IBC Q&A: Where Life Insurance Companies Invest Their Money

When it comes to financial security and control, many people seek clarity around Infinite Banking and the role life insurance plays. The idea of using whole life insurance to gain financial control, create guaranteed growth, and build generational wealth sparks curiosity about how life insurance companies actually manage the funds. In today’s post, we’re exploring where life insurance companies invest their money.

Many people bring misconceptions into conversations about finance, especially around life insurance. They’re often convinced by past experiences or teachings that certain financial products or strategies are inherently “better.” However, as Bruce Wehner shared recently on our podcast, one of his clients experienced a breakthrough moment—a realization about why using whole life insurance with a shorter, more limited period to pay premiums actually limited his options later. With a longer, more flexible term, he gained more control, allowing him to maximize the power of his policy long-term. Moments, like these highlight that, sometimes, truly understanding a financial concept, requires experience.

In this blog, we’ll address these essential questions:

1. Where Do Life Insurance Companies Invest Their Money?
2. Why Not Indexed Universal Life (IUL) for Infinite Banking?
3. Mutual Companies vs. Mutual Holding Companies: What’s the Difference?
4. Is the interest on a life insurance loan variable, and can it change while there’s an outstanding loan?

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Where Do Life Insurance Companies Invest Their Money?

One common question we hear is, “How do life insurance companies invest their money, i.e. the premiums they collect?” Understanding this can add peace of mind about how your policy will perform in the long run. Due to stringent regulations, life insurance companies are required to invest conservatively to ensure they can always meet their policyholder obligations. Here’s a breakdown of their primary investment allocations:

1. Bonds: Approximately 85% of a life insurance company’s assets are invested in bonds, both from U.S. Treasury and corporate issuers. Bonds provide a stable and predictable income stream, essential for meeting guaranteed cash value growth.
2. Mortgage-Backed Securities: Many companies also invest in highly collateralized real estate mortgages. These are chosen for their relatively low risk and consistent returns.
3. Derivatives: Some life insurance companies hold a small portion of their assets in derivatives—about 3-4%. While derivatives can be riskier, insurance companies manage them very carefully to limit exposure.
4. Policy Loans: Another portion of the company’s revenue comes from loans to policyholders. Interestingly, life insurance companies appreciate the stability these loans provide. Since they hold the policy’s cash value as collateral, they reduce long-term liabilities for the company and simultaneously offer a secure, predictable return.

This blend of conservative investments enables life insurance companies to provide the guarantees that form the backbone of whole life insurance policies.

Why Not Indexed Universal Life (IUL) for Infinite Banking?

One of the first questions we often hear is: “Isn’t Infinite Banking a strategy that can be used with different insurance products, like IUL or whole life?” Let’s clear that up.

Infinite Banking is a cash management strategy. It’s a process of storing and accessing your capital, and it allows you to earn interest on your money even when you’re using it. The critical part of Infinite Banking is uninterrupted compound growth. In Infinite Banking, you’re not just buying a life insurance policy—you’re using whole life insurance as a tool to hold, grow, and leverage your capital over time.

But here’s why whole life insurance, not IUL, is the best choice for Infinite Banking. Infinite Banking relies on having certain guarantees. In a whole life policy, the insurance company guarantees the premium amount, cash value growth, and death benefit. With IUL, those guarantees don’t exist in the same way. IULs, on the other hand, expose policyholders to risks tied to the performance of external indexes or interest rates, which lack the same predictability.  Simply put, Infinite Banking is about guarantees and control—and whole life insurance delivers both.

Nelson Nash, the founder of Infinite Banking, was clear about only recommending whole life insurance for this strategy. He understood the importance of guaranteed growth without the risk of fluctuating interest rates or diminishing returns. So, when someone suggests using an IUL for Infinite Banking, it’s essential to remember that true Infinite Banking requires whole life insurance to ensure stability and long-term value.

Mutual Companies vs. Mutual Holding Companies: What’s the Difference?

Another question is whether a mutual company or a mutual holding company is better for policyholders. Here’s what you need to know: In a true mutual company, policyholders own the company, which means the company is designed to serve its policyholders first, returning profits to them in the form of dividends.

A mutual holding company structure involves a mutual company that has reorganized to include a holding company. This holding company may partner with a stock company while still being primarily owned and controlled by policyholders. Importantly, the law mandates that the mutual company retains majority control—51% or more—of the voting shares, meaning policyholders still maintain control.

While there may be stockholders involved due to the holding company’s connection with a stock company, policyholders in a mutual holding company continue to enjoy the same protections and rights as those in a purely mutual company. The structure also allows the mutual holding company to access additional equity capital, which can enhance its financial stability and capacity to serve policyholders.

For policyholders, both mutual and mutual holding companies offer strong protections, with dividends and benefits focused on them as the primary stakeholders. A mutual company remains fully owned by policyholders, whereas a mutual holding company adds flexibility through stock partnerships, allowing for greater capital access. However, the legal protections and state regulations mean that, in practice, there is little difference for policyholders in terms of benefits or rights.

While both types of companies serve policyholders well, understanding these distinctions can help you feel confident that, regardless of the structure, your policy benefits are well-protected, ensuring stability for your Infinite Banking journey.

Is the interest on a life insurance loan variable, and can it change while there’s an outstanding loan?

Interest on life insurance loans can be fixed or variable.  If variable, each company’s policy determines how often and by how much the rate can change. For most life insurance companies, the interest rate is fixed for one year and then may be adjusted on the policy’s anniversary date based on market conditions and the availability of capital.

Some companies cap their maximum interest rate, protecting policyholders from extreme fluctuations. While these caps vary, an 8% cap is common and aligns favorably with current loan rates across various financial products, such as credit cards and home equity lines of credit.

Another common question involves the type of interest applied. Many assume that loan interest is “simple” interest, but this only applies if the interest is paid before the anniversary date. Otherwise, unpaid interest compounds annually, becoming part of the loan principal, thus increasing the next year’s interest charges. However, as you repay the loan, the principal reduces, decreasing the interest cost over time. 

Additionally, if you pay down the loan early in the year, you’ll pay less interest overall than if you waited to pay later in the year because the company will credit back the interest based on your reduced loan balance. This setup encourages timely loan repayment by lowering the interest cost as you pay down the principal.

In summary, life insurance loan interest is typically variable but generally fixed for one-year intervals, with possible caps to protect against sharp rate increases. The compounding interest applies at each policy anniversary if not paid off, though regular payments can reduce the interest over time.

Why This Matters for Your Financial Future

Understanding how life insurance companies invest and structure whole life policies provides clarity on why they’re reliable, secure, and perfectly suited for Infinite Banking. They’re regulated to ensure conservative, stable investments, and mutual companies align their interests with policyholders, creating an ecosystem where your capital can grow without unnecessary risk. The result? A financial tool that offers you true control over your money, protecting it from economic swings and enabling uninterrupted compound growth.

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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.