Infinite Banking Concept [aka Life Insurance]
New to Real Estate · Northern Virginia · Member since 2020 · 20 posts · 14 votes
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.
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.
It's pretty commonly discussed in these areas. If you keep your ears open you'll hear it come up pretty frequently. I've talked with a few folks who have done it and most seem to be happy with the decision. I do think the marketing often overstates what it does. It's so often pitched as a way to become a Rockefeller, which seems a bit like an overstatement as to what it can do.
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.
@Mike S. explained it pretty well. Just to clarify what you stated...
You are not taking a loan against 90% of your premium. The internal fees and load in even the best designed, maximum over-funded policies is about 15%. Premium minus fees equals cash value. The cash value is the asset that you can borrow against. You may see life insurance illustrations that show 90% cash value, but keep in mind that is at the end of the first year and includes a dividend payment. That dividend will not have been credited at the beginning of the year when you'll want to borrow against the cash value.
Also, 4% guarantees are a thing of the past. Congress recently changed the 7702 statutes to allow for a 2% actuarial growth rate. The new rules were effective 1/1/21. These "guaranteed" rates are really just the minimum growth rate that the insurance company needs to achieve for the contract to perform. Because interest rates in the debt markets are now well below 4%, the industry was starting to get a little nervous about all those "guarantees" they made.
@Thomas Rutkowski Thanks for the very informative reply! I've dug through the various forums you referenced and I found it very helpful and more accurate than some of the "marketing" pitches I've seen on IBC videos/materials.
It sounds like in terms of long-term returns, Indexed Universal Life > Whole Life. I'd also be curious to know why you recommend variable interest rates on policy loans.
I actually got my health exam/physical and illustration (whole life) but haven't pulled the trigger yet. I signed up for the FB group so looking forward to learning more!
When you choose a fixed loan on an IUL, the insurance company moves the cash value into the fixed interest crediting strategy. There is no opportunity for interest rate arbitrage. Annualized IUL returns include a premium over the debt market rate of return because of the hedging going on behind the scenes. So if loan rates are based on the Moody's Corporate Bond Yield, there should be a long term arbitrage between loan rates and annualized IUL returns.
But regardless of arbitrage opportunities, the loan rate is your cost of money hurdle. As rates rise, we need to find opportunities with positive NPV.
I actually recommend using a cash value line of credit whenever you are borrowing against your policy to do The Double Play, investing in real estate by leveraging the cash value of a maximum over-funded life insurance policy. Policy loan interest is not tax deductible. Imagine making 10% on an investment and having to pay 40% taxes AND 4% interest. That would leave you with 2% net on top of whatever the cash value earned during the same period.
If the interest is tax-deductible, then your taxable income percentage on the same investment is 6%. At the same 40% tax rate, you'll net 3.6%. That is almost double the income on the outside investment PLUS the return on the cash value during the same period.
Sam,
As folks have explained this is essentially borrowing the cash value and paying it back with interest. It was a way to turn taking cash out from a policy into a loan rather than a surrender/partial surrender. Since surrender and partial surrenders had tax consequences and could affect the life of the policy.
With that in mind, there are two huge things to know about this technique. Firstly, since you are putting your money in the policy first, you will not only lose money to fees and premium taxes, but you can also quickly torpedo this strategy if it isn't done correctly. A previous poster mentioned IRC section 7702. It not only talks about the minimum actuarial growth, but it was a part of a larger tax code change in the 1980s called TAMRA.
Essentially, people were using life insurance products as investments rather than to insure a risk. So this section put limits on this behavior. There is a limit to how much you can fund a life insurance policy at any given time and keep the tax benefits. If you put in more than this, the contract becomes a "Modified Endowment Contract." Once a life insurance policy achieves MEC status, then even loans are taxable.
Further, if you don't keep the policy healthy and it lapses with a loan pending then the loan becomes a surrender/disbursement and there could be taxes due at that time. This is a very powerful strategy, but you'll want a good tax advisor and good life insurance producer who understands these complexities to help you out.
@Thomas Rutkowski I did a quick Google search on cash value line of credits and many of them have a minimum credit line amount ($65,000-$100,000). Even when overfunding, I won't have that amount of cash value for awhile. Are you aware of any banks/credit unions/etc. that offer cash value line of credits with a lower minimum?
Thanks so much for all your help!
@Samuel Choi I steer my clients toward the same bank that I use. They'll do any amount. Even clients with only $10,000 premium can get a LOC.
I have been doing this since 2018. If you net worth is under 500k I would not do it. If someone has more specific questions let me know. Sorry I do not sell insurance 😁
@Lane Kawaoka, any specific reason why you wouldn't recommend it for anyone with net worth under 500k? I'm not at that level (yet), but thought the ability to "double dip" if you can find high returns in real estate/elsewhere would benefit most people? Is it just the higher risk/cost of the policy lapsing per @Michael Redden's point? Any thoughts/recommendations would be welcome!
When you load money into these IBCs you take a big gut-punch in fees. So its a little misleading if you ask most IBC sales people.
When you load money into these IBCs you take a big gut-punch in fees. So its a little misleading if you ask most IBC sales people.
The fees are the same percentage of every premium dollar. If you have been following my posts on this topic, you'll know that I often repeat that the fees in a properly-designed, maximum over-funded policy are approximately 15%. That is true whether the premium is $10,000 per year or $100,000 per year. 85% of your premium dollars should be going to the cash value. You can see that on your illustration when you look at the premium and then look across to your first year cash value. Hardly misleading.
There is no reason why this would only work for someone with more than $500K. Its just a matter of scale.
@Samuel Choi I steer my clients toward the same bank that I use. They'll do any amount. Even clients with only $10,000 premium can get a LOC.
Great thread. I've been in the insurance industry for over a decade and I'm also a real estate investor who actively uses this strategy — so I'll share what I've seen from both sides.
Thomas nailed it on the technical side. The structure of the policy matters more than anything. Most people who get burned by whole life bought a retail policy that wasn't designed for high early cash value. A properly structured policy with paid-up additions can have 80-85% of your premium available as cash value in year one. The wrong structure and you're waiting 10-15 years.
From the investor side, here's what makes this practical for real estate:
I've used policy loans to fund flips. The insurance company sends a check in 3-5 business days — no credit check, no underwriting, no approval committee. And the key part most people miss: your cash value keeps compounding even while the loan is out. The company lends against it as collateral, but your money stays in the policy earning dividends.
I've also used cash value to lend to other investors at market rates. You borrow at ~5% from the insurance company, lend at 8-12%, and your policy is still growing underneath. That spread adds up.
The biggest misconception I see: people compare whole life returns to the stock market. That's the wrong comparison. It replaces your emergency fund and idle capital sitting in a savings account earning nothing. When you reframe it that way — comparing 4-5% tax-free growth to 0.5% taxable in a savings account — the math changes completely.
One thing I'd add to Thomas's point about the 7702 changes: the new 2% floor actually allows you to stuff more premium into the policy relative to the death benefit, which can mean higher early cash value if the policy is designed correctly. It's not all bad news.
Happy to answer any specific questions about how this works in practice for RE investors. I've helped hundreds of investors set this up and I use it myself every day.