Infinite banking, although it has been around for at least a century, didn’t become a popular concept until 2000. The growth of this idea is in thanks to the book “Becoming Your Own Banker” by Nelson Nash.
Understanding what infinite banking means can be a daunting task, but worthwhile to the right person. It may not be for everyone, but learning the core values of infinite banking should be on your investment list of things to know.
So let’s take a look at what infinite banking is, breaking down the core concepts and if going down this path is right for you.
Infinite Banking Basics
The idea behind infinite banking is for you to be your own banking system through “dividend-paying, permanent life insurance.” Instead of an institution or an individual having control over your finances, you take back control of all the banking functions you do every day. Infinite banking is a strategy that allows people to both borrow money and save money.
But before continuing, you must understand what permanent or whole life insurance is. This type of policy is lifetime coverage, as long as you continue to pay the monthly premiums. Because of that, your premiums are more expensive than term life insurance since the insurers are at a higher risk of having to pay out the death benefit.
A whole life insurance policy that has a dividend-paying portion adds cash value to the policy, almost like a savings account. These dividends are paid to the policyholder by the insurance company. It is almost like you are investing in the insurance company. Usually, the amount of dividends paid helps offset the higher monthly premium payments. You must qualify for this type of policy to use the infinite banking concept.
Realize the whole life insurance is also very expensive – especially compared to term life insurance policies. One of the biggest drawbacks of this policy is that insurance salesmen can mislead the pros and cons, simply to earn a commission on the insurance.
How Does Infinite Banking Work?
Once you understand what is involved in infinite banking, you can start to learn how it all works. Your personal bank comes from the cash value of the insurance plan. Insurance companies guarantee a minimum return rate on the cash value that is usually between 3 and 5 percent. On top of that, each year your policy gains an annual dividend based on the company’s performance. This is considered an “overpayment of premium” that is exempt from taxes.
Where the banking comes into play is through borrowing against your policy. You can take money from your cash value and use it for something else. The bonus is your cash value continues to earn dividends. Ultimately you are mimicking how a bank operates with borrowing a loan, just with your own money and insurance policy.
Is Infinite Banking For You?
As mentioned before, infinite banking is not for everyone. It requires a lot of discipline and dedication. It is something you must dive entirely into, which may require sacrifices until you can see the rewards. But when done right, the rewards are endless.
You also have to qualify for the insurance policy needed to follow the infinite banking strategy. If you cannot purchase a dividend-paying whole life insurance policy, then infinite banking won’t work for you.
But if you are dedicated and looking for a way to take control of your finances, then infinite banking may be for you.