Infinite Banking: (Almost) Everything You Need To Know

Shortly before his death, Franklin had his will amended to include a provision for a 200-year insurance policy that would be used to help apprentices (and later, entrepreneurs) get their ideas off the ground. The insurance policy allowed apprentices to borrow money from the insurance fund at 5% interest. Over time, the fund would continue to make loans to many thousands of individuals and would eventually be used to fund city beautification and infrastructure projects for the cities of Philadelphia and Boston.

This idea of using an insurance policy that would last for several hundred years, making countless loans to those in need and being continually refueled by borrowers, actually worked. 

Others tried similar ideas, with varying degrees of success. 

In the late 1800s and early 1900s, John Wanamaker——the pioneer of the modern department store——popularized the idea of using whole life insurance, specifically, as a form of credit that one could borrow against to start and grow a business. At the time, many of his peers thought he was crazy for insisting on carrying minimal to no debt and for wanting to manage his own money and self-finance his business.

Wanamaker ignored them and pursued his own vision and path.

When asked about whole life insurance, Wanamaker freely gave his opinion about it, and why he funded his whole life insurance policies before reinvesting in his own business:

Twenty years ago I had a capital of about a half million dollars. I then realized that a business man with a half million of capital and a million and a half of insurance on his life would have better credit than one with a half million of capital and no insurance — so I took the insurance. I now find that trading on the credit it created I made more profit than if the money which went into insurance had gone directly into my business.

To the members of the National Association of Life Insurance Underwriters, he plainly stated his reasons for owning 62 whole life policies (from the business biography of John Wanamaker):

I simply worked out five conclusions as the result of my own thinking, without any moving cause except my own judgment.

First: that at the time I knew I was insurable and I could not be sure of immunity from accident or ill-health and it might be that at some future time I would not be insurable. This was the first step to the building up of my 62 policies.

Second: that life insurance was one of the best forms of investment because from the moment it was made it was good for all it cost and carried with it a guarantee and there was protection in that investment that I could not get in any other.

Third: that life insurance in the long run was a saving fund that not only saved but took care of my deposits and gave the opportunity for the possible profits that not infrequently returned principal and interest and profit.

Fourth: that life insurance, regarded from the standpoint of quick determination, was more profitable than any other investment I could make.

... I did not know what life insurance really meant to me until my policies were falling due—and I had a large sum of money with which I began to build my Philadelphia store. I would not have been prepared to start my building when I did if I had not saved $2,500,000 little by little.

Wanamaker paid over $800,000 in premium payments which, in today's dollars, would be equal to roughly $22 million. His policy's collective cash values were worth an estimated $70 million (in today's dollars). His insurance and death benefits were worth even more.

At that time, he was the most insured man in America, only to be outdone by his son. At his death, Wanamaker's business empire, financed largely with life insurance policies, was worth more than $100 million.

The Big Idea: Ownership and Control Over Financing and Credit

“Infinite banking” is a modern marketing name given to the centuries-old practice of building, owning, managing, and maintaining personal credit through participating (dividend-paying) whole life insurance. It is more than a mere sales concept or gimmick. And, while the idea has been around forever, Nash gave it wings, a marketing budget, and shoehorned Austrian Economics into the book and concept. Nash's vision was for individuals to "control the banking function at the you-and-me level" using dividend-paying whole life insurance.

The underlying premise and idea of the infinite banking concept, and all other similar ideas, is to build up significant capital, control that capital with contractually-guaranteed access to the money, and thus have total ownership over one's own personal credit. This is something that must be done with some sort of cash value policy, as term life insurance does not have a cash value component.

When money is needed, the owner of a well-funded life insurance policy borrows money from the insurance company, using the cash values as collateral for the loan. A high value is placed on the capital inside the policy, and loan payments made to the insurance company are generally in excess of what the insurer charges for the loan. In essence, the policyholder is recognizing the cost of capital in his policy and treating access to his money as a loan instead of a cash withdrawal that has no value. In the corporate world, the counterpart to this idea is something referred to as "Economic Value Added" (EVA).

When world-famous investor Warren Buffet talks about charging managers for the use of Berkshire Hathaway's capital at a double-digit interest rate, he is implicitly using the core concepts of "infinite banking" inside his company (which happens to be an insurance company). During one shareholder meeting, Buffett elaborated on the idea, stating that he places a high value on Berkshire's capital (higher than other lending institutions), and he pushes that cost onto managers (and anyone else) who wants to use the company's capital.

This really cuts to the heart of the matter.

To successfully implement any variant of the infinite banking strategy, one must first value oneself (specifically, one's own welfare and financial future) over others, placing a higher value on one's own savings and capital than the capital and savings of others. This will become more apparent as you continue reading through this guide.

One of the foundational premises of all variants of infinite banking is the idea that you finance everything you buy——you either pay interest to someone else, or you lose interest on your money by cashing out your savings and investments to pay cash.

Even worse, by paying cash, you leave yourself with constantly diminished savings. This graphic illustrates what happens when an individual always pays cash using the well-known "sinking fund" method to build up savings or capital, then depletes the fund to make purchases or investments in business:

The blue bars in the graph represent capital accumulation. After 5 years, the fund is depleted and the cash is used to make a purchase or invest into a business.

By "paying cash", one always erases long-term capital accumulation, leaving one with zero net capital every time the fund is used to make purchases or investments in a business. This process could be repeated an infinite number of times, with no net growth in capital accumulation or savings.

Contrast this with an "infinite banking" type method of building credit through a specially-designed whole life policy, and borrowing against the insurance policy for major purchases or to make investments in a business:

The blue arrows show cash values always growing, regardless of policy loan activity. The black line shows the effect of policy loans over time on net cash values. Even if policy loans are subtracted from the gross guaranteed cash value of the whole life policy (ignoring dividends completely), there is always net positive capital accumulation. Non-guaranteed dividends only add to this base guaranteed cash value. Either way, gross cash value inside a whole life policy always grows, regardless of policy loan activity.

Figures 1 and 2 also show that there is no way to avoid an interest cost on purchases you make. You pay for it either directly or indirectly. The choice is yours.

By putting your own welfare (wealthfare?) ahead of others, and placing a high value on your own savings and capital, you gain a tremendous advantage over others who fritter away their money or who place a very low value on their savings and capital. You also give your future self a tremendous advantage that you would not otherwise have.

The contrast here is stark, uncompromising, and unequivocal. 

Placing zero value on your capital and savings produces a zero long-term net value. Placing a high value on your capital and savings creates lifelong capital accumulation and savings, and thus, long-term financial security and net positive value.

It's true that some individuals may potentially gain temporary, short-term, advantages (or merely the appearance of an advantage) by valuing others over one's own self. But, such "other-ism" strategies are always short-term in nature. Those short-term thinking individuals are easily outflanked and outcompeted by individuals who value one's self, one's savings, and one's welfare over others, think and plan long-term, and who engage in long-term financial strategies.

Note: It is not about putting others down, hurting or injuring others, or even defeating others. It is about raising one's self up to the highest standard possible.

In the context of financial security and independence, this is the ultimate choice ahead of you. Dividend-paying whole life insurance is simply a tool, a means to that end.

The Basic Process

Here’s how the basic process works:

As a policy owner or member of a mutual life insurance company, you are also entitled to vote on important business matters to influence the direction of your life insurance company and to ensure your (and its) long-term success.

Using Dividend-Paying Whole Life Insurance For Total Control

Dividend-paying (participating) whole life insurance is a financial contract that helps you save money for your future, while also hedging against the financial risk (and consequences) of your death. It shifts financial risks away from you and onto a life insurance company. It insures against the financial risk inherent in death and also the varied and numerous financial risks inherent in life. You can learn more about whole life insurance in the dedicated, exhaustive, guide, Whole Life Insurance: Everything You Need To Know.

A Whole Life Policy Example

Most whole life insurance policies sold today have a low early-year cash value, especially in the first several years of the policy. It's typical to see a whole life policy with a first-year cash surrender value of $0. But, no one really enjoys paying thousands of dollars in whole life premiums and seeing $0 in net cash value. 

Here's an example of a typical "all base" whole life policy (click to see full size):

An IBC Whole Life Policy Example

An IBC whole life policy typically has higher early year cash values than a traditional whole life policy. The first year cash value in these policies is often equal to between 60% and 80% of the first year's premium paid. And, subsequent annual net growth of the policy's cash value is extraordinary.

As with all participating (dividend-paying) whole life policies, the whole life contracts used with infinite banking are guaranteed insurance products. The cash values are guaranteed to grow at a specific rate. The death benefit is also guaranteed. In addition to the guaranteed growth rate, the participating nature of the policy means policyholders have the opportunity to earn dividends. Dividends are not guaranteed to be paid in any specific year, and are based on a combination of savings from mortality and operating expenses and gains from investment returns. If earned dividends are reinvested into the policy (i.e. used to buy additional single-premium paid-up whole An IBC life insurance), those dividends then become part of the guaranteed cash value and death benefit of the policy. This dividend enhancement also alters the trajectory of the initial guaranteed growth of the policy each and every year a dividend is paid.

Infinite banking also involves using policy loans (loans against the cash value of the policy) to buy things——sometimes consumer goods, but more often investments or valuable assets that appreciate in value. The cash value becomes credit for the policy loan. The more cash value you have in your policy, the more personal credit you have to borrow against when needed. This is credit you have complete ownership and control over. No one can take it away from you, and you determine how much credit you want to build up inside your policy.

Because cash values are guaranteed, your personal credit and credit line is guaranteed. The risks inherent in traditional investing accounts don’t exist inside the whole life insurance policy. For some, this implication of this idea is revolutionary and refreshing. For others, it's terrifying. 

Building, owning, and controlling one's own personal credit is a huge responsibility. Some feel they're not ready for it. Others are terrified by the idea that they (and they alone) will determine their own creditworthiness. And some are still hypnotized by an anticivilization that teaches them it's wrong to have that much control over one's own life. 

Regardless of which path one chooses, it doesn't change the facts. Those who choose to build, own, and control their own credit through whole life insurance will have the ultimate financial advantage in life.

A Conceptual Look At IBC Cash Value Growth

Let's start with a basic whole life policy as a reference point. Here's a conceptual illustration of a guaranteed $1 million Life Paid-Up At Age 100 whole life policy on a 40-year old male, standard risk rating, non-smoker:

Understanding Policy Loans At A Deeper Level

Policy loans are very different from traditional bank loans. First, there is no credit application and your loan is only limited by the amount of cash value you have available in the policy.

Also, unlike loans from 401(k) or other retirement plans, these loans are true loans. When you borrow money from a retirement account, you are actually withdrawing money from it. When borrowing against a whole life policy, it's a true loan against the policy itself. The cash value is what the policy is worth if you surrender it——it is equity in the policy. So, when borrowing money against it, no money ever leaves the policy. Because of this, you are effectively leveraging a conservative asset at a very low cost.

Secondly, there is no set repayment period. You choose the terms of the repayment. You may even keep the loan open until your death. If you do, the insurance company will simply deduct the loan amount from your death benefit and pay your beneficiaries the remainder. When you want to take out a policy loan, you simply call up the insurer and request a policy loan. The insurance company issues the loan, and then secures the loan amount with an equal amount of death benefit (some insurers say they secure the cash value) from your policy.

For example, if you have $100,000 in cash value in your policy, and you want a $10,000 loan, the insurer will give you $10,000 and then secure the loan with $10,000 from your policy. This leaves $90,000 available for future loans. As you repay the loan, your cash value is restored with each payment. What’s really special about these loans is that the insurer will continue to pay interest and dividends on the original $100,000 amount.

Some insurers change the dividend payout by lowering or raising it on any loaned cash value, while other insurers keep the dividend the same regardless of loan activity. You’ll hear the former referred to as “direct recognition” and the latter as “non-direct recognition.” This has been the source of much confusion for consumers, who often believe that a very specific type of loan needs to be set up on their policies for this to work. The reality is, both direct and non-direct recognition loans work well for this concept.

There’s no magic here.

With non-direct recognition, an insurer can afford to keep the dividend the same on loaned cash value because it either raises expenses in the policy or lowers the dividend they could otherwise pay to everyone, all the time (which slightly favors people who are taking loans all the time). It’s not a big deal, but something to be aware of.

With direct recognition, the insurer raises or lowers the dividend to reflect the fact that this money is no longer being invested by the insurer, but is instead out on loan. The policyholder’s interest payments, then, become a source of investment gain to the insurance company, which is then fed back into the dividend pool which is repaid to the policyholder at the end of the year when a dividend is declared.

It sounds like a lot of rigamarole, but it results in a very low-cost loan. In some cases, the loan rate can rise above the normal dividend rate, which encourages policyholders to borrow money from the insurance company and, in return, receive a higher dividend payment than they would receive without borrowing money.

Another reason policy loans are sought-after by policyholders is that insurance companies allow policyholders to repay the principal of the loan before paying interest during the year. Again, this helps reduce the cost of the loan and makes it a very attractive source of funds when and if you do need to borrow money.

How To Accelerate Cash Value Growth By Using Infinite Banking

Not all insurance companies are "non-direct recognition" and much ado about nothing has been made about these various loan features. In truth, it doesn't really matter whether the loan is "direct recognition" or "non-direct recognition".

Either way you slice it, insurance policy loans are a very inexpensive way to finance things (most of the time). If you pay the insurer $1 in interest, and your dividend that year is $1, you’ve effectively recovered your interest cost. That doesn’t always happen, but it can. Now, if you pay $1 in interest to the insurer, and your dividend is $0.50 the next year and $0.50 the year after that, you still recovered your interest cost but it took longer.

Furthermore, a life insurance policy loan is the only loan I’m aware of where you can borrow money from a lender, and set up a repayment schedule to pay off the principal of the loan during the year before paying interest on the loan, thus reducing the total interest being paid to the insurance company over the life of the loan. 

Is it possible to get a cheaper loan through a bank than though an insurer? Sure, anything is possible — it’s possible for a case of Jack Daniels to fall out of the sky and land on the roof of your house. 

But seriously, a lot of it depends on what you give up by going to a bank and whether you’re really getting a better deal. Some insurance agents argue it’s all about the interest rate you’re paying. They’ll tell you if you can get a lower interest rate elsewhere, do it. And, while a lower rate is generally a good thing, the problem with that thinking is it’s not always obvious which is the better deal by comparing interest rates.

For example, here is how a typical life insurance policy loan schedule looks. This loan assumes a $5,000 loan paid back over 5 years at 5% APR (click to enlarge):

It's a little hard to see, I realize, but if you look very closely, you can see it shaves a small bit of interest off the loan and results in a true APR that’s actually less than 5%. Depending on whether you make the payment at the beginning or end of the month, this savings over a regular loan at 5% APR could be negligible. In this particular example, however, if you compared a loan from a bank at 5% and a life insurance policy loan at 5%, the insurance policy loan is going to come out slightly cheaper, in spite of the fact that both advertise a 5% APR.

Here is the same loan repaid at an 12% rate (again, sorry for the microscopic printout):

What this is saying is... if you normally qualify for a loan @ 12% APR (e.g. a commercial loan of some kind, a revolving line of credit, or a personal loan, or a margin loan or some other loan for investment purposes), then a policy loan is a lot less expensive than a conventional loan at the same rate. Not only are you paying less interest for the loan itself, money is being added directly to your policy at the end of the term (assuming you keep sending the insurance company money after the loan principal is repaid).

This is the effect of “infinite banking” at work — adding money back to your savings versus sending that $1,440 to another lender.

By putting that money back into your savings, you benefit yourself, you have more money available in your cash value to borrow against in the future, and you have more financial security than you did before. And… that is an ongoing process that builds over time, accelerating the build-up of that $1 million goal. 

Interest rates are very low right now for things like mortgages. But, credit card rates and personal loans still carry a high APR. Personal loan rates vary from 4% up to over 30%, but 12% is the average. Borrowing money to invest in other businesses or to invest “on margin” is expensive. Charles Schwab currently charges an introductory margin rate of 8.325% for debit balances up to $24,999.99. The lowest rate they offer is 6.575%. So, if you borrowed money against your life insurance policy to invest, you’d want to pay at least that much to mirror the market rate for this type of loan. 

You can repeat this process an “infinite” number of types——hence the name. With a conventional loan, you have to requalify each time you want a loan, and you are not adding money to your savings or insurance policy cash value. You can also take on multiple policy loans at the same time from your insurance policy as long as there is cash value available.

Examining Some Potential Problems (And Reining In The Hype)

Most of the negatives (maybe all?) have to do with perception and marketing——specifically, how this concept has been marketed to folks over the years, and how life insurance agents have designed whole life policies for clients.

And so, without further ado, here are a few risks of (and some of the hype surrounding) infinite banking:

1. Infinite banking will not solve all your money problems. Unfortunately, many promoters of this strategy inflate promises, exaggerate benefits, over-illustrate policy values, and inject copious amounts of mystical thinking into an otherwise simple financial strategy. Such mystical and magical thinking often causes policyholders to fail.
2. Self-insurance, as explained in the original concept, is nearly always counterproductive. Some of the original marketing materials for this concept advocated people drop their automobile comprehensive and collision insurance coverage and “self-insure” through their whole life policy. Few policyholders have the skill, discipline, and dedicated capital to objectively manage these risks themselves.
3. While Nelson Nash's contributions to infinite banking are a net positive, he also made some very serious errors. Nash felt that a person's need for finance outstripped his need for insurance. Toward the end of Nelson Nash's life, Nash said, in an interview, that the word "insurance" made "Infinite Banking" harder to understand and that, "it’s really a personal monetary system with a death benefit thrown in on the side just for the heck of it. That would classify it better.” His statements about one's need for finance are illuminating; however, life insurance is not a "monetary system". It's a financial product that is used to control and manage various types of financial risk (primarily the risk of death and all of its implications that reach far beyond having enough money for burial and final expenses). Ignoring or minimizing one component or aspect of the policy in favor of another is a tragic mistake. The death benefit is a necessary and fundamental component of whole life insurance. It serves an important function. And, that misunderstanding can eventually become very costly.
4. Many infinite banking promoters advocate putting every last dollar you make into whole life insurance… just like — wait for it — it’s your own bank. Life insurance companies generally don't allow this, and have actively refused to allow agents to conflate life insurance with a "family bank" or a banking product. Some companies have prohibited insurance agents from marketing their life insurance products as "infinite banking policies", and have explicit rules about how much premium they will accept from policyholders. And, while the original version of Becoming Your Own Banker stressed that life insurance was not a bank (merely a way to fund your "banking system"), this was eventually lost in translation amongst many IBC practitioners and the general public. Additionally, while many IBC practitioners do emphasize the fact that a whole life policy is not a bank, and that "banking is a process, not a product", this pretense is often dropped and the equivocation continues when it comes time to implement the strategy.
5. Not all mutual insurers are created equal. Some insurance carriers sell mediocre or subpar whole life policies. The life insurance business is like any other. A majority of the players are merely average. A small percentage are below average and a small percentage are above average. But, for some reason, I’ve seen a lot of the folks promoting infinite banking recommend mediocre or subpar policies from insurance carriers with a dubious track record. This is not a trivial matter. A mismanaged mutual life insurer runs the risk of being forced to demutualize, which hurts all policyholders, and stings pretty badly for anyone practicing infinite banking (observe what happened to policyholders during the demutualization of Ohio National). Another thing I see is the incessant promotion of indexed universal life insurance instead of whole life insurance. If you want to know my exhaustive thoughts on this type of policy, I've written extensively about universal life insurance, and indexed UL in particular, here, here, here, here, here, and here.
6. You have to commit to paying life insurance premiums, ideally for decades. And, positive returns on your cash value generally don’t materialize for at least 3-4 years, and sometimes for as long as 7 to 9 years. This is a very long-term financial strategy — a decades-long financial strategy. I don’t know why, but some folks can’t think that far ahead. And, for those folks, I recommend you stay away from whole life insurance. It’s only going to become an endless source of frustration for you.
7. Most IBC practitioners do not help policyholders understand and implement loan repayment schedules, nor do they emphasize the importance of a proper repayment schedule. You have to keep track of your policy loans, or the whole thing falls apart. Insurance policy loans don’t work like normal bank loans. Policy loans are non-amortizing loans, where interest is (usually) billed at the end of the year. Converting a non-amortizing loan to one that has a set payment schedule and terms requires some additional effort and skill. It's been almost 20 years since infinite banking went mainstream, and yet... the promoters of infinite banking still don’t teach their policyholders how to amortize a life insurance policy loan correctly (when they do show you how to put together a loan repayment schedule, they treat it like a regular loan which is not how these loans work), how to add money to your policy during the loan repayment process, when to add it, or how to get the timing right so everything works like it’s supposed to. In other words, they are in love with the concept, but not the details.

Regardless of what you think about infinite banking, whole life insurance has helped build some of America’s most iconic businesses, and… it continues to be a core financial product for some some half-million Americans today and counting. 

Right now, there is a bit more than half a trillion dollars sitting in whole life insurance policies at the major mutual life insurance companies. That doesn't count the smaller mutual insurers and the stock companies selling other types of cash value life insurance. And, at least for whole life insurance, each year that dollar figure grows at a guaranteed rate. And, as people die, and death benefits are paid out, more insurance is bought, which pushes the dollar amounts even higher. The momentum at this point is, I believe, unstoppable.

It's not a strategy that everyone will find appealing. But, for some... it may be exactly what they need to feel more secure about their own financial future.

From Infinite Banking To The Perfect Policy™

Infinite banking, as the concept was originally conceived, addresses one type of financial risk—the risk of not having access to savings or credit when it is needed.

The core idea behind infinite banking is, "you finance everything you buy" (you either pay interest to someone else or you give up interest on your savings by paying cash, thus incurring those finance charges indirectly). Nash's original vision for the concept was that an individual's need for finance outstrips his need for life insurance. And, if a policyholder were to solve for the need to finance everything in one's life, then he would buy so much life insurance that it would be impossible to get it past the underwriters.

While it's true that you finance everything you buy, everyone's specific financing needs are different, owing to their unique financial goals, income, ability to produce wealth, availability of goods and services to finance, and so on. "The need to finance" becomes an arbitrary figure, difficult to fully plan for.

In contrast, the goal of The Perfect Policy™ concept is to buy an amount of insurance equal to one's human life value. Human life value is an objective measure of one's economic value, based on an individual's ability to produce net values for others and society. It is a hard-and-fast dollar figure, which is then used as the basis for determining the loss incurred if the insured policyholder dies or his wealth-building ability and capacity is eroded or destroyed.

By implementing The Perfect Policy™ concept, a policyholder realizes the full long-range potential of life insurance——to insure against loss of future economic values while using the current policy values to build those future values. Using this method of life insurance planning, the seemingly impossible becomes impossible. Namely, the future is unknown and uncertain, and yet, life insurance planning tranforms that uncertainty into certainty. 

This unique perspective gives any policyholder an immediate advantage in life, allowing him to bypass others who are trapped by close-ended, short-range, limited, tactical life insurance planning methods. 

And, while early iterations of The Perfect Policy™ grew out of the original infinite banking concept, The Perfect Policy™ now represents the widest scope application of life insurance planning.

Moreover, The Perfect Policy™ directly covers or indirectly hedges against other types of financial risks, including:

• Losing money on investments;
• Not having enough emergency savings;
• Loss of employment;
• Business cash flow interruption;
• Short-term disability;
• Permanent chronic, critical, or terminal illness;
• Loss of income both before and during retirement;
• Instability of income in retirement;
• Interest rate risk on savings;
• Loss of savings through capital gains tax;
• Loss of business through death of a business partner;
• Loss of estate value through probate and final expenses.

… and it protects against these, and many other, financial risks, simultaneously. Due to its flexible design structure, a "hub and spoke" strategy can be used to build a financial and legal shield around one's self, turning the insurance policy into a "protection engine" that protects the policyholder from a wide range of both financial and legal risks.

Instead of having to adopt multiple, expensive, financial strategies to hedge against these risks, policyholders use The Perfect Policy™ concept.