Answers ยท Infinite Banking
Is infinite banking a scam?
No. Infinite banking is a way to use a dividend paying whole life policy: you build cash value, then borrow against it. The trouble is the pitch. Early surrender can be costly, loans charge interest, and the policy needs a long term commitment. Sold to the wrong person, it can feel like a scam.
Infinite banking is an ordinary whole life policy with a sales story on top.
There is no special infinite banking product. The idea took off after a book around 2000, and it runs on a dividend paying whole life policy, usually set up to build cash value fast.
You pay the premium. Part of it pays for the insurance and the costs. The rest builds cash value inside the policy. Once there is enough cash value, you can borrow from the insurance company and use that value as collateral. You use the loan for a car, a business, a down payment, whatever. Then you pay it back, and you can borrow again.
So it is not a scam. It is a real contract, sold by licensed agents, regulated by the state. The problem is the story the policy gets sold with, and who it gets sold to.
One thing up front about who is talking. opfinances.com is a licensed insurance agency. We are not a financial advisor and not a fiduciary, and this is general education, not advice about your situation.
Your first few years buy the insurance, not the bank.
The pitch usually skips this part. In a standard whole life policy, a big share of the early premiums goes to commissions, the cost of insurance, and setup costs. If you cancel in the first few years, the cash surrender value can be well below what you paid in.
Ask for a policy illustration that shows the guaranteed and nonguaranteed cash surrender values each year. The amount available if you cancel early can be much less than the premiums you paid. A paid up additions rider may build cash value faster, but the result depends on the specific policy design and its costs.
Depending on the design, it can take years for the cash value to catch up to what you put in. Until then, your bank has less money in it than you deposited. Ask to see the year by year surrender value column, not just the year 20 number.
You are borrowing the insurance company's money, not your own.
"Be your own bank" sounds like you are lending to yourself. You are not. A policy loan is money from the insurance company, with your cash value as collateral. The insurer charges interest, and that interest goes to the insurer, not back to you.
There can be flexibility in how you repay a policy loan, and cash value may continue to earn while the loan is out. The loan terms and how that value earns depend on the contract. Some policies credit loaned value differently from unloaned value, and dividends are never guaranteed. Ask to see what happens if the loan stays open for years.
An unpaid loan keeps growing with interest. It gets subtracted from the death benefit, and if the loan outgrows the cash value, the policy can lapse.
The tax benefits are real, and they are also where it can go wrong.
While the policy stays in force, a policy loan is generally not taxed as income. That is a real feature, and it is a big part of why the concept works for some people.
But if the policy lapses or you surrender it with a loan still out, the gain can be taxed as ordinary income. And you get no cash to pay that tax, because the loan already spent it.
Pay in too much, too fast, and the policy can turn into a modified endowment contract. Then loans are taxed on the gain first, with a possible 10 percent penalty before age 59 and a half. A good design stays under that limit on purpose. Ask for it in writing.
It works for a few people, and it gets sold to a lot more than that.
It may fit someone with steady income, emergency savings already in place, no high interest debt, a real need for permanent life insurance, and a plan to keep the policy for many years.
It fits badly when money is tight, when you might need the premium back in the next few years, or when the main reason is a return you were shown next to a savings account rate. Those numbers are not the same kind of number.
Then there is how the agent gets paid. On most whole life policies, the agent's commission is a big chunk of the first year's base premium. A paid up additions rider usually pays the agent a lot less. That is why the split between base premium and paid up additions is worth asking about. That goes for anyone quoting you, us included.
Any guarantee in the policy depends on the claims paying ability of the insurance company that issues it.
Before you decide
Questions worth asking.
What is the cash surrender value at the end of years one, three, five and ten, in the guaranteed column and the non guaranteed column?
How much of my premium goes to base premium and how much to paid up additions, and why that split?
What interest rate will a policy loan charge, is it fixed or variable, and how does an open loan change the dividends credited on my cash value?
How close does this design come to the modified endowment contract limit, and what happens if I want to put in more?
If I miss a year of premium, or have to stop paying in year four, what happens to the policy and to any loan?
What is your commission on this design, and how would it change if more of the premium went to paid up additions?
Related
Is infinite banking legal?
Yes. It is a way of using a whole life insurance policy, which is a regulated contract sold by licensed agents. Borrowing against your cash value is a standard policy feature. Whether it suits you is a separate question from whether it is legal.
Can you lose money with infinite banking?
Yes. If you cancel in the early years, the surrender value can be less than what you paid in. An unpaid loan cuts the death benefit, and a policy that lapses with a loan can leave you owing tax on the gain.
Do you pay interest to yourself with infinite banking?
No. A policy loan comes from the insurance company, and the interest goes to the insurer. Your cash value may keep earning while the loan is out, depending on the contract, but the dividends are not guaranteed.
How long does infinite banking take to work?
It depends on the design, but plan in years, not months. It can take several years for the cash value to catch up to the premiums you paid. Ask for an illustration showing annual premiums and cash surrender values so you can judge the commitment for yourself.
What is a paid up additions rider?
It is an option on a whole life policy that lets part of your premium buy small chunks of extra paid up coverage. Those additions build cash value faster than the base policy does, which is why infinite banking designs lean on them.
Where this fits.
This question sits inside a bigger one. Infinite Banking walks through the whole decision rather than this one piece of it.
On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.