The majority of financial ideas are relatively simple to grasp. If you talk to someone who can explain them clearly, they won’t appear so frightening or perplexing. For those who aren’t familiar with the term “what is a infinite banking,” or IBC, there’s that. I can’t think of anything “simple” to describe it.
In the end, though, the infinite banking concept has some intriguing advantages for wealthy persons. You can use the following as a high-level introduction to the IBC before meeting with an expert to learn more.
Definition of Infinite Banking
For the most part, infinite banking is a way to become your own bank, rather than to save or borrow money from an established bank.
As an example, you can open a whole life insurance policy and use it as a tax-friendly vehicle for storing money (more on that later). You can borrow against the rising cash value of your policy at any moment.
Saving on interest costs is possible thanks to the death benefit as collateral. Even better, even if you borrow against your policy, interest, and dividends will continue to accrue.
Even while banking life insurance has been around since the Romans, and people have been creatively employing it for ages, R. Nelson Nash’s book “Becoming Your Own Banker” popularised infinite banking in the mid-2000s. If the term “popularised” can be used to describe a wealthy-only financial trend, then yes.
In a nutshell, infinite banking is a new approach to storing money for future use. It has a slew of distinct advantages, but it also has some significant drawbacks.
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The Importance of Having a Life Insurance Policy
We should take a moment to point out that there are two primary types of life insurance: whole and term.
Term life insurance is the cheapest and most straightforward of the two options, providing a lump sum payment to your loved ones if you die before the policy expires. For as long as you pay the monthly fee, you’ll be covered.
Whole life insurance, on the other hand, is permanent. In addition to the death benefit, this policy has a higher monthly premium because of the higher cash value. You have the option of withdrawing the cash value or taking out a loan at a lower rate of interest.
Insurance policies from a mutual insurance firm are the best option for infinite banking. In contrast to stock life insurance firms, mutual insurance companies are owned by their policyholders.
Sadly, whole life insurance is a thorn on the side of many people. There are near-endless variations for different types of policies and how to arrange them. You and I are not specialists in whole life insurance, so we must rely on other experts—who are all trying to sell us something—to help us make the right decision.
Even when you study the benefits of unlimited banking, complexity is a constant subject.
Infinite Banking’s Advantages
What’s the point of being your own bank if you don’t want to?
Some convincing advantages have been found for the IBC, even if they are more useful for high net worth persons than for the average Joe.
Benefits to the Taxpayer
Your contributions and withdrawals from a whole life insurance policy can be tax-free if you structure it appropriately.
The tax advantages of both a regular and a Roth Individual Retirement Account can be combined into one asset. The health savings account is the only tax-advantaged account I’m aware of that gives similar tax advantages (HSA).
Your insurance policy’s cash worth grows tax-free each year because of interest and dividends. If you borrow money against it, you don’t have to pay taxes on it. Even if you take a distribution, you may not be required to pay taxes on it in some instances.
The death benefit is free of income tax for your heirs or other beneficiaries when you pass away. If your total estate exceeds the federal estate tax exemption ($11.7 million in 2021) then they pay federal estate taxes. It doesn’t matter if you have an estate in excess of that amount; an Irrevocable Life Insurance Trust may still be an option for you.
Avoid making one of these at home. When it comes to limitless banking, you should get the advice of a financial specialist before making any decisions.
Investments that guarantee a profit
There is no volatility in whole-life benefits, unlike in the stock market. Prior to purchasing the policy, you and the insurance company agree on the monthly premium amount, the rate at which the policy’s cash value will increase, and the amount of the death benefit that will be given to your beneficiaries. Just a contract between you and them, no surprises or story twists.
It is possible that the insurance firm will go bankrupt. State-run insurance guaranty associations and required reinsurance among providers are just two of the safeguards the United States has in place to keep its citizens safe from this kind of risk.
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Liquidity
A savings account or money market account has the same level of liquidity because you can borrow against your cash value at any moment, without a loan application or credit check.
As a result, you can use your complete life insurance policy as an emergency savings account. When it comes to tax advantages, a high-interest savings account may be more advantageous than a conventional bank account. Your whole life insurance policy serves a variety of objectives, including providing a death benefit.
It should be noted, however, that not all whole life insurance policies permit immediate borrowing against the life insurance cash value. Again, you’ll need the advice of an expert to arrange your insurance with precision.
Even on Loans, Interest and Dividends Continue.
Interest and dividends continue to accrue on the full amount of money borrowed against your life insurance policy.
The reason for this is that legally, you never withdrew any money from your insurance coverage. The life insurance company took a loan from you, and your account balance is only collateral. So it continues to generate revenue.
Borrowing against life insurance money and having to pay interest is a lot less painful now. As an example, if your policy pays 3% interest and dividends, you pay only 2% interest on the loan if you borrow money at 5% interest.
That’s a lot cheaper than getting a car loan at 5%, a personal loan at 10%, or owing 20% on your credit card.
Retirement Savings Options That Can Be Modifiable
When it comes to saving money, a whole life insurance policy isn’t an infinite investment like stocks or real estate, but rather an alternative to a savings or money market account. It’s possible to draw from a deep pool of cash value after decades of tax-free compounding.
Withdrawing it as cash risk-free, you can manage and prevent a sequence of returns risks early in your retirement. You can ride out a market downturn by withdrawing money from your insurance policy or borrowing against it.
You never have to pay it back since it’s so flexible. If you don’t, your heirs will receive less in the event of your death.
The Safeguarding of Financial Resources
Life insurance policies cannot be seized by creditors as a rule. They can’t make you give it up or use it as collateral for a loan. In most states, this is also true of bankruptcy proceedings.
The policy’s death benefit can be accessed by creditors if it is paid to your estate, rather than directly to your heirs, after you die.
You should consult with an attorney before using whole life insurance as part of your asset protection plan.
Protected from the Request for Financial Assistance for College
If you have a life insurance policy with a cash value, you do not have to include that on your Free Application for Federal Student Aid (FAFSA). That’s great news for parents who want to take out a loan to pay for their children’s college tuition.
Parents, on the other hand, are required to declare their children’s 529 college savings plans on the FAFSA, and their financial assistance would be affected. For Coverdell education savings accounts, the same holds true (ESAs).
Some parents utilize “infinite banking system” to save for their children’s education, and after paying it back, they can take money out of their life insurance policy to spend for retirement.
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Divorce protection may be possible.
In divorce procedures, whole life insurance’s complexity might be a benefit.
When it comes time to divide your whole life insurance policy’s cash value, your divorce court and your ex-lawyer spouse may or may not insist on designating it as a “marital asset.” This policy benefits your ex-spouse and your kids rather than banking on yourself because they are its intended recipients.
Divorce courts have even ordered one spouse to purchase life insurance, even if the other spouse earns more money. Infinite banking can be preemptively structured to provide you with benefits as well.
Remember, too, that the cash value of your whole life insurance policy will only grow significantly over a long period of time. Contrary to popular belief, being a woman in a divorce procedure can be an advantage rather than an obstacle. Early on, the policy appears unassuming and understated, until the cash value catches up to the monthly premiums you have placed into it.
Keep in mind that constructing an IBC simply as a protection against divorce is not worth the time and effort required to do so. In addition to being cynical, the technique has no guarantees and could backfire on you if the court orders you to relinquish the policy completely.
The Death Benefit and Estate Planning
Your children or other heirs will receive a sizable tax-free inheritance in addition to the benefits listed above.
In addition to being banking, loan, tax, asset, and retirement savings tool, it also serves as an estate planning tool. To me, this is the finest argument for limitless banking because it serves so many distinct objectives at once.
You’re also leaving a legacy for your offspring when you create a flexible asset with numerous safeguards. That does not even touch on the importance of protecting your loved ones financially in the event of your untimely death. For most people, life insurance is purchased for this very reason!
Cons of Infinite Banking
I’ve already touched on a few of them, but there are plenty of other reasons to be suspicious of the IBC.
Increased Difficulty and Requirement for Outside Help
I’m a firm believer in streamlining and automating one’s own money and saving efforts. The infinite banking concept, on the other hand, is anything but straightforward.
In order to build a life insurance policy for limitless banking, I scheduled a call with Wealth Without Wall Street, a consulting organization that assists clients in doing just that. I had the pleasure of speaking on their podcast as a guest a few years back, and I know them to be professionals in this subject. Assuming that a phone consultation would suffice, I asked “How do you ensure that your premiums and withdrawals both remain tax-free?”
In the end, I was left with more questions than answers. To be honest, even though we were conversing with a sales representative, I believed him when he said, “You’ll need an expert’s guidance to organize this properly.”
To help consumers get started with infinite banking, an entire consultancy industry has emerged. To their credit, Wealth Without Wall Street informed me that they would be happy to assist me in formulating a policy that would allow for unlimited banking. One-on-one calls, weekly Q&A sessions with specialists, a community for peer assistance, and a wide selection of tools and an infinite banking concept calculator are all included in a high-end subscription package.
Insurance agents, on the other hand, are unlikely to have any knowledge of IBC. A professional consultant, who may or may not charge a fee, is necessary if you want to get it correctly.
Commitment to a Regular Payment Schedule
The cost of a whole life insurance policy can be prohibitive. Several hundred bucks a month or more is not out of the question.
On the one hand, you may consider it a form of self-imposed financial discipline. Losing your work, changing careers, or retiring early might make this an onerous task.
If you want to save money by paying your premiums upfront, rather than over the course of many years, you can front-load your insurance. However, when it comes to formulating your policy, you must be well-versed on the subject.
Surrender for an extended period of time
Whole life insurance policies can’t be surrendered for at least five to ten years after they’ve been purchased. As a result, if your plans or circumstances change, you’ll be stuck with this long-term commitment.
You have the option of giving it up early. You’re hammered hard by the insurance company, and it’s easy to see why the phrase “surrender” is used when your coverage is prematurely terminated.
Delays in Your Cash Value Accumulating to Pay Your Debts
In the beginning, the cash value of your whole life insurance policy is less than what you’ve paid in. For many years, if not decades, it remains that way.
You may have paid $50,000 into insurance over the course of five years, but only have a cash value of $20,000 five years later. If you’ve set away money through your policy, you can only access a small portion of it for banking purposes.
You can organize your insurance in a way that allows you instant access to your money, according to advocates of limitless banking. You may, however, have to pay a consultancy charge to get it just right.
As interest, dividends, and tax savings accumulate, the cash value of your insurance will eventually be more than the amount you initially invested. However, if you don’t properly organize your strategy, “eventually” could be decades from now.
Funding Too Quickly Increases the Risk of Paying Taxes
If you’ve just read about the lengthy delay, you might be tempted to rush out and get a large sum of insurance. This banking method can be made to violate the IRS threshold for a “modified endowment contract,” which results in the loss of the tax benefits associated with whole life insurance policies that allow for infinite banking.
Again, once you pay their fee, experts can show you how to prevent this danger.
You must be medically qualified before you may enter the program.
Your health is taken into account when determining the price of your life insurance policy. They want to validate a quote based on the results of a medical exam.
When it comes to the value and savings of limitless banking, your health, age, and other non-banking-related characteristics have a role. When it comes to unlimited banking, health is less important than wealth.
That’s not even mentioning the hassle of going through a battery of medical exams.
Infinite Banking is a good option for whom?
In the words of financial advisors, everyone should “leave the tyranny of banks” and “become the banker.”
However, in this day and age of free checking, commission-free brokerages, and free Robo-advisors, I have to disagree with this statement.
How to set up infinite banking?
You don’t require acrobatic financial manipulations and a level of complexity so opaque that you effectively cannot set up your own banking without assistance. The common person, on the other hand, is looking for a simple and transparent approach to their finances.
Everyone’s financial situation is not the same. More advanced estate planning and features like asset protection, tax shelters, and education funding protection become more appealing as your net worth increases. The more money you have, the more eager you’ll be to learn about more complex techniques like infinite banking.
The infinite banking concept works best for persons who are relatively young and have a lot of money to invest. There is less time for a policy’s cash value to surpass your total infinite investment and begin producing actual returns the older you are.
A Word of Caution
The infinite banking concept is most effective when it allows your money to work for you in multiple ways at once. Be aware of an infinite banking scam.
Infinite banking, on the other hand, necessitates the assistance of a financial professional.
You are the only one who can decide if the time and effort required to implement infinite banking is worth it. Consider it a sophisticated financial approach best suited for Americans who are relatively wealthy, knowledgeable, and still relatively young.