We see endless videos on social media of people with no financial background trying to sell the concept of infinite banking, so we are going to walk through why infinite banking is not the best option for most people.
Why the hype? What is Infinite Banking?
Infinite banking is a personal finance strategy that typically leverages a whole life policy as a “personal bank.” People love the idea of being able to borrow from themselves to improve cash flow and liquidity.
The concept is made to sound easy and became popular after economist Nelson Nash wrote “Becoming Your Own Banker” in the 1980s. To get started, you open a whole life insurance policy, pay the premiums and save to build up the cash value, and then take out a loan against your own money all while your policy’s cash value continues to gain interest as you pay yourself back.
5 reasons why infinite banking may not be the best solution for you
Infinite banking is not the best strategy that can be used to increase cash flow for most people. Here’s why.
1. Whole life insurance policies are expensive.
Whole life policies are 5 - 20xsmore expensive than term insurance because whole life insurance lasts your entire life. Most people do not need life insurance coverage for their entire life.
2. You need to save a lot of money to your whole life policy before you can take a loan.
Infinite banking is not the get rich quick strategy as it is advertised. It takes time, and lots of over funding your policy, to build your cash value over time to where it is large enough to borrow against. Just like you build equity in your home over time by paying your mortgage, you build “equity” over time in a whole life insurance policy by building your cash value.
3. You pay interest on your loan even though you are “borrowing your own money”.
Imagine a product so great, that you are actually charged interest by the insurance company to borrow your OWN money! It sounds comical when it’s explained this simply, but that is exactly what is happening. It’s no different than when you borrow via a credit card loan or mortgage where loan interest is paid. In this case, you’re borrowing from an insurance company. Why not just save or invest the same monthly amount into your own account, and then use it when needed for free?
4. If something happens to you, you lose your cash value.
Typically, the life insurance company will keep the cash value upon your death and the beneficiary will receive the policy’s death benefit. So essentially you have an investment (your cash value) and an insurance policy(the death benefit), and if something were to happen to you, you actually lose your investment account balance. That doesn’t sound very good to most people.
5. Insurance salesman love to sell the infinite banking concept.
Unless you specifically need a permanent life insurance benefit or are already maxing out all of your other investment options, the people that are telling you that Infinite Banking is a good idea are likely the people who will directly receive money through commissions by you purchasing a policy. When you dig into actual costs of whole life policies, 50-70% of the premium is commission that goes to the salesman that sold you the policy. That’s why in our opinion, infinite banking is nothing more than a marketing tactic to oversell insurance products.
What if I need life insurance?
If you are looking to purchase life insurance as part of your financial plan, consider term life insurance that is low cost and covers you for the time that you need financial protection the most. You can then invest the difference that you’d paying in more expensive premiums if you were to purchase a whole life policies. And what happens if you die? Your beneficiaries can receive BOTH the death benefit and your investment account balance.
When should I consider a whole life policy?
Whole life policies can be considered in specific circumstances where you have a special needs child or want to fund a special needs trust, if you are maxing out all other investment and retirement accounts or if you have an estate tax issue. Point being, whole life policies, and policies like it, are usually best reserved for very specific cases.
We strongly recommend working with a fee-only, CERTIFIEDFINANCIAL PLANNER™ if you have detailed questions regarding insurance planning for your unique needs. A CFP® professional can often provide you with an independent, objective, opinion on what is best suited to your situation.