Answers · Infinite Banking

Is infinite banking better than a HELOC or a bank loan?

Usually not on cost. A HELOC borrows against home equity you already own. A policy loan borrows against cash value you first have to build with years of premiums, and the early years cost money. What a policy loan does better is access: no credit check, no fixed payments, and your house is not the collateral.

The loan rate is the wrong number to compare.

The usual pitch puts two interest rates side by side. The policy loan rate on one side, the bank's rate on the other. That comparison leaves out the biggest cost.

A HELOC borrows against equity you already have. You paid down the mortgage or the house went up in value, and the collateral is sitting there. A policy loan borrows against cash value inside a whole life policy, and that cash value does not exist until you build it with premiums.

So you are not comparing two loans. You are comparing a phone call to your bank against the last step of a plan that takes years to set up.

Quick note on who is talking. opfinances.com is a licensed insurance agency. We are not a financial advisor and not a fiduciary. This is general education, not advice about your situation.

Building the collateral is where the policy costs you.

Here is some illustrative arithmetic, not a quote. Say a policy design has you pay 40,000 in premiums over four years, and the illustration shows 34,000 of cash value at the end of year four. That 6,000 gap is what it cost to open your bank. It covers commissions, the cost of the insurance, and policy charges.

Most policies let you borrow up to a set share of the cash value, so your borrowing room is a bit smaller than that 34,000.

Now the other side. Opening a HELOC might mean an appraisal and a few fees, and some lenders waive them. A personal loan or car loan may have an origination fee. Either way, you are usually talking hundreds of dollars, not thousands.

If you need the life insurance anyway, part of that 6,000 is buying something you wanted. If you do not need the insurance, all of it is the price of the loan.

A policy loan asks no questions, and that is its real advantage.

Once the cash value is there, a policy loan is simple. No credit check. No income paperwork. No approval that can be denied. The loan generally does not show up on your credit report, and there is usually no required monthly payment.

A HELOC works differently. You have to qualify, the rate is usually variable, and the bank can freeze or cut the line. Lots of lenders did exactly that when home values fell in 2008. A HELOC also has a draw period and then a repayment period, and the payment can jump when that switch happens. Miss enough payments and the house is at risk.

A bank loan or car loan is the most rigid of the three. Fixed payments, fixed term, and approval based on your credit. The upside of rigid is that it gets paid off.

So the policy wins on control. The catch is that no required payment also means nothing forces you to pay it back.

An unpaid policy loan quietly grows, and the policy pays for it.

Interest you do not pay on a policy loan gets added to the loan. Say you borrow 30,000 at an illustrative 7 percent and pay nothing back. In about ten years the loan is close to 59,000.

That balance comes off the death benefit when you die. If it ever grows bigger than the cash value, the policy can lapse. A lapse with a loan out can mean a tax bill on the gain, with no cash left to pay it.

You will also hear that your cash value keeps earning while it is borrowed, so the loan nearly pays for itself. Sometimes it is close. It depends on the contract. Some policies credit borrowed cash value differently from the rest, and dividends are never guaranteed. Ask to see an illustration with the loan left open, not just the version where everything goes right.

It wins in a narrow case, and that case starts with needing the insurance.

A policy loan can make sense for someone who needs permanent life insurance anyway, already has the cash value built, and values borrowing without a bank's approval. For that person the loan is a feature of a policy they would own either way.

It makes less sense when the loan is the reason to buy the policy. If you have home equity, steady income, and good credit, the bank is usually the cheaper lender, even at a higher rate, because you never paid to build the collateral.

One more thing about incentives. We get paid when we sell a policy, and nobody gets a commission when you call your bank. Weigh anything an agent tells you on this question with that in mind, us included.

Any guarantee in a life insurance policy depends on the claims paying ability of the insurance company that issues it.

Related

Is a policy loan cheaper than a HELOC?

The rates can be close. The difference is the setup. A HELOC uses home equity you already own. A policy loan needs cash value you build with premiums first, and early years usually show less cash value than you paid in.

Does a policy loan affect my credit score?

Generally no. There is no credit check to borrow from your own policy, and the loan does not usually get reported to the credit bureaus. That also means nothing outside the policy is tracking whether you pay it back.

Do I have to pay back a life insurance policy loan?

Usually there is no required payment schedule. Unpaid interest gets added to the loan, the balance comes off the death benefit, and if it outgrows the cash value the policy can lapse and may leave you owing tax on the gain.

Is HELOC interest tax deductible?

Generally only if you itemize and the money is used to buy, build or substantially improve the home that secures it. Interest on a policy loan used for personal spending is generally not deductible. Check your own case with a tax professional.

Can a bank freeze a HELOC?

Yes. A lender can freeze or reduce a HELOC in some situations, such as a big drop in the home's value or a change in your finances. Many did this during the 2008 housing downturn.

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.

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