Infinite Banking Concept: Maximizing Financial Windfalls

Today, we’re answering a listener question on maximizing financial windfalls:

Can you do a future episode on what to do with a windfall? Specifically, the use of a premium deposit fund over many years and dumping it into a 7-pay or 10-pay policy. I would love to hear how this could be an option for inheritance or selling a business or property.

What should you do when a financial windfall lands in your lap? Whether it’s from selling a business, a property, or receiving an inheritance, knowing how to manage and maximize a large influx of cash can be daunting. On this episode of the Money Advantage podcast, we tackle this critical question by breaking down strategic approaches tailored to individual financial goals and circumstances. Using the analogy of a sailboat, we explore how to incorporate additional funds into a well-balanced policy without risking instability or running afoul of modified endowment contract laws.

Our discussion touches on the considerations for managing windfalls through life insurance policies. We look at the sustainability of funding new policies beyond the initial windfall and the implications of different funding durations, like 10-pay versus 30-pay options. The potential benefits of convertible term life insurance and practical steps for integrating significant windfalls into your policy are highlighted. You’ll gain insights into cash flow strategies and premium deposit funds, all aligned with long-term financial goals.

Finally, we examine the benefits and pitfalls of various policy designs. From the “skinny base policy” with large Paid-Up Additions (PUAs) to the risks of prematurely hitting human life value limits, we cover it all. Our conversation also dives into the actuarial decisions that impact policy performance, emphasizing the importance of flexible policy designs to adapt to future changes.

Podcast: Play in new window | Download (Duration: 45:25 — 52.0MB)

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Can You Design a Policy to Store a Windfall?

One of the most common questions we get pertaining to windfalls—i.e. Unpredictable sums of money like an inheritance—is can you design a life insurance policy to plunk that money into? It’s a smart question, especially if you are currently implementing an Infinite Banking strategy. After all, if you already know that life insurance is your preferred asset for warehousing wealth, why wouldn’t you do so? 

So what’s the answer? Well, you certainly can design a whole life insurance policy to house a windfall, but you might not want to. At least, you might not want to put that money in via a lump sum. Otherwise, you run the risk of your policy turning into a MEC, or modified endowment contract. A whole life insurance policy can become a MEC by over-funding it and doing so means that it loses its designation as an insurance asset in the eyes of the IRS and it loses its tax advantages. 

Think of your life insurance premiums as a sailboat. The base premium is the boat itself, the hull. To put additional funds into the policy, you would add term riders, which would be like the mast of the sailboat. Then, the PUAs are like the sails. If the mast or the sails get too big relative to the base of the boat, it’s going to tip over. It won’t be efficient—becoming a MEC. If you’re trying to design a policy now for a potential windfall later, you would be designing a policy with a “skinny base” in order to have room for PUAs later. But doing this creates an unstable policy.

All of this is to say, you definitely want to add sufficient term insurance riders and PUAs in a policy, but be careful to keep it balanced for your personal goals. Some people may want to have a MEC, but it’s better to do so when you’re choosing to, rather than by accident or carelessness. 

Policy Design for Maximizing Financial Windfalls

So what can you do to create a well-balanced policy with a windfall? One of the first questions you should ask yourself when buying a new policy is, will you be able to fund it properly going forward? This will shape the type of policy you get. For example, if you receive a sufficiently large windfall, a 10-pay policy (one that you pay in 10 years) might be a good option for you if you can’t foresee being able to continue funding a policy without the windfall money.

Another option, if you’re unsure whether you can afford to keep maintaining a policy, is to buy convertible term insurance that you can convert into whole life insurance over time. This way you lock in your insurability and secure temporary coverage, but you still have the option to turn this into permanent coverage as your income and human life value increases over time. 

Using a Windfall to Pay Policy Loans

Another option, if you receive a windfall, is to put that money to use in your current personal economy. If you’re already using an Infinite Banking strategy, then it’s possible that you have outstanding policy loans. Using your windfall to repay those loans can help you to cut down on interest costs, replenish your available capital so that you can leverage it again, and free up some cash flow. 

Those last two points, in particular, can be helpful to you on your journey. By paying your policy loans in full, you’d be able to take a new policy loan almost immediately. This could mean leveraging your cash value for new, cash-flowing investment months or years before you expected to. In addition, by paying off your loan, you can now redirect the cash flow you had dedicated to repaying that loan. You can use this to open a new life insurance policy, since your human life value has likely increased, or to enhance other areas of your life. 

In this way, a windfall can help you make your Infinite Banking system more robust, as well as your overall personal economy.

Fund an Investment First

Another option is the inverse of this—if you don’t have any policy loans and you really want to increase your human life value first, then use your windfall to fund an investment. Then, you can use the cash flow to fund a new policy. If you choose a long-term investment like a rental property, you can be confident that you have a fairly reliable income stream to fund those premiums. 

Book A Strategy Call

Do you want to coordinate your finances so that everything works together to improve your life today, accelerate time and money freedom, and leave the greatest legacy? We can help!  Book an Introductory Call with our team today https://themoneyadvantage.com/calendar/, and find out how Privatized Banking, alternative investments, or cash flow strategies can help you accomplish your goals better and faster. That being said, if you want to find out more about how Privatized Banking gives you the most safety, liquidity, and growth… plus boosts your investment returns, and guarantees a legacy, go to https://privatizedbankingsecrets.com/freeguide to learn more.