Perhaps, you’ve heard about the infamous Infinite Banking Concept –a concept that was created by Nelson Nash to enable individuals to take control of their financial future. However, the best way to be in charge of your financial future, means you need to be your own banker.

What is The Role of Whole Life Insurance?

According to Nash, the best tool for infinite banking is whole life insurance.

Whole life insurance and infinite banking are two different things. However, the infinite banking concept functions properly when you are the banker. All you have to do is make good use of a properly designed whole life insurance policy, and voilà, you are the bank.

A common strategy during the 1980s, was the use of whole life insurance policies, as it was a financial tool for wealth multiplication. Great business tycoons like John Rockfeller took advantage of whole life insurance to amass fortunes, and utilizing their insurance policies to build generational wealth. Huge corporations purchase whole life insurance policies worth millions of dollars to aid in financing expenses while enjoying favorable tax benefits. In addition, banks utilize whole life insurance policies as their First-Tier assets.

Actually, in colleges such as Wharton School in Pennsylvania, whole life insurance was offered as a course. The curriculum included topics like how to utilize the cash value to finance business expenditures, investment opportunities, entrepreneurial ventures, avoiding debt, purchasing real estate, among others.

At the time Nash was coming up with the Infinite Banking Concept, there are individuals who were already going for policy loans rather than bank loans to privatize their family fortunes. Nash applied the name “Infinite Banking” to attract more clients to this idea, bringing a fresh transformation to the centuries-old concept. Know how to manage family banking in Ontario?

How Does Whole Life Insurance Operate in Infinite Banking?

Whole life insurance policies have something called cash surrender value, otherwise referred to as cash value. Your policy’s cash value, is the amount of death benefit an insurance firm can make liquid to you. Let’s say if you were to terminate your life insurance policy while you’re still alive, your cash value is the amount of money your insurer will typically pay you. Provided that you keep remitting your premiums, you can utilize your policy’s cash value for business and personal loans by using the policy as your collateral.

As opposed to a term life insurance policy, whose main aim is to support your loved ones when you’re no more, whole life insurance caters to you for your whole entire life. It provides you, the policy owner, with benefits even when you’re still enjoying life and the best things about life.

Whole life insurance can be put into two categories: Participating or non-participating. The two types of companies differ mainly because a participating whole life insurance policy gives you an opportunity to participate or be a beneficiary of your insurance company’s profits through dividend payments. On the contrary, a non-participating insurance policy does not offer you the privilege to participate or earn dividends from the insurance carrier.

By using a participating whole life insurance policy with infinite banking, you get to experience cash value that multiplies whenever your insurance company pays out dividends. Again, it increases every time you remit your premiums and you also get to benefit from interest rates that are guaranteed.

Basically, your “bank” is made up of a percentage from the premiums you remitted (your cash) + guaranteed earned interest + expected dividends (cash from the insurance carrier). This is the only math equation, not to worry.

Rather than keeping your savings in conventional bank accounts where minimum returns are limited, you can save in a whole life insurance policy that pays dividends, while the money multiplies tax-free attracting a humongous rate of return.

Policy Loan

For any reason, you can approach your insurer whenever you want to liquidate the cash value from your whole life insurance policy. This allows you to access your cash value anytime for emergency expenditures, business capital, other investment opportunities, college fees, real estate purchases… for whatever needs you have. However, to enjoy the maximum benefits of the Infinite Banking Concept, you need to utilize your cash value by taking a policy loan rather than withdrawing the cash value.

Using the policy loan feature from a whole life insurance policy enables your cash value to grow continuously notwithstanding the loan. Any amount of cash you borrow against, earns interest and possibly dividends. Upon paying back the policy loan, the interest is added to your cash value – it is not earned by a bank. This is what forms the foundation of the Infinite Banking Concept; as you borrow against your wealth it keeps growing. You are officially lending yourself money.

In addition, policy loans are not subject to taxation (tax-free). You are free to utilize your interest as well as earned dividends without the requirement to pay taxes on the money. Relatively, if you access your cash value through withdrawal, any amount that exceeds your basis (the amount of premiums you’ve contributed) will be subjected to taxation.

When it comes to repaying the policy loans, you operate as your own personal banker and you are the one who will determine your payment schedule. In case you fail to pay back any loan, the amount owing will be deducted from your death benefit.

What Are the Benefits of Whole Life Insurance Policy?

A Whole life insurance policy is associated with several advantages such as:

1. It builds cash value

Whole life insurance policies utilized for infinite banking, have cash value that grows over time. Just as mentioned earlier, you can withdraw the policy’s cash value or borrow against it. However, when you withdraw your cash value the death benefit is reduced and you may be required to pay taxes. You have the option of getting out the cash value in case you finally decide that you don’t need the policy.

Apart from the death benefit, a whole life insurance policy also has a feature that allows you to save cash and wait for it to earn dividends.

When you activate a whole life insurance policy, you have the freedom to borrow against it. You can take cash out of the policy, and since your insurance company has guaranteed it, it makes for a solid piece of collateral. In case you fail to effectively repay your loan to the insurance company, the remaining balance can be deducted from the death benefit.

The operation mode of the system, to some extent, can be compared to a reverse mortgage. Since you own an appreciating asset that you can borrow against and then repay the loan in a flexible manner and of course let’s not forget, with a lower rate of interest than what you would have to pay to creditors. Essentially, you are borrowing cash from yourself. However, you are advised to apply wisdom while taking loans against your life insurance. If you fail to pay the loan back, your beneficiaries might remain unprotected upon your demise.

2. Whole life insurance earns dividends

On top of guaranteed cash value growth, the majority of life insurance companies pay out dividends. You can handle the dividends in various ways – withdraw them inf form of cash, or utilize them to settle part of your premiums. You can also reinvest the dividends in your policy. This will accelerate the rate of accumulation for your death benefit.

3. The premiums are fixed

With whole life insurance policies, the premiums remain constant and any changes to the health of the policyholder does not change the policy in force. In other words, if you are young at the time of subscribing to the policy, you will pay lower premiums since it’s assumed that you are healthier.

For instance, if you purchase a life insurance policy while still a child, when you reach, let’s say 80, you will still pay an equal rate of premium. However, if you purchase a similar policy at 80, you will pay a monthly premium of about $1,500. In case you are in the mid 30s, a benefit worth $250,000 can cost you between $140 and $160 monthly.

Therefore, regardless of whether you are young or single and you’re not interested in life insurance currently, signing up for a life insurance policy is a wise investment to make now– you will pay a lesser monthly premium than what you would have otherwise paid in the future.

4. Tax benefits of whole life insurance

Life insurance enjoys various key tax benefits. It has a tax-free death benefit. Again, it allows you to borrow using your cash value as collateral – of course for riding out market downturns, or accessing cash during retirement – tax free, provided you are paying the loans as required.

In addition, your cash value acceleration (and growth as a result of dividends) is tax-deferred. Meaning that, you only pay tax when terminating the policy and withdrawing the cash. The amount of premium you pay is accessible tax-free.

5. Living benefits of whole life insurance policy

As mentioned earlier, apart from having a guaranteed death benefit, you can also utilize your whole life insurance policy as a financial asset for your entire lifetime. The living benefits of having a life insurance policy, includes accessing the cash value accumulated by your policy and enhancing the flexibility of your present and future financial plans.

Living benefit rider

A rider refers to an added benefit to your life insurance policy and it comes at an extra cost. You can think of this as upgrade to a particular feature of your new automobile – perhaps installing leather seats or a roof rack. A living benefit gives you early access to your death benefit – while you are still living – for any of your particular need. Another rider example is a premium waiver benefit, where your policy remains active even in the event you are not able to pay the premiums due to a particular qualified reason.

Final word

Even though it may sound like you have an option to choose between whole or other types of life insurance, the reality is with infinite banking, a participating whole life insurance policy is the best. Once you have signed up to such a policy, you can borrow cash from yourself using your policy’s cash value as collateral. Through that, you avoid borrowing from credit institutions that will charge you exaggerated interest rates. Since you are your own banker, you can access your money easily, by just making a quick phone call.

Basically, purchasing a participating whole life insurance policy means you will earn dividends, which in turn will contribute towards increasing your policy’s cash value or paying a portion of your insurance premiums.

Therefore, to start practicing the Infinite Banking Concept, you should approach an insurance broker versed in Infinite Banking. Specifically, a broker who can help you in determining the best products that match your financial needs (ability to earn dividends, coverage rate, and premium rate). Your insurance broker will come up with a financial plan that focuses on infinite banking as well as guiding you through on how to set up your new improved policy.