The rich utilize this process to grow their wealth exponentially
“Infinite Banking” has been a term used scarcely in the investment world. It is not a new concept or phenomenon — but many people, even investment professionals who have been a part of the industry and know about its ins and outs — do not know about the concept of infinite banking.
If you have heard of it, you are amongst a select few who have this information that the majority of others don’t. Infinite banking or “banking on yourself” are synonymous terms first introduced by Nelson Nash who was an economist, and he aligned himself with the Austrian school of economics.
“The very first principle that must be understood is that you finance everything you buy — you either pay interest to someone else or you give up interest you could have earned otherwise.” — Nelson Nash
This concept to generate wealth is certainly not for everyone. I will explain in detail the pros and cons — whether it makes sense for the average person. Now, having said that, the biggest names in American banking families, be it the J.P Morgan family, the Rothschilds, or the Rockefeller's — they all have amassed billions of dollars using this very same concept. Interested now? Let's dig in.
One of the strongest selling points of the whole life insurance policy is the fact that this product allows policyholders to borrow against the actual cash value of the life insurance policy. Now, taking advantage of this in our favor, according to Nash, a person having enough cash reserves deposited in these life insurance policies can continually, over long periods of time, borrow from themselves using this same policy as collateral.
This way you won’t need to borrow from a bank ever again. You would just borrow from yourself and continue paying yourself back over time — thus becoming “your own bank”. Needing the money to buy an engagement ring, a new car or house, or a child’s education — you can borrow for anything using this policy. No more paying interest to the banks anymore. Think about it — this is beating the banks in their own game. How good!
Now we come to the infinite part of the infinite banking process and this refers to the whole life insurance payout in the event you are to die. As long as you’ve paid regular premiums on your policy, the whole life policy always payout. A policyholder can continue to borrow against their policy throughout their lifetime and once they die, the payout goes to the beneficiaries who can then repeat this magical process again and bank on themselves.
This would then work as a family bank where you pass on the wealth to your next generations and thus continuing to reap the rewards. And to make things even more appealing (if this wasn’t enough already), the death benefit payable is completely tax-free.
You lose money to creditors whenever you take a loan. Be it a loan for a big-ticket item like a house, a car, or a child’s education — or a loan to fund your lifestyle needs through a personal loan. You will continue to pay principal and interest throughout the loan tenure. All of these examples will deplete your wealth over a lifetime.
The argument in favor of infinite banking is that its sort of an interest-free loan that offers tax-free growth potential, loans, and withdrawals along with an annual dividend payment through the mutual insurance company — at the same time guaranteeing a tax-free death benefit. In essence, being your own bank.
On the contrary, there are severe downsides as well. Like any other investment, this too has its disadvantages. Insurance companies aren’t stupid and they aren’t providing these amazing benefits out of the kindness of their heart. Like any other business, they are here to make money as well, and that they make from you, the policyholder.
Consider these factors before even planning to garner thoughts of taking the infinite banking route:
- Do the math — make sure that the way the infinite banking system is structured makes sense for your individual needs. I am not going to bore you with numbers here, but bear in mind that it's highly critical to run the numbers before making any decisions. Consider taking the advice of a licensed professional.
- Being patient and giving it time — the whole of life policies take time to break even, typically 5 to 7 years. This is a multi-decade game where the magic of compounding works and starts kicking in aggressively after 10 years.
- Agent commissions — these policies are sold (and often missold) by agents as they provide real incentives for the salespeople. They are sold in a way that may not be in the client’s best interests so, doing your due diligence is a must to understand the structure and long-term ramifications.
Short answer — High Net Worth (HNI) individuals. As these HNI clients are susceptible to lawsuits being filed against them, the whole of life policies protects them as these assets can’t be garnished in a civil lawsuit. This also helps these individuals with estate planning purposes and asset protection to keep the wealth these families have amassed over the years.
As has been reminded to us again and again by the so-called financial gurus of the world, it's easy to amass a great deal of wealth over a lifetime but really hard to protect it from the predators who are looking for shortcuts to take advantage of any loopholes in the system.
Life is a journey. No one can predict the future. While you may be in a situation where the infinite banking concept doesn't work for you now, but 10–20 years down the line, this could be the best strategy for you to protect, grow and pass on your wealth to your heirs.
Talk to your financial adviser who is a fiduciary (a person who has your best interest in mind) and not a salesperson. Look at your income and expenses and work out if you can pay higher premiums for your whole of life policies (the whole of life policies are typically more expensive than term insurance).
Consider the fact that time and patience play a huge role in compound interest to works its magic. While being your own banker is highly advantageous, talk to an expert and run the numbers to figure out if you are on track for it.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.
