Infinite Banking Concept [aka Life Insurance]

[Samuel Choi]

I recently listened to the Millennial Money Podcast where Chris Naugle talks about using a specific type of life insurance policy to "become your own bank" and build a foundation for wealthy building.

The idea is that you are able to take a loan out for 90% of your premiums. The loan comes out of the life insurance company's general account at 5% simple interest (paid annually) and technically you don't have to pay it back as it will be taken off your death benefit. The cash value in your policy continues to compound at 5.6%-6% (4% guaranteed, 1%-2% dividends) for the full amount. It's like an appreciating HELOC?

Just wanted to post and see if anything is familiar with the concept or have used it for real estate investing (i.e. hard money lending, down payments, etc.). I probably didn't explain it thoroughly and welcome any questions/critiques.

[Mike S.]

The core behind this technique is to use a maximum overfunded permanent life insurance policy. The strategy is branded under different name like infinite banking, bank on yourself, be your own bank, the LASER fund, ...
Some are promoting the use of Whole Life Insurance, some the use of Universal Index Life Insurance. They both have their pro and con and can work well.

The cash value of the life insurance is expected to grow at a 4 to 8% IRR depending on the type of policy.
You can use your cash value as a collateral for a loan (between prime and 6% interest rate depending on the policy or the bank you use), while the cash value continue to compound its grow on its full value uninterrupted. You are making your money work at two places at the same time. If you use an independent bank for the loan you will have to pay the interest back, but you should be able to deduct them as expense if the loan was used for investment. If you use the insurance loan directly, you don't have to pay it back if you don't want too as you can compound the interest until you die. At that time, the insurance will reimburse itself from a portion of the death benefit. It is a powerful strategy to get tax free income during retirement. The rest of the death benefit is transferred tax free to your beneficiary.

Life insurances have bad reputation as the fee are front loaded and it may take a few years to absorb them. But if you look in the long run, over the life of the policy, the average fee is probably lower than in an employer 401k or many mutual funds. Also, only a few insurance agents are familiar, or willing to structure max overfunded life insurance policies as instead of getting the maximum death benefit for the minimum premium you should seek getting the minimum death benefit for the maximum premium allowed by the IRS. The agent commission is primarily related to the amount of death benefit, so they are lowering their commission selling these policies.

You should have a look at @Thomas Rutkowski website and posts where he has plenty of useful information on these kind of policy uses for real estate investor.