer to an account of your choice. Best of all, when you take out a loan collateralized by your CSV, the CSV continues to grow as if nothing came out of it, because it didn't. This is how the uninterrupted compounding component of these contracts comes into play and why it's in your best interest to continue to pay these loans back.
At a minimum you want to at least pay the interest on the loans that you have outstanding because you don't want the compounding working against you. At the policy anniversary of each contract the company will include the interest due for that year, and unlike any other loan interest that I'm aware of, the interest payments go right back into the pool of capital (CSV) that you can again access.
As you continue to put this capital to work and add further premiums every year, the whole system grows bigger, and now you're running your finances like a bank does - but for your benefit, not theirs!
Another important piece of the equation is something called paid-up additions, where any dividends that are declared and paid by these companies simply buys more life insurance, which helps the whole thing grow larger and remain tax-advantaged. Dividends are never guaranteed, but the companies that we use have been paying dividends consistently for decades, and in some cases for over a hundred years.
With Infinite Banking you set up your own 'financing system' and then take on the role of both lender and borrower for your own benefit.
My Personal Infinite Banking Case Study
Here's a personal example I like to share with people as I'm educating them on how this works and why it's a superior way to manage your cashflow and overall wealth: My wife Ann and I had just learned about infinite banking and wanted to start our first policy using this strategy.
We had around $24,000.00 that we'd received as part of my father-in-law's estate after he'd passed and decided to use it for this purpose. Now, at the time we had almost 20k in high interest credit card and other debt, so one might think it best to just pay the debt and then use the remaining 4k for the policy.
That my friends, is incorrect thinking!
What we did was use the entire 24k to apply towards a single policy on my wife, with 4k being the ongoing annual premium and the remaining 20k going into the CSV so we could tap into it quickly. Once set up, we borrowed the necessary funds to pay off the high interest debt, but we still had that money growing in the cash value of the policy.
Then we were able to do another beautiful thing and that is to use the same dollar more than once.
Follow me here, we took a loan out of our 'banking' system to pay off the 18% and higher debt we had, so that's done, and then we eventually paid back the loan to the insurance company and were able to access that capital again for some future purpose of our choice.
With the infinite banking concept you first create a new asset, then put that capital to work for you as you see fit all while not losing control of that capital.
One final thing I want to say is that with the way we set up these contracts, by year five these contracts are so efficient that for every dollar of premium paid in you get more than a dollar back to put to use.
Another Infinite Banking Concept Example
I'll use an example of a 49 year old client I recently did an analysis on. In it we started with $100,000.00 in overall premium with $60K going towards the cash surrender value and $40K going to the base premium:
A) In year five of his projection when we've reduced the total premium to base only $40K he pays his 40k in premium and within days there's an additional $45,867 available to borrow against - that's a 15.37% rate of return folks!
B) In year 10 he puts another $40K of premium to work and now there's $56,972 available to access - that's a 42.43% rate of return by simply paying the contractual annual premium.
C) And jumping ahead to year twenty, he pays a little bit less $39,703, because we've dropped a small, ten-year term rider that's used sometimes to keep the whole thing tax-advantaged and guess what's available for him now? $93,807.00, that's a 136.27% internal rate of return!
Do you see a trend? These contracts, when structured properly, do provide a tremendous cashflow mechanism after the first year, but it is over time when you're able to take advantage of the uninterrupted compounding interest that the remarkable yield on your money comes to fruition.
Mind you, in the above example we did not show the client putting that capital to work and replenishing it, all we did was add premium each year and let the machine go to work. When you utilize the available cash value in these contracts like a bank by lending out (to yourself, your business, others) and putting your capital to work at interest, and then having the money come back to you at interest the results depicted in the above example would be far more dramatic.
What are the Benefits of Infinite Banking?
The Infinite Banking Concept, when properly executed, provides normal hard-working people with an amazing suite of financial options most people never knew were possible:
- Growing and accessing your wealth tax-free with healthy, guaranteed growth
- Zero stock market exposure, these contracts are not affected by market volatility
- The ability to take advantage of uninterrupted, compounding interest growth of your money
- Privacy - the vehicles we use for this strategy are private contracts between the individual and the insurance company
- Ownership - you own the contract(s) and have complete control of the capital stored there
- Access to your capital with no credit checks, collateral or any explanations as to why or what the capital is for
- The ability to take advantage of something that lending institutions enjoy, and that is the volume return of money at work.
- The ability to create intergenerational wealth for us regular people, not just the uber-wealthy
Who does Infinite Banking help the most?
The infinite banking concept can be utilized by a wide range of people and business entities, but these are some general categories for which it fits most ideally:
- Successful small business owners, either sole proprietor or partnerships in any industry
- Middle class to upper middle class working professional couples, with children not necessary but a nice bonus. These people are often making good money, and at the same time have a significant amount of debt in student loans, mortgages, credit cards, auto loans, etc. Infinite Banking can help them turn that debt into wealth and turn outflow of money into inflow of money.
- Investors of all sorts - real estate, cryptocurrency, stock market, etc. You may recall earlier my saying that you want to establish your bank first (cashflow management asset) and then use that capital for whatever else you're up to.
- Any open-minded individual or couple interested in taking real charge of their financial situation, they're doing well but know that there's got to be something more than what the government & Wall Street tell them to do (in the form of 401ks, IRAs,etc.)
The people who benefit the most from Infinite Banking are free thinkers who tend to think outside the box when it comes to money. They understand that they need leverage in their financial lives to get ahead and are willing to put in the effort required to educate themselves.
Who shouldn't be considering using the infinite banking concept?
With the infinite banking concept, you're in essence starting your own financing business and it requires funding to get it started. So, if someone is barely making ends meet or there's more going out than coming in on a monthly basis, it won't work - at least for now.
As a general rule of thumb, I tell my adult clients that if they can't allocate $10K per policy per year on an annualized basis, then it's probably best to put it off until finances permit. For policies on my clients' children it can be less than that, say $2K - $5K for an annual minimum range.
There is another category of people who should not consider this strategy, and that is people who are fine doing what they're told by the typical financial world and aren't willing to consider alternatives to the conventional wisdom. If you're unwilling to think differently, this won't work for you and it's best to have someone manage your money and hope for the best.
Who knew you could do this with life insurance?
Let me share how I first got into the life insurance business, and how that lead me to first hearing about the Infinite Banking Concept back in 2014. After having had my own business for 16 years, followed by some real estate investing and active trading in the futures and options markets, I found myself going to work for a national life insurance carrier.
If memory serves, my wife suggested it because we thought there were benefits (there weren’t) and because it was somewhat money-related and that interested me. Before working there, I knew next to nothing about life insurance other than the fact that the only one who seems to benefit from it are the people who get the money when you kick the bucket!
Little did I know that there is so much more to these contracts once you dig a little deeper. I learned a lot at this company and was actively sharing and selling the type of life insurance that they offered, but as a captive agent, I could only go with what the company sold.
Since I didn’t know any better, I was out there doing my thing none the wiser when one day my wife Ann mentioned something that ultimately changed our world.
At the time she was working with an outfit that specialized in website traffic conversion, and one of their new clients Tom seemed to be doing something kinda/sorta like what I was doing with life insurance as a wealth vehicle for my clients. Well, I listened to an interview with Tom, and it simply blew my mind to be honest!
And the thing I realized very quickly was that I couldn’t stay with my current employer if I wanted to offer these superior life insurance contracts to people. So shortly thereafter I turned in my notice and never looked back.
We started our first policy with Tom’s guidance in September of 2014 and began our own journey with the Infinite Banking Concept. I even looked into going to work with his firm because I was so excited about it, but for a variety of reasons it didn’t work out at that time.
After a few fits and starts and a few years, I was able to align with a small firm that focuses solely on teaching and setting clients up with their own Infinite Banking systems. My wife and I now have eight of these policies and just love the financial clarity and control that they provide us.
Who created the Infinite Banking Concept?
The late, great R. Nelson Nash officially introduced this concept to the world with the publication of his seminal book “Becoming Your Own Banker: Unlock the Infinite Banking Concept” in 2000.
He had been teaching it in live seminars for several years prior to that, and really the book is the text of those ten-hour seminars. Nelson came to understand the power of dividend-paying (also known as participating) whole life insurance contracts with certain mutual insurance companies in the U.S. His experiences as a life insurance producer, trained forester, real estate investor and a licensed pilot all inform this work.
In many ways, what he taught is not new.
Whole life insurance has been around for a long, long time and there are great stories of how these contracts were utilized by some very famous and successful people over the years: Walt Disney, J.C. Penny, Ray Kroc and Doris Christopher just to name a few.
What Nelson did was redirect our attention to this wonderful wealth vehicle and shine a light on something that had been largely forgotten by the general public, whose attention has been drawn to government and stock market-related vehicles over the past fifty years or so.
Understand that things of great value have constantly been forgotten by humans over the years, memories are short and there’s always the next shiny thing to chase after.
J.S. Bach and the Infinite Banking Concept
I like to share this story with my clients sometimes when discussing this phenomenon: I’m a classical guitarist and overall music lover, and my favorite composer is J.S. Bach. After Bach died in 1750 he was largely forgotten for some eighty years until the composer Felix Mendelssohn ‘rediscovered’ his music and shared it with the world again.
You may or may not be a classical music fan, but the fact that Bach basically disappeared from human consciousness for eighty years is hard to fathom now, given his standing and popularity all these centuries later.
What happened with these participating whole life insurance contracts is very similar to Bach’s genius ‘disappearing’ for decades, they didn’t go anywhere, they just needed to be rediscovered and shared.
That’s what Nelson’s goal was, and what mine is today.
In closing on this section, I would be remiss to mention that I had the great privilege of meeting Nelson shortly before his passing in March of 2019. The first time was via a zoom meeting where he and the three other principals at the Nelson Nash Institute interviewed me as part of my application process to become a certified Infinite Banking Concept Practitioner. He was sharp as a tack and thrilled to have someone like me in the northeast (where the influence of big banks and Wall Street loom large) embarking on this journey of sharing these concepts with the public.
The following month I attended my first think tank in Birmingham AL and met him in person for the first and last time. He was quite frail at this point, but still sharp and remembered me as soon as I mentioned that I was the guy from Rhode Island!
Nelson’s legacy looms large and I, along with some two hundred or so certified practitioners in the U.S. are dedicated to carrying it forward and showing people that there is a better way to store, grow and access your wealth. And this way involves zero stock market risk, has ironclad guarantees and if utilized properly will provide yields on your money that will excite you and blow away the alternatives that you’re told you must do by the current financial regime.
How does the Infinite Banking Concept work?
Part 1 (the proper vehicle & set-up)
Okay, here we get down to the nitty gritty. The first thing is to start with the right type of life insurance contract with an appropriate life insurance company, here are the qualifiers and the whys:
- We want to use participating whole life insurance contracts with certain mutual insurance companies. There are people out there professing to “do” IBC by using what are called Indexed Universal Life policies, which is inappropriate as IULs have negligent guarantees and are for the most part not participating. There are other reasons for avoiding IULs for infinite banking, which I won’t go into for this article.
- Participating simply means that the policy holders (owners of the contracts) get to participate in the surplus that the companies experience. As mentioned before, participating also means dividend-paying in this regard and while dividends are never guaranteed, the companies that we use have been paying dividends consistently for decades and in some cases for over a hundred years. We set it up so that the dividends buy up more life insurance, which serves two purposes:
- They buy more insurance which is non-taxable, so we’re able to keep it in that tax-advantaged sweet spot and
- This enables the entire contract to grow larger, which brings a higher face amount over time and a larger ‘bank’ for you to utilize for your own purposes.
- Why use only mutual insurance companies? Mutual insurance companies are not publicly traded and are owned by the policy holders, as opposed to publicly traded insurance companies, who are obligated to satisfy the shareholders first and foremost. You see it all the time with publicly traded companies, where an active investor (usually some billionaire or massive hedge fund manager) buys up enough stock to wield their influence over the entire direction of the company. With the mutual insurance companies we use, this can never happen.
- Why only use certain mutual insurance companies? There are some wonderful, well-known mutual insurance companies out there that are not ideal for Infinite Banking mostly because they don’t allow the same access to your capital as the others that are more appropriate for this strategy.
- It is critical to set these policies up correctly from the get-go. We’re trying to strike a balance between the need for financing in life and keeping these contracts as tax advantaged as possible. These contracts pre-date the income tax code and enjoy tax-favored status, but they can lose those advantages if not set up and cared for properly. That is my job.
- What we’re looking to accomplish here is to fund each individual policy as much as possible for the first few years, and then back off on the amount of annual premium we’re paying in per year. I like to use the analogy of an old-school rocket ship from when I was a kid; where you’d have booster rockets that provided all the necessary power to get off the ground, free the ship from the grip of gravity and get it out of the atmosphere. After its job was done, they were discarded because they weren’t needed any longer and it was clear sailing. That’s kind of like the early funding of these contracts.
Part 2 (the mindset & thinking like a banker)
Okay, this is probably the most important part of the whole equation, how you need to change the way you look at money and how you think about it.
- In his book “Becoming Your Own Banker”, Nelson Nash talks about the idea that one way or another, we finance everything that we buy throughout our lives. We either pay interest to someone else to get the things we need (mortgage, car loans, credit cards, etc.) or we pay cash only by saving up our earnings until we can afford the object, thus losing out on any interest we could have earned from those earnings.
- We are constantly bombarded with chatter about the overall economy, how it’s doing, where it’s headed, whose fault it is that it’s not where it should be – it’s endless! Well, I submit that we should all be paying more attention to our own personal economies. We all have them, money comes in and money goes out constantly and the trick is to have more coming in than going out, right?
- Unfortunately, most of us are operating an open-ended personal economy where most of the money we touch flows away from us never to be seen again. The Infinite Banking Concept is all about creating a closed-looped economy, so the money comes back to us like it does for the banks.
- Think about it for a second, what is the single most profitable part of the banking business? It’s not the fees and penalties and not even the real estate that they own, it’s the fact that they’re able to lend out money at interest, and it always comes back to them. Rinse and repeat.
- Although we’re not able to lend out multiples on what’s on deposit like some banks can do (something called factoring, where banks can lend out up to ten times as much as what is deposited), we can benefit for ourselves in a similar fashion.
- It’s been estimated that some .35 cents per every dollar spent in the U.S. is in the form of interest on debt. That’s more than a third of each dollar spent doing nothing but benefitting the banks and lenders, and we need to flip that script if we want to succeed financially.
Using Infinite Banking to Reduce Debt
I mentioned before the idea of turning debt into wealth by turning outflow of money to inflow of money.
When our clients are reducing debt, they have already created an asset in the form of an infinite banking concept policy, or policies, and the capital from that entity is what you use to pay down your debt. By doing this, you do not lose control of that money and by then simply redirecting the payments you were already sending to outside lenders to your own system, you enjoy volume of return of money at work.
Here's an example:
Let's say a couple has $10,000.00 in credit card debt charging an interest rate of 21%, with a monthly payment of $500.00. They've taken the time to learn about the Infinite Banking Concept and have set up their first policy, which happens to have a full $10K available to borrow against in the cash surrender value (CSV).
They now act as both lender and borrower and pay off the credit card debt with a loan from the insurance company, and they (in the role of the client) continue to pay the $500 back to themselves (in the role of the lender) and create volume of money at work.
To calculate the volume return of money simply divide the money coming back to them ($500 per month for 12 months, or $6,000 annually) by the money at work (the $10,000 used to buy the debt), and you get a 60% volume return of money at work each year.
We coach our clients to focus on optimizing the volume of money at work. The system works most efficiently this way and it also sets you up for paying the next year's premium.
Given that most of us have, over time, acquired more types of debt, once this first $10,000 is paid off we encourage our clients to continue the process applying the same amount to the next debt that needs liquidating.
One thing to take into account is that while interest rates are important, often it is more beneficial to order your debts by the amount of outflow. The sooner we can reduce the amount of money that is leaving, never to return, the sooner we can begin transforming debt into wealth.
Finally, you need to prepare for future expenses, as well.
You see, buying a new car, appliance or paying for your kids education is still money going out the door, regardless of whether or not you need financing.
By first putting this money into your own bank, you can allow it to grow simultaneously while you use it for the upcoming expense.
Infinite Banking FAQs
As I mentioned before there are premium amounts below which it won't work generally, $10K per year for adults, $2K - $5K for children (with the parents paying for and owning the policies). It takes some capital to set these up, but remember that 60 - 80% of that initial capital is accessible within weeks of paying your first premium.
No, it can work with people considered middle class in income and up (roughly $40K per year in earnings and up). However, it will have to be determined on a case by case basis, because the most important thing is that there is more money coming in than going out for it to work. You don't necessarily have to have a lot of discretionary income, just some.
I have clients who've started their first infinite banking policy at 65 years of age, health is more important for older people since these are fully underwritten life insurance contracts. Also, older people with some means can take out policies on their children and/or grandchildren, whereby they own the policies initially and can utilize them for their financing needs and then pass ownership over to their progeny when they wish.
No, certainly not compared to stock market-related or other such speculative investments. The main risk with these contracts is the human nature element attached to them, in not taking care of them and being disciplined about how you utilize them. You can mess these up, let them lapse and become a taxable event if you don't manage them properly, that is the biggest risk.
This is a great question, and has multiple answers in my experience. Things of great value have constantly been forgotten about or shelved by human society for millenia, and this falls into that category.
It's important to understand that starting back in the 1970s there's been a shift away from things like pensions and whole life insurance as a viable asset & wealth accumulation vehicles, and to stock market related instruments such as 401ks, IRAs, etc. where more and more the risk is on regular people.
As a result, you have a whole new generation of financial professionals that are taught primarily about these types of instruments, at the expense of others such that many perfectly well-meaning financial advisors and fiduciaries have no clue that you can utilize these policies as we teach them.
They've typically been taught and trained that life insurance is merely a piece of the pie and primarily for protection purposes only. The idea that it can do what it does when set up and implemented properly simply does not compute!
There is one more reason that I want to touch on, and that comes from the life insurance industry itself and the government's (and by extension, IRS's) treatment of it. Back in the 1980s when President Reagan changed the tax code, some significant changes were made to whole life insurance contracts to make them less tax-advantaged than they previously were. Basically, as a result of these changes in the tax code, some of the advantages that the wealthy enjoyed before the change now were not so advantageous.
Many were advised to dump their money into single premium whole life policies because of how great they were with tax-free growth and access, as well as the guarantees and privacy within the contracts. Well, it didn't take long for the IRS to get wind of this and quickly make changes to the construction of these policies.
They're still really great, but it's almost like the industry is forced to focus primarily on the protection aspect of the death benefit and not on the wonderful financing, tax-free growth/access and cashflow components they have.
In closing, the Infinite Banking Concept is all about thinking for yourself and not just going along with what the conventional wisdom of the financial world tells you to do.
It’s important to understand that any professional in any field only knows what they’ve been taught, and unless they’re open-minded there’s an inherent bias to keep things a certain way.
Unfortunately, we are not taught how money really works and how to take advantage of the strategies that banks, and other lenders use.
With the teachings of Nelson Nash, we can truly set ourselves and future generations up with certainty and control and enjoy the peace of mind that true financial security engenders.
By the way, the reason Nelson used the word ‘infinite’ in the title is because once you really become your own banker with your own money, the possibilities truly are ‘infinite’.
Interested in learning more about the Infinite Banking Concept? Click here and book a free 22 minute discovery call with me!