Infinite Banking is a unique concept that was developed by Nelson Nash. Infinite Banking lets you be your own banker and offers much more when it comes to safety and control than most other financial or investment option that are out there today. It may sound strange to some, but Infinite Banking relies on utilizing high cash value life insurance to create your own personal banking system.
About 30% of your income actually goes into paying loan money with savings as low as 10% on an average. While these are the US numbers, things are not much different in other countries either. This debt percentage is what makes Infinite Banking so powerful. Let’s get to know more about the concept and how it works:
What Is Infinite Banking?
Infinite Banking relies on a custom designed whole life insurance policy that allows users to access money, like a bank, and growing their money through the use of whole life insurance dividends. This lets individuals manage cash flow within their own system without the need to count on outside options such as actual banks or other lending institutions.
You start by building a large amount of “cash value” in a whole life policy. Now that you have this cash value, you can borrow money out of our life insurance policy. This can be used to fulfill your needs, be it to buy a car or some other items.
The money is basically a side loan provided by your insurance company and is guarded by the life insurance policy’s cash surrender value.
The concept has gained immense popularity in the last few years and is also known as bank on yourself, perpetual wealth system etc. In simple words, you put all your investments in a life insurance policy instead of investing somewhere else. From here you can withdraw, as needed, on agreed terms that include paying interest like you normally would if you took loan from a third-party.
Meanwhile, the actual cash value inside the life insurance policy is untouched, and continues to grow, with interest, whether money is borrowed against it or not.
How Does It Work?
A lot of people confuse infinite banking with a life insurance policy. By overfunding a life insurance policy, it can actually generate a substantial amount of interest.
The Infinite banking system is merely a way of utilizing the rules that are already in place by the government and by life insurance companies in order to gain the most benefit.
Infinite banking system works in 4 ways.
- You are the depositor.
- You are the bank.
- You are the borrower.
- You get the profits from the system.
Let’s say you choose long-term investments to deposit into an Infinite Banking policy. Normally, long-term investments are deposited into IRAs, 401ks etc. However, that can be a risky investment as your investment can lose value with time. Plus, the taxes are also very high and liquidity can also be an issue.
Infinite banking gets its name due to it being infinite. There is no limit on how much money you can invest and the cycle can continue for as long as you want it to. Taxes can be dramatically reduced, and money is always liquid and accessable.
Depositing, Withdrawing And Imposing Interest
Consider the Infinite Banking system as an interest bearing system. The money you deposit in your own bank grows tax-free. This is why you pay no taxes on withdrawals as long as it is setup and treated properly.
The money is 100% liquid. This means you can take out the money whenever you want to. This money comes out as a loan, which gives us some added benefits when we borrow and when we retire. The benefit of taking the amount out as a loan is that the money keeps on growing. Here’s an example:
Let’s say, you have $100,000 in your banking system and you take out $25,000 for home remodeling, $2,500 to buy a lawn mower, and $10,000 for business purposes.
Now, even though you have borrowed this money out of your banking system, the amount continues to grow inside of your Infinite Banking policy.
Many who do this will choose to pay themselves back at a higher interest rate than the required amount. Now, the interest you pay will actually be in your favor and go in, as extra money, into the Infinite Banking policy.
By the time you pay the whole interest and loan amount, you will have more money in the bank and growing at a reasonable compound interest rate.
When money is borrowed out, it is treated as a loan to yourself. What interest rate would you want to earn on your money? It’s up to you to either follow the market interest rate or come up with your own interest rate. Experts believe that an interest rate of 5% to 10% is viable. Paying a higher interest rate will create a better future for yourself and your family.
So, you make a plan and set monthly principal amounts along with a set interest rate. This way, you keep on adding money into your banking system with interest and that money continues to grow with tax advantages. When done correctly, it can be a huge win-win for your situation.
This way, for every purchase you make, you increase your principal amount along with compound interest.
Benefits Of Infinite Banking
Non Correlated Assets: This investment option is non correlated. Meaning, there’s no ties to any shares or stock market. Hence, no fluctuations are observed throughout the investment period.
Tax Advantages: We can avoid taxes indefinitely when done correctly. This is because, as long as the life insurance policy is in effect, taxes are never owed. When you die, money is transferred from the Infinite Banking policy to your heirs tax free. This is the biggest drawback of other options such as IRAs and many consider this to be Infinite Banking’s biggest strength.
You’re The Boss and Have Total Control over Your Money: When it comes to other investment options, you have no control over your money. Infinite Banking offers you full control. You can borrow money whenever you like, and can charge interest as well. You can also borrow money from your policy for other investments when you feel they are a good option.
Bank Balance Growth: For every time that you withdraw money, your principal amount increases when you pay it back with compound interest. Why? Because you are paying yourself back with principal amount along with interest.
Like every other investment option, IBC has its downfalls too.
Large Part Of Income May Be Required: To start this banking system, you will have to have a good amount of cash. You cannot start your own bank with $10. You should have at least 100 dollars a month, minimum, to start your own banking system.
You Need To Be Strict And Disciplined: The whole plan will fail if you get weak and do not pay the interest as agreed upon, or if you stop putting money into the policy too early. Usually, it takes 5-7 years to get an Infinite Banking policy running efficiently.
Infinite Banking is not a cure all for financial problems. However, it does provide a safe alternative to market based investments.
Disclaimer: This is a guest post and it doesn’t represent the views of IWB.
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