Infinite Banking Concept

Did you know that you can structure a Whole Life insurance policy to accelerate the accumulation of the Cash Surrender value instead of maximizing the insurance death benefit? Why would you do such a thing you might ask?

Good Questions.

You can structure a Whole Life policy such that you can make annual insurance payments, plus extra cash (think savings) that will purchase Paid-Up Additions (additional paid up insurance) that goes directly into the Cash Surrender value. This accumulation of cash value is guaranteed to earn a minimum return, typically 4%. However, you would only approach this idea with Mutual Insurance Companies. Why? Mutual Insurance companies pay any dividends for the year back to the policy holders, not share holders as they are not public companies. The result, you can earn more than the guaranteed return. Oh, by the way, Tax free.

You can find a lot of opinions regarding this concept under the terms: Infinite Banking Concept, Bank on Yourself, 702(j) Retirement Plan, among many others. A word of caution. Do your homework, work with a certified IBC insurance agent, or Bank on Yourself agent. Those agents that specialize in structuring this type of policy actually earn less than a typical whole life policy agent.

Why might you setup such a policy?

The IBC concept is to accumulate enough cash value such that you can become ‘your own bank’ and loan yourself money for those life events that you need some cash. Weddings, purchase of a car, college education, starting a business, etc.

Why would I put money into a policy so that I can loan it back to myself? Why not just save the money and then purchase with cash? When structured correctly, these policies should be non-direct recognition policies. This means that although you have loaned yourself some money from the cash value, the guaranteed rate of return plus any dividends will be credited based on the total cash value not taking the loan into account.

Say you have $50,000 in Cash Value. You take a $10,000 loan against that Cash Value. When returns/dividends are credited, they will be based on the $50,000 Cash Value. So, let’s say your loan has an interest rate of 5% and your guaranteed return is 4%. In the long run, you are effectively borrowing money at a fairly low rate. BUT – The big powerful benefit is that you continue to compound interest on the entire cash value year over year while you are paying that loan back on your terms. Why not just save and pay with cash? Once you pay with cash, you are earning nothing because the money is gone. You can actually compound your savings for your lifetime which will make a big difference over time.

How does that work?

What is actually going on behind the scenes is that the Mutual Insurance company is loaning you the funds and using your Cash Surrender value as collateral. And it is a no fuss process to request the money, mainly because they know they will get paid back upon the death of the policy holder. It sounds morbid, but they know that at some point, the death benefit they are contractually obligated to pay out, will be reduced by the outstanding loan balance. They have no doubt about receiving their loan money back.

Your situation varies

Depending on your financial situation, this might be a good savings vehicle for you.

Term Insurance may be a valid approach as well. Lots of variables, and this post is just skimming the surface. Expect to see more.

Greg Pfister

Ramblings and other things.