Infinite Banking: Could It Create Freedom From Debt?

In this article...
  • The infinite banking model lets you borrow from yourself in the future and avoid debt. Find out how it works and if it might work for your financial goals.

Economist Nelson Nash came up with the term infinite banking in the 1980s to describe a strategy of borrowing money from the cash value of a permanent life insurance policy. In this scenario, you can theoretically access the funds you need for education, home repairs or any other purpose without a credit check and then repay yourself with the life insurance premium payments. Find out if infinite banking can help you become financially independent.

What Is the Infinite Banking Model?

With this financial concept, you start by purchasing a whole life insurance policy. As long as you pay the premiums as agreed, this type of policy carries a permanent cash value. Each payment you make is divided into three components. Part goes toward the death benefit your family members will receive in the future, part goes toward the policy fees and part goes toward your cash value account.

Over time, this account accumulates interest, and its value also increases as you make your periodic premium payments. You can borrow from your life insurance policy based on the value of this cash account, effectively acting as your own lender and removing the need to apply for external funding for student loans, mortgages and other significant expenses.

How Does Infinite Banking Work?

Set up the infinite banking model with these simple steps:

  • Purchase your whole life policy at the youngest age possible. You'll lock in a lower rate compared to the higher cost of buying life insurance when you get older.
  • Research life insurance providers and make sure you select a quality company. If your policyholder goes out of business, you'll need to start from scratch with a new plan.
  • Select the right type of permanent whole life insurance:

    • You want a non-direct recognition policy, which continues to pay the total amount of dividends even when you have an existing loan against your cash value account.
    • You may also want to add a rider to ensure your beneficiaries will receive the remaining value of the cash account when you die. Otherwise, the plan may use these funds to pay outstanding costs.
    • You can increase your earnings, and your borrowing power, with a paid-up addition (PUA) rider. This contract clause lets you put more money toward the cash value account to accelerate its growth. 
  • Withdraw the funds you need. It can take up to 10 years for your account to earn enough money to borrow against for large expenses. When you reach that point, you just need to arrange a loan with your life insurance provider. You don't need to go through the normal application steps with a bank or lender, and it won't affect your credit score. It also won't impact your income tax because the IRS does not consider this type of loan part of your income.
  • Continue making premium payments, which will automatically repay your loan. Although your plan will charge interest on this type of transaction, it's usually lower than the APR you'd have with a traditional lender. 

What Are the Possible Drawbacks of Infinite Banking?

Infinite banking isn't the best financial path for everyone. You'll need to plan for your long-term monetary needs, and you'll need to have the discipline necessary to repay the loan. Some other downsides you may want to consider include:

  • Sometimes-expensive monthly premiums
  • Reduced benefit for your family members if you die without repaying the loan
  • Difficulty qualifying if you're an older adult or you have chronic health conditions
  • Higher returns with other investments than with a permanent whole life policy

If you decide against infinite banking, you may consider alternatives such as high-yield savings accounts and loans from traditional banks and credit unions.

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