The Case for Infinite Banking
September 8, 2021 | BY JP
For the past few years, I have been obsessed with a concept known as Infinite Banking. I first heard about Infinite Banking through Twitter (believe it or not) and initially was skeptical. However, I gave it a chance (by “it” I mean a $147 introductory course created by my now good friend and mentor, Nate). The course was good overview of the concept and piqued my interest (to say the least). Since then, I have spent hundreds of hours researching Infinite Banking, its history, the “inventors” of the concept, etc. Those who deal with me on a regular basis are well-aware of my excitement for IBC.
When sharing IBC with friends and acquaintances, I realized there was a need for a good definitive resource to refer them to. The course is great, but for someone who is skeptical they might want to do their due diligence first. Every article or video I found online was only partial info, missing the big picture – or way too long, in book format, full of analogies that require serious thought in order to grasp (no one wants to sit through that, besides maybe me). I now feel confident writing a “definitive text” that can be read in ~30 minutes that hits all the key points of IBC. This is not meant to be a cute informative guide…this is meant to prove to you (quantifiably) that you would be substantially better off if you implemented IBC,
regardless of your current investing habits (or lack thereof)!
Before I delve in, I ask that you are fully-present while you’re reading. This information might just change your life.
What IBC (Infinite Banking Concept) is: If you Google IBC, you’ll come across a variety of different explanations… “being your own bank”, “paying yourself back”, etc. A lot of catchy phrases but no real clear answer, and you’ll probably be even more confused than before.
Let me provide a concrete example that will give you a model for what IBC is. Imagine you recently purchased a house with 20% down. The house cost $100K. You have 20% equity and it continues to grow as you pay off your mortgage. Now, say you need a loan (for a wedding or some other large expense). You can take out a HELOC (home equity line of credit) using the equity you have in your house as collateral. You will
have to be vetted by a bank first (income/credit verification, etc. – it’s a lengthy process), but they will give you a loan. You can, hypothetically, do this with any asset that has real value. This, in essence, is exactly what IBC is. You are building up an asset and then loaning against that asset to yourself.
Keep this model in mind as you continue to read through the text. I am now going to explain what Participating Whole-Life Insurance is and why, when designed specifically for IBC (and only then), this vehicle (I use the word “vehicle” because it really does not have much to do with life insurance!) is perfect for IBC.
*Note: I am a licensed life-insurance agent and am qualified to discuss life-insurance*
Now, when the average person thinks of “life insurance” they think: so-and-so pays $100 a month (or something), they eventually die, their kids get a few hundred thousand dollars. This is what’s known as term-insurance. An individual pays a relatively low premium and they eventually get a death benefit pay-out. Note that term-insurance only covers a pre-determined amount of time and then expires (10 years for example).
Whole-life insurance, in contrast to term, is a little more complex. It includes a cash-value associated with the policy. The cash-value comes from the premiums you pay into the policy. People who are a little more “in-the-know” (so to speak) typically opt for whole-life rather than term, even though it is more expensive. The reason people choose whole-life over term is because of the cash-value and the benefits that come with it, which I will discuss in detail later. Note that “whole-life” is just that - it covers your entire life, not just a term of a decade or two.
This is obviously just the bare-bones of life-insurance and reality is more nuanced, but this is the general idea and all you need to know for now about the difference between term and whole-life if you are a complete beginner.
Now, a little more detail about whole-life insurance. There are fundamentally two “strains” of whole-life. participating and non-participating. This is the key difference between IBC policies and “regular” whole-life policies (the majority of insurance companies offer non-participating). The policy design and structure are important in creating your banking system and beign able to loan against your growth. You will soon see that the LOAN CAPABILITY of IBC policies is what makes it invaluable.
A few notes about cash-value. The cash-value is guaranteed (legally) to grow 3-4% per year. This is the minimum amount of growth your policy could ever realize. In addition, the insurance company pays an annual dividend (like a normal publicly owned company). The dividend varies, but you are typically seeing between 4.0% and 6.0% growth annually (the 3-4% guaranteed interest plus the dividend). A major 30-year study of whole-life policies concluded that 4.2% is the average rate of cash-value growth per year for whole-life. Some companies are higher, some are lower. My company, Mutual Trust Life, has been in existence since 1904 and has hit, on average, 5% growth every year. Now, before you complain about the “low” rate of return…whole-life policies existed long before the income-tax was established and thus, are not subject to any form of taxation – there are no capital gains taxes or any equivalent when the cash-value grows or when you access that cash via loans (this is a huge deal!). Compare this to capital gains tax rates which range anywhere from 15% to 40% (on a 7% return, you are only realizing around 5% post-tax anyway).
Even still, this may not seem like much of a return (because in investment terms…it’s really not!). This is where I lose certain people. “The S&P does better” or “My real estate portfolio does better” – now, this is something you must ingrain in your brain in order to “get” IBC…Infinite Banking is not an investment. It is a way of BANKING. You are not “investing” in whole-life, any more than you “invest” in your checking
So, now you understand that your policy will grow at a guaranteed rate (3-4%) and will include a dividend that varies (but is by no means insignificant). A few other notes on the cash value:
- 1) it is guaranteed to never go down (it is literally a parabola of compounding, un-taxed growth for as long as your policy is in existence – these numbers are available to you and are not kept secret!)
- 2) It is completely uncorrelated with the stock market (this is implied)
- 3) It is creditor protected (this is huge!), meaning it is safe from the IRS and/or lawyers (cough cough…divorce!) under all circumstances (which is why life insurance is a prime-time suspect for money laundering!)
- 4) There are no hidden fees or penalties
- 5) Insurance is NOT considered an asset…the implication of this is that when you go to do something like send your kids to college, your FAFSA does not consider your whole-life policy an asset. My buddies who have kids have sent their children to college FOR FREE because they are “broke” on paper, even though they have MILLIONS of dollars in cash-value in insurance policies.
Now it’s time to talk about the LOAN PROCESS. You now understand the return profile of whole-life (and might still be unimpressed), so it’s time to go deeper. The loan process is really the key to everything, and is what blew my mind when it first “clicked”. Think back to the home equity loan example. You are building equity in an asset (in this case, the asset is your cash-value!) and you are going to take a loan out against
it, using your death benefit as collateral. When you take a loan out from your IBC policy (I took out a $6,000 loan initially!) your cash-value remains the same. It never goes down (under any circumstance) other than termination of your policy. What does this mean? It means you realize un-interrupted compounding interest. Even though I have a policy loan outstanding, I am still earning interest on the $6,000 I took out at ~5% a year…compounding, forever. Obviously, I am only able to loan out up to the amount of cash-value I have in my policy (again, think of the home equity example).
For concreteness, I am going to use real numbers from my own policy. My first IBC policy had an annual premium of $10,000 with a death benefit of $500K (a little more than that, actually). As I mentioned, today I took out a loan for $6,000. My cash-value remains unchanged…but my death benefit is $6,000 less! If I were to die with the loan outstanding, my beneficiary would only be awarded $494K. Now, the loan rate of Mutual Trust Life is 4.7% for a policy loan. The interest on the loan does compound and does roll-over, just like a home-equity loan or a student loan or most other loans
So, what’s special about whole-life loans for IBC? There are a few things.
- For starters, the loan and its compounding interest will just be subtracted from the death benefit (which, ultimately, we don’t care about at all!)
- The loan never needs to be repaid. That’s right. This is not like a loan from a bank that you need to repay monthly or face steep consequences. If you can’t make the payment, that’s fine! You pay loans back on your own schedule. I request a policy loan online and it’s deposited to my bank in 2-3 business days. No questions asked (there is no vetting process, “what is this for”, etc.).
Now, here’s where I get people arguing that 4%-5% un-taxed returns is “not a lot” or some variation of that argument – it’s not significant enough for them. Even if you’re foolish enough to believe this is true, you must understand that you are only restricted by your post-tax income with IBC, rather than your disposable income, due to the incredible loan process. Do you have any idea how fast your entire income would
compound at 5% after 10 years after funneling all of it through whole-life? Run the numbers on that with your own income for fun
Hopefully you’re able to infer now that whole-life is not an “either/or” investment. People always struggle with this. “But I want to invest in real estate…but I like buying gold…I want to max out my 401k…Bitcoin…etc.” – which is all great. You can funnel your money into whole-life before investing in those other assets to improve the rate of return. It is literally like having “two assets” growing at once (do you see now why I had my mind blown?)
Going back to my own policy as an example, a $6K outstanding loan against my $500K death benefit will just cause the death benefit to decrease as the loan compounds…but, the beauty of IBC is that the death benefit also grows! (in correspondence with the cash value) - if you pay your premium, you are guaranteed to never have a policy lapse, even if you never repay a single policy loan. Incredible, right?
A common question that comes up at this point is, “But why would the insurance company allow you to do this?” – the reason is because a policy loan is the safest loan they can make. Think about it. My $500K death benefit is an “Account Payable” on their end. They know they will have to pay it someday (again, unless I terminate the policy). They will just subtract my outstanding loan balance from my death benefit when
the time comes. A mind-blowingly simple concept.
This literally took me weeks/months to fully grasp. I legitimately could not believe this was possible, but when it first “clicked”…I was blown away (now do you see why it’s called Infinite Banking?)
At this point, most people have the following objection (as did I). “There’s no way this is possible. I hang out with a ton of smart people…someone would have told me about this…my uncle is an insurance agent and he would have set me up…if it was that good everyone would be doing it, dude…”
This is what Nelson Nash (the founder of IBC and a great man) referred to as “Arrival Syndrome” – and it’s especially problematic amongst otherwise smart people. “You’ve arrived” … so this can’t possibly be true
I was so skeptical I asked if someone at ULC could send me their policy info to verify that this was possible. The fact of the matter is that lots of people are already doing this and living IBC successfully. There is no “one-size-fits-all” IBC policy. It must be tailored to fit your financial needs. And now that you know that this is a possibility, it is entirely up to you what you do with the information.
Another comment I want to make is that despite the fact that thousands of people already practice IBC, it is still by no means “mainstream” (why is that?). For one, and this is not meant as a dig to anyone, but the average person has absolutely no idea how to manage their money. Second, the average person definitely doesn’t know much about the nuances of life insurance policies (neither do insurance agents!). Do you
have any idea how hard it is to broach this topic with people? It’s not easy. Most people don’t care, which is fine. They hear “life-insurance” or “being your own bank” and immediately tune out. But they will miss out on hundreds of thousands (more likely millions!) of dollars they could’ve created by utilizing a properly structured whole-life policy.
Structure of Policies and Fees:
Two things I want to address now are policy structure and fees. As stated, the policy structure of IBC policies is different than typical whole-life policies. Specifically, there is something called a “Paid-Up Additions Rider” (a rider is like a perk for your policy…I won’t get too much into the weeds here, though) that IBC policies utilize. This is just a way of maximizing your cash-value. My policy, for example, is 60% Paid-Up Additions Rider and 40% Base Premium. There are legal requirements in place that limit the amount of cash value you can have for a certain death benefit (look up MEC laws if you’re curious). IBC policies are structured to maximize the cash-value and, in turn, minimize the death benefit (this is a byproduct of maximizing cash-value).
There are really only two “catches” to IBC that could be seen as a negative:
- Insurance policies are not like a bank in the sense that you’re able to dump money in whenever you feel like it. You must establish pre-determined premium amounts that you pay on a monthly, quarterly, or yearly basis. It is important not to be over-leveraged because you could risk lapsing a policy (if you can’t afford it).
- There are fees factored into the premiums you pay (obviously). Thankfully, IBC agents should be transparent about how they’re getting paid.
Additional uses and possibilities:
One implication of the loan capability is that you can finance large purchases (a car, for example) and completely forego the amortization process of the car dealership or bank or whoever you might be taking a loan from. This is where “being your own bank” comes from! Maybe you don’t have $50K in cash-value to buy a car with. That’s fine, you can still funnel your money through whole-life while you make the payments, though. But if you do have $50K, take out a policy loan, buy the car in cash, and repay the loan on your own time-frame. No car note required. Now if you were to buy a $100K house and amortize the payments over 30 years, you will pay $200K+ when it’s all said and done.
Instead, you can pay for it in cash using IBC and that money is still growing…amazing. Are you finally seeing how liberating this system is?
Now, if you are wondering why this system is better than just using cash, re-read the section on the loan process. The guys who have been doing this 10+ years who I've learned from do not have mortgages. They don’t have car payments. Nearly everything they buy is from a policy loan! They are, literally, earning 5% interest on the cash in their wallet when they go to the store!
I’m going to address some common comments/rebuttals that I get often:
- “Why not just buy term insurance and invest the difference?” – this is the most common question I get. Now that you understand the loan process, hopefully you understand why this is not a legitimate argument at all. If you are struggling to understand why “buy term and invest the difference” makes no sense, you don’t understand IBC. Remember, with IBC you are only limited by your post-tax income…not your disposable income. Suppose you can invest 10% of your income in the stock market. That’s great, but I can funnel 100% of my income into whole-life, pull it out, and do a 5% return on it. Even if you’re making 10% post-tax returns consistently (you’re not), you’d have to invest a huge percentage of your income to even get close to the growth I’m going to get with IBC. Oh, and I can also invest in the stock market too using policy loans (again, IBC is not “either/or”). A little back of the napkin math and some common sense crushes this argument immediately.
- “The life insurance company might go under” – this is extremely unlikely and not a legitimate argument. Insurance is one of the most financially stable industries in the world. Most of these companies weathered the Great Depression and several recessions just fine. And there are reinsurance agencies in place that are there to protect you in case your life insurance company does go under. I guarantee you make far riskier investments than buying life-insurance.
- “It won’t make me that much money” – compounding interest is, literally, one of the hardest concepts to grasp even for the quantitatively savvy. It really takes sitting down with a calculator or Excel (or a policy illustration) to see what we mean by uninterrupted compounding interest. I dare you to play around with the numbers yourself a bit. What if I invested 50% of my income for 10 years and it was compounding at 5% every year? You will be shocked how fast it can grow.
- “Why/how is this possible?” – remember, as soon as you pay your first premium the insurance company has an “Account Payable” in your name. They know they will have to pay you, so they don’t care if you take a loan out against your death benefit...because they will have to pay it someday! IBC successfully allows you to isolate the growth of an asset you care about (the cash-value) from the depreciation of an asset you don’t care about. So you’re just able to benefit from the parabolic growth. I know – it’s amazing. I do want to add, though, that the death benefit is an incredible wealth-transfer mechanism. IBC also sets your family up on your passing (in addition to being a great way to bank your money while you’re still alive).
- “What can I use the loan for?” – anything. You can use it to buy assets, pay off debt, or even pay policy premiums! There’s no qualification process or anything. Just fill out a quick form and it’ll be in your bank in a few days.
Final commentary and the “big picture”:
For those of you who know me well, you know I am a numbers guy at heart. I have run the numbers on Infinite Banking in every way you can imagine.
This is the single most mind-blowing, and honestly beautiful, financial concept I have ever come across.
It is changing thousands of lives every day, and I’m proud to say I’m playing a role in the movement.
My “big picture” plan (I don’t mind revealing) is to have minimum $3 million “liquid” by 30 ($3 million cash-value). I’d be doing around $150K,
or ~$200K pre-tax, in growth “for free” (this is not like having $3 million tied up in stocks, remember) and it will only grow at a compounding
rate every year.
Are you beginning to see how this is a game-changer when it comes to retirement, stability, cash-flow, etc.? And, do you think I will be ahead of my peers at 30, even if I have $1 million in cash value..?
My final thought is that the majority of people:
- Won’t care and/or won’t understand IBC
- Will believe it’s “too good to be true” or something.
Meanwhile, individuals have been doing this for 100+ years successfully and have the bank transcripts to prove it!
Now, Infinite Banking is certainly not the only way to generate wealth, and there are plenty of wealthy people who have never even heard of Infinite Banking! (but does that in any way negate its legitimacy?). On the other hand, there are lots of wealthy individuals who do use IBC (politicians and wealthy families are where you will see it's most prominent use because they understand the game).
Lastly, I challenge you to do your own research and discover these truths for yourself.
If you are seriously interested in learning more, I can't recommend the course that Nate & Brandon put together Holy Shift! Rethinking Your Money Paradigm. Their program is how I was introduced to this incredible concept and comes with 1-on-1 coaching so you aren't left trying to figure things out on your own.
I hope you found great value in this information and my hope is that you will dive deep into this educational journey.