Infinite Banking

There are endless videos on social media of people with no financial background, trying to sell the concept of infinite banking. Let’s have a look at what it is, and if it is a good option for people.

Infinite banking is a personal finance strategy that typically leverages a whole life policy as a “personal bank.” People love the idea of being able to borrow from themselves to improve cash flow and liquidity instead of using a bank.

The concept became popular after economist Nelson Nash wrote “Becoming Your Own Banker” in the 1980s. To get started, you open a whole life (or Universal Life in some cases) insurance policy, pay the premiums, save to build up the cash value, and then take out a loan against your own money, all while your policy’s cash value continues to gain interest as you pay yourself back.

That sounds pretty good, but infinite banking is not necessarily the best strategy that can be used to increase cash flow for most people. Here’s why...

You need to save a lot of money to your whole life policy before you can take a loan. Also, while whole life policies are much more cost efficient than term policies over the long term, the immediate cost out of pocket is much higher. If your insurance need is short term, there is no need for these much higher whole life premiums.

It takes time and lots of over funding your policy, to build your cash value over time to where it is large enough to borrow against. Just like you build equity in your home over time by paying your mortgage, you build “equity” over time in a whole life insurance policy by building your cash value.

You will pay interest on your loan, even though you are borrowing from your own policy, no different from borrowing money against your own house.

Whole Life policies can be a valuable tool as part of your financial plan, especially for Estate Planning, but I don’t think anyone should buy a policy just for the purpose of infinite banking.

The ability to borrow from existing policies can be very helpful. I have helped clients doing so and have done it with my own policies. But infinite banking is not the get rich quick strategy as sometimes advertised.

If you are looking to purchase life insurance as part of your financial plan, seek good advice. Sometimes it’s term, sometimes it’s whole life or universal life, and sometimes it’s a combination. Stay away from opinions and “one fit’s all” solutions. There are over a hundred ways to structure life insurance. It is important that it is structured to meet YOUR needs.