What is Infinite Banking?

I wouldn’t consider myself to be a conspiracy theorist, but I LOVE the theories that the NFL is scripted. Did the NFL offer the refs financial incentives for helping ensure a Chiefs Super Bowl victory to get the coveted Taylor/Travis post-game field picture? Maybe not, but it’s fun to get Chiefs fans worked up about it.

Infinite banking isn’t a description of the limitless endorsement opportunities that Taylor Swift and Travis Kelce have after their big Super Bowl victory.

Infinite banking involves buying a whole life insurance policy and borrowing money from it rather than dipping into your savings or taking out a traditional loan.

The term infinite banking concept was coined by economist Nelson Nash in the 80s, growing legs after the release of his book “Becoming Your Own Banker.”

Nash advocated for using the cash value (the pile of cash that a portion of a whole life insurance payment goes into) to act as collateral for loans against your own insurance policy. The greater the cash value you build, the more money you can borrow. You’re practically treating your cash value as a line of credit that you borrow against.

Renowned financial expert Waka Flocka Flame describes the process best. “Man, please. I’m gonna open up an insurance, put two, three million on my insurance. And borrow from it and put it back in it. I never lose my money, ever.”

If Waka Flocka is on board, sign me up.

Being your own bank briefs well, but is it legit? Let’s look at both sides, starting with the downsides.

Cons

It’s not what it’s advertised to be.

Although taking a loan out from yourself and paying yourself back sounds nice, that’s not really how it works.

You’re actually taking out a loan from the insurance company. And like any other loan, you’ll have to pay it back, plus interest. And that interest doesn’t all go to you, some of it goes into the pockets of the insurance company itself.

And if you don’t pay it back, you risk depleting the cash value you’ve built in your whole life insurance policy or voiding your policy all together. So it’s your “personal bank” that is governed by someone else.

It’s expensive.

Infinite banking only works if you overfund the cash value of your whole life insurance policy, meaning you pay more than your required insurance premium amount to build up your cash value.

While contributing anything over your premium will further increase the cash value of your insurance policy, you have to fight through some gnarly fees and commissions to get there.

Whole life insurance is five to fifteen times more expensive than a comparable term life insurance policy. And it's a terrible place to invest your money.

It takes forever to build.

Unless you have Waka Flocka money to dump millions at a time into the policy, it takes a while to reap any benefits from infinite banking.

Borrowing against your whole life insurance policy requires a sizable cash value to act as collateral. Building that cash value in a whole life insurance policy with a measly 1.5% interest rate requires you to do all the heavy lifting, while your cash value struggles to keep up with inflation.

Whole life insurance is like a home mortgage, the bulk of your payments early on go straight into fees and commissions (interest) while only a fraction goes toward the cash value (equity). Eventually, more of your premium goes to cash value than interest, but it takes over a decade to get there.

There is no benefit to your credit score.

Yes, I know I am still in the cons. People usually say this is a pro of the life insurance banking system. I am taking a different angle on it.

Your credit report proves to future lenders that you are a reliable borrower, and they can trust you with a loan. If you are taking a loan against your whole life insurance policy, you are agreeing to continue making premium payments and the additional loan payments. If you are worried that you won’t be able to make the payments and fear the damage to your credit, you shouldn’t be taking this loan in the first place.

Having a solid credit score can improve the rates you are offered. If you avoid taking debt at all costs, your credit score will not be strong if you need it for a home or car loan.

Let’s recap the cons:

You pay money (like a lot of money) to a whole life insurance company. In return, they promise a larger payment to surviving dependents when you die. Until that happens, the life insurance company takes your money, invests it, and kindly gives you a fraction of the profits. Then, once you’ve given them much, much more money than needed, they generously let you borrow some of it back. BUT THEY ARE GOING TO CHARGE YOU INTEREST FOR TAKING YOUR OWN MONEY BACK. This isn’t “becoming your own banker,” this is prepaying for loans. 

This is just another amazing spin by life insurance salesmen to sell you on the benefits of a whole life insurance policy. If a company is ever offering a deal that seems too good to be true, it is. If life insurance companies weren’t making good money on these deals, they wouldn’t offer them.

Pros

Although the cash value gains are (very) small, it is guaranteed to increase in value at a steady rate with no risk of losses, so long as the life insurance company that holds your policy stays in business and you keep making all your premium payments without a lapse in coverage.

Cash value growth within whole life insurance policies is also tax-deferred, like a Traditional IRA. And you can access your cash value at any time for any reason. So that’s cool too.

Waka Flocka does it and TikTok likes it… so that has to be worth something.

That’s about all I’ve got.

Call to Action

With tax season approaching, take a look at your retirement investment accounts (IRA, 401(k), etc.) to see how much money you have contributed to each account compared to the account limits. You have until April 15th of this year (the end of tax season) to invest toward 2023 retirement accounts and lock in those tax bennies.

What We’re Reading/Listening To:

Youtube: Good Work. I stumbled across this guy by accident, and I’m so glad I did. If you’re looking for hilarious and informative videos about all things business, this YouTube channel is for you. Start here to learn about how private equity firms are slowly taking over the world. I advise watching these without kids around.

Debrief on Deck

Next week, we’re going to continue our journey into the mysterious world of life insurance! Specifically indexed universal life (IUL) insurance. It has the word index in it (my favorite financial word), so I’m already drawn to it. Let’s see if it’s legit.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (X (formerly Twitter) and Instagram).

Until then, stay the course.

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