Introduction
Today we’ll talk about infinite banking and whole life insurance. We’ll talk about how to set up a whole life insurance policy for infinite banking and then how you can use a whole life insurance policy for infinite banking. Let’s get on into it.
What Is Infinite Banking?
So the idea of infinite banking or bank on yourself — they’re the exact same thing. What this is, it is a concept that teaches one how to use a whole life insurance policy as their own bank or as their own financing tool.
I often like to describe it as your own personal line of credit. The reason why is because you’re building up a pool of capital or cash value in a whole life insurance policy and then you’re using that cash value to invest in opportunities, make large purchases, and you’re using your whole life insurance policy instead of going to a bank and financing that large purchase or opportunity with the bank.
Example of Using a Bank
So we’ll provide more detail, but let’s start with an example of just going to a bank.
So let’s pretend that you go to a bank because you want to buy a property. So you borrow money from them. The terms of that loan are set by the bank. You make payments, you also pay interest, and that interest goes to the bank.
A classic example would be a mortgage. The information you’ll see here is based on a mortgage we recently looked at for someone. It was a 30-year term. Their monthly payment was just under $3,000. Their interest rate is 6.63%.
If they do nothing other than just pay their monthly payment for the next 30 years, they will have paid a total of just about $1,060,000, of which $460,000 is a return of principal. That’s how much they borrowed from the bank to purchase their home. Then the other $600,000 is interest that goes to the bank. So that’s the bank’s profit there.
So if this is you, who’s in control of this loan? The bank.
Who makes the money in this particular example? The bank.
So again, this is pre-infinite banking or bank on yourself.
Saving Money in a Bank
Let’s look at another example of using a bank. In this case, we’re going to store money in the bank.
So if I said, “Hey, I’ve got enough money in cash. I don’t need to borrow from a bank to buy a property. I can just write a check to purchase this property.” That’s a very good situation to be in.
So if you have the cash on hand, the thing we like to mention here is that money in cash, when you pull it out of your bank account, no longer earns interest.
So a very simple example:
If I have $100,000 in a bank account and that account is earning 5%, if I take $80,000 out for an opportunity, that means I have $20,000 left in my account.
What earns interest? The $20,000.
The $80,000 is no longer earning that 5% anymore.
So what I have to do then is refill my bank account, which is what most people do, and then when it’s filled up again, they’ll take that money out and use it for another opportunity.
Does that make sense? Cool.
Using Infinite Banking
Next, let’s look at using infinite banking.
So now, instead of doing what we saw before, we’re going to look at using a whole life insurance policy.
When it comes to infinite banking or bank on yourself, this is a solution that for many is viewed as better than working with a bank.
Benefits of Infinite Banking
1. It Gives You Control
Meaning you control the terms of how and when you pay back loans — not a bank, not an insurance company. You’ve got control, which is very nice.
2. Your Money Keeps Working for You
When you take loans against your policy, you continue to earn dividends and interest on the money that you borrowed.
Now a key item of awareness that I like to provide is that the loan interest is paid to the insurance company. It is not paid to yourself.
When we look at these concepts, whether there’s infinite banking or bank on yourself, a common misunderstanding is one will read about the concept and think that the interest payments they’re making always go back to themselves.
No.
If I see an interest rate on my life insurance policy, that is the loan interest that goes to the insurance company. It does not come back to me.
That concept of paying yourself back with interest involves you just putting more money into the life insurance policy, which we can do another video on in the future.
So just keep this awareness: anytime you see loan interest, that is money that goes to the insurance company.
How Infinite Banking Works
We’ll break it down into 3 steps.
Step 1 — Save Money in a Whole Life Insurance Policy
I save money in a whole life insurance policy. That whole life insurance policy builds cash value, and that cash value is viewed as my bank or my source of financing over time.
Step 2 — Take Loans From the Policy
I take loans from my whole life insurance policy instead of going to a bank.
Here’s the key:
I keep earning interest on the money that I’ve borrowed against my policy as if I never pulled it out in the first place.
So unlike the bank example where if I pull out $80,000, I’m no longer going to earn interest on that money, with a whole life insurance policy, if I have $100,000 in cash value and it’s earning 5%, and I borrow $80,000 against the policy, I still earn that 5% on the full $100,000.
Step 3 — Repay the Loan
Then step 3 is pretty simple: I repay those loans.
You’re not required to, but it does make sense.
When I repay the policy loan, what I’ll notice is that the cash value is 100% restored to what it would have been as if I never touched it in the first place.
Setting Up a Whole Life Insurance Policy for Infinite Banking
Now here’s the most important thing that always gets overlooked:
Make sure the policy is set up for maximum cash value.
When people have buyer’s remorse about getting a whole life insurance policy for infinite banking, it is never because of the loans.
It always has to do with someone finding out that they got a policy and it could have been set up where they could have had more cash value upfront and also more cash value long term.
That’s where people get upset.
40/60 Split Example
A common setup is a 40/60 split.
If I pay $10,000 per year:
- 40% goes to base premium
- 60% goes to paid-up additions (PUA)
This means my 1st-year cash value is somewhere between $6,000 and $7,000.
The break-even point is usually between 7 to 10 years.
10/90 Split Example
Now here’s a better setup.
A 10/90 split means:
- 10% goes to base premium
- 90% goes to PUA
So if I put in $10,000 per year:
- My 1st-year cash value may be between $8,000 and $9,000
- My break-even point may be between 3 and 5 years
Why is it better?
Because more money goes toward the paid-up additions rider, which builds cash value much faster.
Policy Loans
Let’s talk about loans.
If I have $100,000 in cash value and in 10 years it’s going to be worth $200,000, I can take a loan today for $50,000 or even $90,000.
Let’s assume the interest is 5%.
That means I pay $2,500 in interest to the insurance company every year.
Important Facts About Policy Loans
- You can access them anytime you want
- It can be as early as 10 business days after starting the policy
- Loans are often sent through direct deposit
- Payments are flexible
- Loan interest rates are usually between 5% and 6%
- Loans do not affect your credit score
Paying the Loan Back
So let’s say:
- I had $100,000 in cash value
- I took a $50,000 loan
- I paid interest to the insurance company
- I paid the loan back in 10 years
My cash value is still worth $200,000.
That’s the big difference between this and taking a loan from a bank.
I controlled the payments and my money kept compounding for me.
Example of Growth
Let’s look at a real example.
A 35-year-old individual wanted to aggressively fund a policy with $200,000 over 4 years.
That’s $50,000 per year going into the policy.
By year 10, the cash value is $268,796.
Now here’s the exact same policy except we take a policy loan of $150,000 and repay it later.
Even with the loan outstanding, the cash value is still $268,796 because the policy kept earning interest the entire time.
Net Spread Example
Now here’s the important question:
What’s the spread?
Meaning:
- How much interest am I paying?
- How much is the policy earning?
Example:
- Loan interest paid = $7,605
- Cash value growth = $10,554
That means the net spread is positive by about $3,000.
So even after paying loan interest, the policy still grew more than the borrowing cost.
Conclusion
So overall, when we set up whole life insurance policies for infinite banking, the first thing we like to do is set them up for as much cash value as possible.
This gives us more money for more opportunities.
Then we look at how we can use the policy through loans and repayment strategies.
We also like to look at worst-case scenarios, such as what happens if someone never pays the loans back, so they understand everything upfront.
So with all of that said, I do hope that you enjoyed this video. Please let us know your thoughts, and if you have any questions at all.