What is the Strategy of Infinite Banking With Life Insurance Policy Loans?

Have you heard about Nelson Nash Infinite Banking, and Becoming Your Own Banker and you want to learn more? Or maybe you’re already using Infinite Banking, but would like to explain it better. Today, we’re unpacking the truth about the Infinite Banking Concept and the strategy of using life insurance policy loans. If you’re ready to learn more about the IBC strategy, and how to use your life insurance more effectively… tune in now!

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What is the Strategy of Infinite Banking with Whole Life Insurance Policy Loans?

It’s a process of borrowing against the cash value of your whole life insurance. To do this, you place a lien against your cash value. This allows your cash value to grow with uninterrupted compound interest. And you can put dollars to work in another asset at the same time.

Your money has to go somewhere. Typically, people choose to put their money in the bank. However, this gives the bank the opportunity to reap all the rewards of your cash while you’re not using it. They can loan out your dollars to other bank members and earn interest on that money exponentially. So while it may not be bad to store your money in the bank (and inevitably, you’ll always have some money in the banks), you can create your own leverageable pool of money with whole life insurance. Then, you can reap the rewards that banks can.

How Does Infinite Banking Allow You to Become Your Own Banker?

Many people are curious: what does it mean to be your own banker? Since you’re not working with other people’s money, what’s the advantage of having a banking system? And how can you use it? The answer is leverage.

When you pay premiums, your cash value (equity in the policy) increases. This is your pool of money, or banking system. When you want to access your cash the IBC way, you do this as a policy loan. This means you’re using the insurance company’s money, instead of your own—just like the banks use their customer’s money. 

A few things happen when you leverage other people’s money. First, you get to access capital without losing the compounding effect of interest on YOUR cash. So instead of withdrawing money and only earning interest on what’s left, you’re earning interest on everything you have. And while you’re using it, you still get to use that money. 

Second, you get to use that money to do anything you want. Many people choose to invest in cash-flowing assets, which help pay back the life insurance loans and create income. Third, because mutual companies are owned by the policyholders, you receive dividends when the company profits. The interest that you pay to the company for your loan is part of that profit, which means anything you pay directly correlates to the strength of the company and your own “profits.” 

Lastly, you have all the control when it comes to how and when you use your money (unlike banks, which can choose not to lend you money). 

How Does Your Money Keep Growing, Even While You Use Policy Loans?

When you borrow against your cash value, you’re putting a lien against your cash value. This means the money you’re using is actually the life insurance company’s money. The lien indicates how much of your account is earmarked as collateral in case you do not pay the loan back. 

During the life of the loan, your cash value is never depleted. You simply cannot over-leverage your cash value. This means as you continue to pay premiums, your equity in the policy continues to grow. At this time, you’re also earning the guaranteed interest and non-guaranteed dividends on your policy. 

Additionally, as you repay your loan, your lien shrinks and you “replenish” the leveragable portion of your cash value to use again at any time. In essence, because you’re not withdrawing any money from your account, it continues to grow as usual. The greater the volume of your cash value, the more valuable this provision is (because 4% of 100k will always be better than 4% of 10k, for example).

How Does Infinite Banking Help Minimize the Cost of Capital? 

When you want capital for a project or investment, you typically want a pretty good chunk of cash. For example, a real estate investment will probably cost you a few tens of thousands at a minimum. There are a few ways to finance real estate, and all of them have a cost (even cash).

Let’s say you want a property for $100k. You can either go to a mortgage lender and get a loan, go to your IBC policy for a loan, or pay for the property in cash. If you finance a mortgage through a bank, you may get a lower interest rate than your insurance company can offer. That alone might be enough to make it worthwhile for you. 

On the opposite side, you can pay for the property in cash. While you won’t ever have to pay interest, there’s an “opportunity cost” to that money. In other words, you lose the ability to use that money for some other kind of investment or opportunity. You might be getting significant cash flow, with no payments, yet you no longer have a reserve of $100k for other opportunities. 

A policy loan lands you somewhere in the middle. You still pay interest on the loan, yet you’re also earning interest and dividends on that same amount of cash, plus whatever you are earning in the opportunity. So while your loan rate may be 7% and your interest earnings at 4%, your pool of money is still there for you and increasing. (As a straightforward example, if you only leverage 100k of your full 200k cash value, the initial interest cost may be 7k at 7%, but your interest earnings on the 200k could be 8k at 4%, plus whatever you earn with your investment(s) outside the life insurance.)

Why Do You NOT Pay Interest to Yourself When You Repay a Policy Loan?

When you repay your policy loan, you’re paying your lender: the insurance company. However, this isn’t a total loss. As a policyholder, you are a partial owner of the life insurance company. Therefore, you receive a portion of all profits (including profits from loan interest) as dividends. Therefore, paying your interest has a direct benefit to you. Not to mention, as a partial owner of the company, you should have an interest in seeing the company be successful and stable. Paying back your loans contributes to the stability and health of the company. 

What Did Nelson Nash Mean When He Said to Be a Good Banker?

If you’re familiar with Nelson Nash and IBC, you’re likely familiar with the concept that to be a good banker is to pay back more interest than required. Yet we also know that when you pay interest on your policy loan, you’re NOT paying interest to yourself. However, when you make payments over and above what is required for the interest charges, you actually can use that to buy additional PUAs in your policy. A PUA, or paid-up addition, is like a small, fully paid-for insurance policy that gets rolled into your main policy. This increases the death benefit and cash value. However, there’s a limit to how much PUA you can buy each year. 

What is the Benefit of Cash Values Being Listed as After Tax, or Net of All Taxes and Fees?

When you view your cash value, you’re viewing what’s available to you net of all taxes and fees. This is a huge benefit because it shows you what you actually have to use, instead of a gross amount that isn’t entirely realistic. This helps you to have a better picture of what your financial situation is, and what you’re working with.

Additionally, the cash value grows tax-deferred, which means that if you withdraw beyond what you contribute, you can incur a taxable event. This is an additional benefit to the policy loan provision because you can access your full cash value (even beyond what you’ve contributed in premiums) without creating a taxable event. So you can use and access your policy tax-free, via policy loans, throughout your lifetime. If the policy endows or the death benefit is paid, this is also tax-free due to how the contract is constructed. 

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