What Are The Downsides To The Infinite Banking Concept?

by David Lewis

Anyone who has ever had to deal with an incompetent loan officer asking for the same paperwork 6 different times within the span of a week probably sees at least the general value in not having to interact with these idiots.

Enter the Infinite Banking Concept (IBC).

The infinite banking financial strategy is all about "controlling the banking function in your life" using a specially-designed dividend paying whole life insurance policy (a type of permanent life insurance policy with both a death benefit and cash value component), so you don't have to rely on 3rd-party lenders or traditional loans for financing. 

You pay premiums into a whole life policy, cash value builds up inside the policy on a tax free basis, and when there's sufficient cash value in your "infinite banking policy", you either surrender some of the paid-up additions or take a policy loan to buy whatever you need. Policy loans are the preferred method, but the classic Becoming Your Own Banker book by R. Nelson Nash (2000) actually showed some policy illustrations using withdrawals for "banking" instead of loans.

Regardless, your infinite banking agent is almost certainly going to tell you to use policy loans instead of partial surrenders, and for the most part, that's good advice. When you repay your policy loan, you're repaying the insurance company—an entity you have partial ownership stake in through the policy itself. So, as a borrower, you get the benefits of borrowing from a company you "own" and then as part owner of the company, you collect the profits that normally would go to the stockholder of a public company.

You're essentially sitting on both sides of the table. Win-win.

What's not to love?

A few things... maybe. Here are the disadvantages of infinite banking as I see it...

Whole Life Policies Require High Premiums

The only way infinite banking works is if you pay a lot of premium to the life insurance company.

It's not uncommon to start infinite banking with $20,000-$50,000 (or more) per year in premium. Most of this premium ends up as cash value in the first year of the policy, so it's ultimately coming back to you. But it has to go in there first. You cannot thin-fund your policy. That's not how infinite banking works. Most infinite banking pros will want to see at least 10% of your annual income going into a policy. 

Of course, not all policies are funded with tens of thousands of dollars every year. Some policies can be funded with a mere $5,000 annually. But, you'll rarely see illustrations less than $10,000/yr these days. 

Some policies are funded with a large lump sum amount, plus a smaller monthly premium payment. It just depends on what the policyholder is starting with, and what they can afford. If you're not going to pay premiums of $5,000-$10,000 per year, for example, you'll probably have to start with a large lump sum amount to get your policy started.

Basically, you have to be "bought in" on the whole infinite banking concept. You can't half-ass it. And if you do, God help you. You're not going to like the end-result. The infinite banking system hinges on making these high premiums for decades on end. This is how you build up your capital surplus and "become your own banker" (BYOB). You're not going to BYOB with no "B".

In fact, this was a core tenet in Nash's book—'Don't be afraid to capitalize'. Not everyone likes the idea of saving up this much money. It's weird, but I get it. I don't agree with it, but I get it. Still, the only way the infinite banking concept works is for you to be a serious saver. There's just no way around it.

Cash Value Growth Can Be Slow

Cash value growth inside a whole life insurance policy, even one designed for infinite banking, can be slow. This is especially true of the guaranteed growth part of the policy's cash value, which is why your life insurance agent will use a paid-up additions rider (PUA rider) on your policy. The goal of the PUA rider is to help accelerate your policy's cash value growth, but it can only do so much. "Accelerate" does not mean "instant", and I think a lot of people get disappointed when their policy's cash value doesn't grow as fast as they want it to, even with a healthy PUA payment. 

I've seen more than a few folks get frustrated by this. Even after having "the talk" about patience and how it pays off, they eventually get mad and quit.

It can take several years for the total premiums you pay to equal the total net cash value of your policy (often referred to as the "break even point"). "Break even" might take between 4-5 years, but could also take between 6-9 years, depending on the company, policy, and how the infinite banking policy was designed. 

Some whole life insurance policies have suppressed guaranteed cash value growth in the early years so the insurer can boost the dividend payout later, thus optimizing long-term cash value accumulation. If you have a policy from a company that does this, you have to be even more patient for the payoff. 

Often, high early-year cash value growth comes at the price of long-term policy performance, and can even cause policies to MEC later on due to the excessive "forced premium". Early "break even" points might also reduce the ability to put in premiums later on or cause a slowdown in cash value growth later on. So, if you're impatient, you're hit on the back end of the policy's cash value growth curve, which can also be very frustrating.

End of the day, cash value growth can be very slow in any infinite banking policy your agent designs for you. The point here is cash value is supposed to grow slowly and steadily. If that bothers you, you're going to be very frustrated holding this policy for decades.

Poor Customer Service From The Life Insurance Company

Customer service is very much hit or miss at the life insurers these days.

Let's face it, it's an entry-level job and the insurance companies don't always hire the cream of the crop here. They're not criminals or anything, but they aren't always the most helpful folks you'll encounter. And, even when you're dealing with a reasonably intelligent, normally-adjusted, human being, keep in mind the dude taking your call at 4PM on a Friday afternoon ain't interested in what you want from your whole life insurance policy. He just wants to clock out in an hour, go to the bar, and "unwind" from a tough week of being beat up on the phone by serial complainers.

Now, don't get me wrong. I've worked with some absolutely amazing customer service people. People who—frankly—deserve more pay and a better job title for what they do. But... many (most?) of the service folks you'll encounter aren't infinite banking experts. Just something to keep in mind.

Infinite Banking Involves Loans

Infinite banking emphasizes the use of policy loans. Some people don't like paying interest, even if it's to themselves or a company they have ownership rights in. While the loans are tax free (a point IBC practitioners are quick to point out), they also accrue interest which must be paid every year. If you don't pay the interest on the policy loan, the interest gets added to the loan principal and the loan starts to compound against you.

Very bad.

Lapsed Life Insurance Policies Kill Tax Benefits

If you overloan any of your policies, or there's not enough cash value in your whole life insurance policy to keep it in force using the automatic premium loan feature, it will lapse. If your policy lapses, you'll lose your policy's tax free benefits, and you'll owe income tax on all the gains realized in the policy.

Life Insurance Policy Loans Reduce Your Death Benefit

Even if your whole life insurance policy doesn't lapse due to loan activity, every policy loan reduces the death benefit by an amount equal to the loan until the loan is repaid. If you repay the loan, the death benefit is restored. However, if you don’t pay the loan back, the amount will be deducted from the death benefit when you die.

You Might Not Qualify For An Infinite Banking Policy

Qualifying for a new whole life insurance policy may be difficult for older individuals, those who smoke, or those in poor health. Although your agent might describe it as "being your own bank", the reality is the insurer views it as a permanent life insurance policy, and all insurance policies require you to pass both medical and financial underwriting. 

If you can't get through underwriting, you don't get a policy. End of story.

You Might MEC Your Whole Life Insurance Policy By Taking Loans

It's rare, but I've seen it happen where very large policy loans taken too early on in the contract cause the policy to MEC.

It happens as a result of a sudden change in the ratio between the life insurance cash value build-up, death benefit, and premiums paid. If a loan causes your policy to MEC, you'll lose virtually all the advertised tax benefits, including the tax free access to cash values. You won't lose the tax deferred growth of the policy, but the IRS will reclassify your policy as a "modified endowment contract", and treat it like a more traditional investment, applying the rules than normally apply to retirement and other tax advantaged accounts.

Most people don't want this to happen to their policy. It sucks, and virtually destroys your ability to use your policy as an emergency fund (since you've lost tax free access to the cash value) or in any other meaningful or practical way for infinite banking.

Cash Value Withdrawals Can Also MEC Your Infinite Banking Policy

In Nash's first book, some of the illustrations he included show a withdrawal of cash value from a whole life insurance policy, not a loan. 

Thing is, it's probably easier to MEC your infinite banking policy with cash value withdrawals (partial surrenders) than with loans because the partial surrender permanently reduces the death benefit of your policy. Withdrawals made earlier on in the life of the policy are riskier than withdrawals made later on in the life of the policy.

And just like with MEC'ing your policy with loans, you'll also lose most of the policy's tax advantages, including the tax free policy loans your policy if you MEC it by taking too many withdrawals (or excessively large withdrawals) early on.

The Infinite Banking Strategy Requires Long-Term Thinking And Planning

I know this sounds like a weird "disadvantage", but some people haven't developed a long-term mindset. These people are functionally children. So, pretty much anything that requires long-term thinking and planning is endlessly frustrating to them. 

Childish, I realize. But it is what it is. 

Really, it amazes me how many people think 5 years is "long-term". You need to think longer. How long? Try, your entire life. Average life expectancy at birth for both men and women is between 70-80 years. Obviously, if you live to age 80, you're going to live longer.

Point is, you're not buying a whole life policy for 5 years. You're buying it for—wait for it—your whole life. If you're not really sure you want to own a policy for the rest of your life, might not be something you want to get involved in.

It Requires A Complete Shift In Your Thinking And Attitude

People are trained and conditioned to be followers from a very young age. They're taught to obey authority, stop questioning authority figures, and fall in line with the "mainstream". Once this attitude, behavior, and habits are established, it's very difficult for a person to change. Yet, this change is necessary for you to be successful with the infinite banking strategy.

Infinite banking is not just a product, and it's not just something you do occasionally, for fun. You basically have to overhaul your entire approach to money. A lot of people simply don't want to do that, and don't like the changes that must be made for infinite banking to work.

You Might Be Joining A Cult

As much as your authorized infinite banking insurance agent doesn't want to admit it, "The Nelson Nash Institute" has become, well... an institution. Back when it was the Infinite Banking Institute, it was a bit more acceptable. The focus was on the idea. Now, the focus is mostly on what Nash said, what Nash did. It's very much become a "What Would Nash Do?" (WWND) groupthink type of organization.

This sort of thing tends to kill innovation and causes stagnation, which (in my opinion) is exactly what's happened. It also leads to odd consensus-like statements and viewpoints about how infinite banking should be done, and how it shouldn't be done, policy design "rules" and so on.

Self-Insuring Is Probably A Bad Idea

A section of the Becoming Your Own Banker book delves into the idea of self-insuring for certain kinds of insurance—auto comprehensive and collision. This always struck me as a bit off course because the infinite banking book is about becoming your own banker, not becoming your own insurance company

Self-insuring requires some special risk management chops and for most people, in most situations, it's best to just let the insurer handle comp and collision. Not saying it can't work, but for most people it's going to be a bad idea.

It's Not A True Emergency Fund

An emergency fund is money you can access immediately. Life insurance cash value takes some time to get access to—typically 3-5 business days. Don't get me wrong. It's an excellent backstop for a saving's account or maybe even a credit card. And, if you need large sums of money for unplanned non-emergency type stuff, then it works great.

But if you get into a car accident and need a tow, or your pipes burst during a hard freeze in the middle of winter, or if you need money to bail out your buddy or something, you're better off using cash savings or a credit card.

You Cannot Buy Unlimited Amounts Of Life Insurance On Your Kids Or Other People

No. Just, no. 

This doesn't work. 

And in the circumstances when it does work, it's rather limited. 

Life insurers don't want you buying a bunch of life insurance on other people before you've fully insured yourself. And even when you've bought enough life insurance on yourself, they still don't want you to buy a bunch of life insurance on other people. And if you manage to convince an underwriter to underwrite your children, here's the deal: the death benefit limit on your children generally must be 75% or less of whatever death benefit coverage you have on yourself.

If you can't buy insurance on yourself because of health reasons, well then that's just how the cookie crumbles. 

Insurers generally prohibit buying insurance on strangers and most other people outside your immediate family or business relationships (spouse, children, business partners, etc.). Remember, this is not a "bank" from the insurer's point of view. To them, it's a death benefit, and they don't want the inherent risk of stranger-owned life insurance on their books.

Premiums Cannot Equal Income - You Cannot Treat It Like It's Your Own Bank

One of the ideas some agents still push is buying so many infinite banking policies that your premiums will equal your income. At that point, the policy's dividends become your new source of income. 

While there are probably ways to pull this off in your old age, most life insurers will not allow you to pay more than a certain percentage of your income into a life insurance policy because... as far as they're concerned, this is still life insurance, not a savings account or a bank account of any kind. A real savings account you can slosh money into and out of. Banks generally don't have restrictions about how much of your income you put in there. 

Life insurers do.

Repeat after me: whole life insurance is not a bank.

Non-Direct Recognition Is Oversold

The infinite banking die-hards still insist that non-direct recognition loans are a requirement to practice the infinite banking concept. They'll also tell you non-direct recognition "works better" because the insurer doesn't change your dividend when you take policy loans. 

I've written about this elsewhere, but the long-and-short of it is both non-direct recognition and direct recognition loans work fine. Non-direct recognition policies are subsidized, which is how the insurer can afford to pay the same dividend regardless of loan activity (which the IBC practitioners deny, but which is a well-established fact in the insurance industry, and which can be easily verified by examining any insurer's financial statements). The subsidy results in an effective spread being worked into the dividend rate, which lowers everyone's dividend to give the appearance (illusion?) that you're getting something for nothing.

But there's no free lunch. Every Austrian economist knows this.

Infinite Banking Doesn't Replace Investing

If what you really want is a way to invest your money, infinite banking isn't for you. Life insurance isn't an investment. It's a financial product that helps you manage a variety of different financial risks. In the context of the infinite banking concept, your whole life policy is solving for the financial risk of not having enough capital and not having access to credit when you need it.

The Infinite Banking Concept Can Be Alienating

The infinite banking concept can be quite alienating. 

First of all, you're funneling an inordinate amount of your cash flow into a life insurance policy. Most of your peers won't understand how life insurance cash value works, so they're going to see this as an oddball move. Most personal finance goo-ruse don't like the infinite banking concept, either. They're addicted to traditional/mainstream retirement planning. Anything that deviates from that is "weird", or more likely, "wrong".

Another thing is, all your friends and family have been told by the personal finance industry that whole life insurance is a scam, so... strike two. You're not going to get any support from your usual support structure.

On top of this, you're self-financing everything you buy. This is abnormal to a lot of people. Most people use credit cards, personal loans, auto loans, and mortgages, to buy stuff, not cash value from a life insurance policy. If they buy life insurance at all, it's term life insurance. That's what they've been told to buy. They also go deep into debt, and spend years—sometimes decades—digging themselves out of debt. They keep up with the Joneses, and are always leasing new cars, living beyond their means. 

You can't do that with infinite banking, so you're going to be the boring friend or family member who can never afford to do "fun stuff".

You Might Drive Your Spouse Crazy

... and if you have a normie spouse who likes to spend money all the time, you're going to drive them crazy, too. Even if they're not a spendthrift you might still drive them crazy. The whole idea of building up cash value and then borrowing against it will sound like some sort of strange Rube Goldberg machine to them. 

They're also going to think (and be told) anyone promoting this alienating sort of lifestyle is harmful to your traditional support structure, driving a wedge between you and "normal society", and is probably not giving you good financial advice.

It's a lot to battle.

A client once told me his wife thought he was insane buying so many whole life insurance policies. She didn't understand how the cash value in those policies worked. All she saw were these large premium bills from the insurance company and she saw them as an expense, not as cash value savings. So, as a result, she believed they were "insurance poor", even though her husband's policies have millions of dollars worth of cash value in them, and the policies themselves generate enough dividend income to pay for just about any lifestyle she could possibly want.

Yet she still believes, for whatever reason, they'd be better off with term life insurance and some money stuffed into a savings account.

You Might Drive Your Accountant/Financial Advisor Crazy

Most accountants push tax-advantaged qualified retirement plans as a "tax planning" strategy. A lot of them don't "get" the logic of infinite banking. They might understand how cash value is an asset, but they're not going to understand the logic behind using it.

Weird, but true.

If your accountant has a more traditional mindset, be prepared to fight with him every year about your infinite banking system.

You Might Not Have The Time To Manage Your Life Insurance Policy Loans

While you don't have to actively manage the cash value in your policy, you do have to keep tabs on any loans you take, and be diligent about repaying them. Staying organized is key. Usually, all it takes is a spreadsheet and some basic math to calculate how much to repay those loans with.

But, I get it. Not everyone wants to do that. 

And, if you're taking multiple loans, and truly being your own "banker", you're going to spend a fair amount of time managing policy loans and tracking repayments, optimizing things, and so on. I'm not saying it will take over your life, but there are going to be times when you're spending an evening (maybe even a Friday night—GASP!) poring over spreadsheets. Just a heads up.

You Might End Up With The Wrong Whole Life Insurance Policy Design

There are basically four different ways an insurance agent can design your policy. The wrong policy design might leave you with a policy you don't want, or can't use, or one that causes tax or other problems later on down the road.

Here are a few basic ways to design whole life policies:

All base premium - This is not an infinite banking life insurance policy. This is more like a traditional life insurance policy with low or zero early-year cash value. Life insurance policies with zero cash value in the early years aren't usually the type of policy design that's associated with infinite banking. Don't get me wrong. A traditional whole life policy can work just fine once there's cash value in there. But it's not the typical infinite banking design.

A 90/10 design - This is becoming more and more popular and I don't know why, really. The 90/10 split means 90% of your premium dollars are being shuttled into a term rider or paid-up additions rider, and the remaining 10% of your premium goes to the base premium. I guess newbie policyholders love it because it shows very high early-year cash values, and the "break even" point comes on in years 3-5.

However, long-term cash value performance tends to suffer, as does the ability to put in premium dollars down the road. The other thing I don't personally like about this approach is there's entirely too much focus on the illustration and illustrated performance.

Any whole life policy designed for short-term cash value accumulation tends to be the worst long-term performers. Keep that in mind. Unfortunately, these short-term policy designs also tend to be the most common because insurance agents are selling the illustrated rates of the policy, and gearing their marketing to consumers who are accustomed to thinking about investments in the short-term.

You Might End Up With The Wrong Cash Value Life Insurance Policy

There are many different types of permanent life insurance and cash value life insurance on the market that aren't whole life insurance. In fact, whenever an agent uses terms like "cash value life insurance" or even just "permanent life insurance", just assume it's some type of universal life insurance, because it almost certainly is. Those are cue words. All these nondescript life policies imply a UL chassis. They usually won't come right out and say it. But, most of the time, that's what it is.

"Permanent life insurance" has become synonymous with universal life insurance or indexed universal life sold by stock life insurers. These permanent life insurance policies are, in fact, a combination of term life insurance and a cash value account. It's a clever way to imply you're getting a whole life policy without actually giving you a whole life policy, because they superficially look like whole life insurance.

Your policy's cash grows tax-deferred. You get tax free withdrawals and loans. On the surface of it, it feels just like a whole life policy. But, there's no guaranteed growth and the insurer can change the internal costs of the policy as and when they need (or want) to. 

Bottom line is everyone in the industry knows whole life is the gold standard. That's why everyone likes to pretend every other type of cash value life insurance is whole life insurance. 

And if you can make a permanent life insurance policy sound like whole life, while still technically telling the truth about what you're offering (the best kind of truth, amirite?), well then... at least 2 out of 3 people will be happy about it— the agent and the insurer.

Your Life Insurance Company Might Discourage You From Using The Infinite Banking Concept

MassMutual, and some other companies don't really like agents selling infinite banking life insurance policies, are threatening to cancel agent contracts if they do, and are even going so far as to discourage policyholders from utilizing their policies for "infinite banking".

Now, they can't prevent you from borrowing money against your policy. They can't tell you what to do with your policy, or cancel your policy, but they can't strongly discourage you from using it to its full effect. How? Simple. By delaying policy loan requests, drag out the disbursement, "accidentally" misallocating policy loan repayments, and so on.

Now, not all companies are like this. Some companies welcome the infinite banking concept with open arms, will process your policy loan quickly and efficiently, and won't create problems for you. But, if you choose the wrong company, you'll be making it harder on yourself.

Final Thoughts About The Infinite Banking Concept

Is infinite banking legitimate?

Yes. 

Does infinite banking work as advertised?

Essentially, yes. Infinite banking works as advertised.

Are there risks with using an infinite banking insurance policy?

Most definitely.

Infinite banking requires the policyholder to be more financially responsible and aware than your average Boobus Americanus. This is big boy/girl stuff. Not for people playing pretend. I mean that. You cannot be a financially irresponsible person and use the infinite banking strategy. It simply will not work. 

Furthermore, you must have an above-average understanding of life insurance, whole life insurance in particular, and a deeper understanding of how loans and loan amortization works. Plus, you need to have the sticktoitiveness, gumption, and that Rogue Spirit Americans used to be known for. It also helps to have a good head on your shoulders and the ability to be patient.

Unfortunately (or fortunately, depending on who you ask), life insurance products today are sold as commodities, and so few people give it the deep thought and attention required to make it really work for them. These products are not mutual funds or retirement accounts, and (in spite of what some of the marketers/promoters tell you) it's not a bank account or personal bank. Policy loans are not like traditional loans, and your typical financial advisor will probably advise you against doing this (or anything like this) with your money. In fact, the entire personal finance industry is likely going to mock and ridicule you for even thinking about the infinite banking concept.

In that sense, you're on your own.

With all these cons of infinite banking, why bother with it? 

Great question.

Maybe you shouldn't.

Look, I'm not going to sit here and pretend that everyone thinks like me. I know they don't. Personally, I believe everyone can benefit from implementing infinite banking in some way, shape, or form. But, not everyone is in the right frame of mind right now to implement it. I'd go so far as to argue many folks probably need some serious introspection time to sort out personal hangups they have about money.

Anyway, if you've made it this far, and still want to know how to implement infinite banking for yourself and your family, go sign up to my email list and read my exclusive daily emails that I never publish to the blog. When you sign up to my email list, you also get free access to The Monegenix App (where I go into even more detail about life insurance and infinite banking).

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About David


David Lewis is a licensed life insurance agent, and has worked in the life insurance industry since 2004. During that time, he has worked with some of the oldest and most respected mutual life insurance companies in the U.S. To learn more about him and his business, go here.