Infinite Banking Concept

16 Replies

I took a deep dive on this about a year ago. Read the book and everything. It's a lot of hype but not that exciting, at least the way I see it.

The model is to start an insurance policy that gains value as you pay your premiums. After about 5 years, you can start borrowing from the policy and thus buy a car or whatnot and pay interest to yourself.

The problem is

  1. for 5 years, you get no return on your money. ouch.
  2. You can really only use it for consumer debt like cars since investments like houses cost so much more. Any successful investor I know knows that consumer debt reverses net worth progress. If you need a loan to buy a car, probably shouldn't be buying that car.
  3. Then there's the whole thing of where I stand on life insurance. My life insurance is $6M of real estate that makes $100k/yr. Why would I pay for an insurance policy so they can pay all their accountants and salespeople and then what's left goes to my estate if I die...

@Allan Smith

I don't believe that you are looking at it properly. The life insurance cash value is not the investment.

1. You are wrong about the borrowing In a properly-designed policy, you can borrow immediately upon issue. Further, a properly-designed policy should have about 85% cash value to premium. So a $50,000 annual premium would allow for an immediate loan of about $42,500.

2. Who says it has to be consumer debt? Be aware that point of The Double Play is to put your money to work in two places at one time. Use a policy loan, or better yet, a cash value line of credit from a bank, to invest in real estate. Now you are putting your money to work in two places at once. 

3. Understand that because of the tax advantage of this structure, you are earning a higher combined rate of return. This means that you will quickly catch up to and surpass where you would have been had you simply invested your cash directly in real estate. 

You don't need to be a mathematician to know that this makes sense.

Promotion
Vacasa
Vacation Rental Property Management
We do the work. You get the ROI.
We do it all for your vacation rental. All—marketing, pricing, guest requests, housekeeping & more.
Free income estimate

Click on the magnifying glass in the upper right. You’ll hit the search Engle limit. 

MAYBE it was a good deal when interest rates were 10-12%. It was a pretty bad deal when interest rates hit 6%. And it’s a horrible idea now. Keeep your money and start investing in yourself instead of the salesman.

GL.  

Originally posted by @Thomas Rutkowski :

@Allan Smith

I don't believe that you are looking at it properly. The life insurance cash value is not the investment.

1. You are wrong about the borrowing In a properly-designed policy, you can borrow immediately upon issue. Further, a properly-designed policy should have about 85% cash value to premium. So a $50,000 annual premium would allow for an immediate loan of about $42,500.

2. Who says it has to be consumer debt? Be aware that point of The Double Play is to put your money to work in two places at one time. Use a policy loan, or better yet, a cash value line of credit from a bank, to invest in real estate. Now you are putting your money to work in two places at once. 

3. Understand that because of the tax advantage of this structure, you are earning a higher combined rate of return. This means that you will quickly catch up to and surpass where you would have been had you simply invested your cash directly in real estate. 

You don't need to be a mathematician to know that this makes sense.

  1.  so without even paying premiums into the policy you can already borrow? What is the collateral? I don't get it. How can you borrow from yourself without having put any value in via premiums? I heard somewhere it takes about 5 years before there's anything worth borrowing from.
  2. The infinite banking book uses almost exclusively consumer purchases as examples. Investments would be better of course, but this hinges on #1 above. Setting that aside, the double play is a little hokey to me. Say you borrow from the policy and pay yourself interest to own a rental property. You are either paying yourself a great interest rate (12%!) and getting a crappy return on a rental, or you are getting a great interest rate for the rental (2%!), but the insurance policy value grows at a sad rate. They cancel each other out. Effectively 2 half-investments to equal one. 
  3. Assuming the tax advantage is tax-deductible contributions/premiums paid into the policy? And no taxes paid on the interest/gains of the policy as it grows? Sounds like it would be more cost-effective to get self-directed IRA maybe. I know a TON of people that use those. Very powerful.

To sum, maybe the way I'm looking at it is it's a great vehicle for people who A) feel the need to pay life insurance AKA forced savings plan, and B) people who like larger consumer purchases like cars. What am I missing?

Originally posted by @Thomas Rutkowski :

@Allan Smith

I don't believe that you are looking at it properly. The life insurance cash value is not the investment.

1. You are wrong about the borrowing In a properly-designed policy, you can borrow immediately upon issue. Further, a properly-designed policy should have about 85% cash value to premium. So a $50,000 annual premium would allow for an immediate loan of about $42,500.

2. Who says it has to be consumer debt? Be aware that point of The Double Play is to put your money to work in two places at one time. Use a policy loan, or better yet, a cash value line of credit from a bank, to invest in real estate. Now you are putting your money to work in two places at once. 

3. Understand that because of the tax advantage of this structure, you are earning a higher combined rate of return. This means that you will quickly catch up to and surpass where you would have been had you simply invested your cash directly in real estate. 

You don't need to be a mathematician to know that this makes sense.

So with a $50k per year premium, let's say that after 2 years, I can borrow close to 90K and that will be an interest free loan. I use that to invest in real estate earning 8% a year. 

The advantage here over just saving your money for two years outside of the policy and then investing is that in addition to the life insurance death benefit, your policy's cash value continues to grow tax deferred (i.e., working in two places at once)?

Also, doesn't the cash value go to the insurance company upon the death of the insured?

Originally posted by @Tony Kim :
Originally posted by @Thomas Rutkowski:

@Allan Smith

I don't believe that you are looking at it properly. The life insurance cash value is not the investment.

1. You are wrong about the borrowing In a properly-designed policy, you can borrow immediately upon issue. Further, a properly-designed policy should have about 85% cash value to premium. So a $50,000 annual premium would allow for an immediate loan of about $42,500.

2. Who says it has to be consumer debt? Be aware that point of The Double Play is to put your money to work in two places at one time. Use a policy loan, or better yet, a cash value line of credit from a bank, to invest in real estate. Now you are putting your money to work in two places at once. 

3. Understand that because of the tax advantage of this structure, you are earning a higher combined rate of return. This means that you will quickly catch up to and surpass where you would have been had you simply invested your cash directly in real estate. 

You don't need to be a mathematician to know that this makes sense.

So with a $50k per year premium, let's say that after 2 years, I can borrow close to 90K and that will be an interest free loan. I use that to invest in real estate earning 8% a year. 

The advantage here over just saving your money for two years outside of the policy and then investing is that in addition to the life insurance death benefit, your policy's cash value continues to grow tax deferred (i.e., working in two places at once)?

Also, doesn't the cash value go to the insurance company upon the death of the insured?

Interest free loan, really? How does the money within the insurance policy continue to grow - can it be invested in anything desired? I haven’t looked into insurance policies as an investment vehicle because I’ve heard it’s not a good strategy.

I think borrowing from 401k/IRA is done by people who are really desperate or are gullible enough to be sold on that, because the interest paid to the 401k/IRA is by the person themselves (i.e. the interest income is not new money). Besides the fact that money doesn't continue to grow within the 401k/IRA because it has been taken out of the 401k/IRA. Unlike margin loans in brokerage accounts (right now can borrow at 1.6% interest rate for balances over 5 mm$) where the borrowed money is deployed in investments outside the brokerage account and continues to grow within the brokerage account too (e.g. invested in index funds) because they were not really pulled out of the brokerage account.

Originally posted by @Lane Kawaoka :

I have been doing this since 2017. It allows we to story dry powder for deals. Let me know if specific questions.

Lane, this is a topic I'm trying to understand better - is it a specific type of life insurance policy? I've looked into this before but would love some resources from someone who is familiar with it. Thanks

IBC Global has some good videos on youtube that explain it.  

;t=2s

I was interested in it at one point, but because of the amount of premium you have to pay on the paid-up rider that impacts your cash flow, I figured I could use that money to buy real estate instead. And you can borrow immediately but not the full amount of premium that you paid.  It's about 3 - 5 years before you can borrow all of the cash value.  

Originally posted by @Tony Kim :

So with a $50k per year premium, let's say that after 2 years, I can borrow close to 90K and that will be an interest free loan. I use that to invest in real estate earning 8% a year. 

The advantage here over just saving your money for two years outside of the policy and then investing is that in addition to the life insurance death benefit, your policy's cash value continues to grow tax deferred (i.e., working in two places at once)?

Also, doesn't the cash value go to the insurance company upon the death of the insured?

The cash value of your policy growth uninterrupted while you are using it as a collateral for a loan.

That is the same principle as using a cash out refi. You have an asset (the life insurance or a home) that is growing in value every year (in the case of a home, the value can go down). You are taking a loan that is using the asset as collateral. The asset continues to grow, but you have cash that you can use to reinvest in other assets producing more income. The loan that you are taking is tax free, and the interest that you are paying back to the lender may be also tax deductible if the proceed are use for investment.

So your money is growing at two places at the same time.

When you buy a home for cash, you are paying closing cost, broker fee, stamp tax, etc... If you want to get a mortgage cash out, the lender will not give your 100% of the home value. Usually you may get only 70%. So if you refi every year, it will take a few years of increased home value so the 70% that you can cash out will exceed the initial cash that you put in to buy the home. If you die, when you heirs will sell the home, they will get the proceed of the sale, minus the outstanding loan due.

When you buy a permanent overfunded life insurance, instead of paying a one time amount, you need to put a steady amount of money for at least 5 to 7 years to minimize the cost while meeting the IRS guideline. As soon as you put a premium, only 75 to 85% of the premium you payed will go to the cash value (the rest pays the cost of insurance, and the different front loaded fee). You can borrow around 90% of that cash value immediately. Every year your cash value increase (either by a steady 3 to 5% in a Whole Life insurance, or a variable 0 to 13% in an Index Universal Life). When you die, your heirs don't get the current cash value, but will get the current death benefit minus the outstanding loan. The death benefit is higher than the cash value. It is a lot higher when you are younger, and become closer to the cash value when you reach your life expectancy. And that is a great feature, as if you die young you may have put only $50k in premium, have a $40k cash value, but your death benefit may be $2M. When you reach 80 y/o you may have put $500k in premium, have a cash value of $3M but a death benefit of only $3.5M.

The growth in a permanent overfunded life insurance is not fantastic, but it is tax free, so to compare apple to apple, a 6% conservative IRR of an IUL, or a 4% IRR in a WL may be closer to a 9% or 7% in a taxable account. On top of it you have a life insurance that will protect your family if you die early. But also it is a liquid asset that you can use as collateral to reinvest. When you use it that way, because you are not withdrawing the money from the life insurance, but only using it as collateral, the full value of the life insurance continues to grow uninterrupted. And it you use the proceed to reinvest, you can also deduct the interest of the loan from your investment gains. Cash value loan are easy to obtain, and don't need the long and arduous underwriting that you get for a mortgage. You don't need to pay mortgage insurance, it does not affect your credit score. Life insurance are also asset protected and don't count as asset on a financial aid form.

The Infinite Banking (TM) concept use WL life insurance as part of a way of spending your money. I don't personally believe that you should use this for buying non revenue producing asset (ie spending, buying cars, etc...). Like for velocity banking, it is a framework that works for people who have difficulty managing their spending.

However as a real estate investor, I am 100% behind the use of overfunded life insurance policy as part of my wealth building strategy. It is a complex product and some will prefer the lower guaranteed rate of a Whole Life insurance, while others like myself will prefer the more volatile returns of an Index Universal Life insurance that should outperform the return of a WL in the long run. As an heavily front loaded product, you take a small hit of opportunity cost for the first few years, but after year 5 to 8, you are getting ahead. Like most of real estate investments it's a long term play.

Originally posted by @Tony Kim :
Originally posted by @Thomas Rutkowski:

@Allan Smith

I don't believe that you are looking at it properly. The life insurance cash value is not the investment.

1. You are wrong about the borrowing In a properly-designed policy, you can borrow immediately upon issue. Further, a properly-designed policy should have about 85% cash value to premium. So a $50,000 annual premium would allow for an immediate loan of about $42,500.

2. Who says it has to be consumer debt? Be aware that point of The Double Play is to put your money to work in two places at one time. Use a policy loan, or better yet, a cash value line of credit from a bank, to invest in real estate. Now you are putting your money to work in two places at once. 

3. Understand that because of the tax advantage of this structure, you are earning a higher combined rate of return. This means that you will quickly catch up to and surpass where you would have been had you simply invested your cash directly in real estate. 

You don't need to be a mathematician to know that this makes sense.

So with a $50k per year premium, let's say that after 2 years, I can borrow close to 90K and that will be an interest free loan. I use that to invest in real estate earning 8% a year. 

The advantage here over just saving your money for two years outside of the policy and then investing is that in addition to the life insurance death benefit, your policy's cash value continues to grow tax deferred (i.e., working in two places at once)?

Also, doesn't the cash value go to the insurance company upon the death of the insured?

Sorry for the late reply. I've been really busy and haven't had time to get on social media. No, the life insurance company does not keep the cash value. The cash value of a policy is literally the policy owner saving up the death benefit for the insured over the insured's life expectancy. 

If the insured dies in the early years, the insurance company pays most of the death benefit. If the insured dies late in life, then the cash value makes up most of the death benefit.

The risk that the insurance company covers is the gap between the DB and the CV

DB = Death Benefit, CV = Cash Value 

Promotion
Marko Rubel
ATTENTION INVESTORS
Get Deals 100% Funded – No Credit, No Banks, No Job Verification
New Unlimited Funding® program for investors: low-interest, without banks or shark lenders.
Check availability
Originally posted by @Tushar P. :
Originally posted by @Tony Kim:
Originally posted by @Thomas Rutkowski:

@Allan Smith

I don't believe that you are looking at it properly. The life insurance cash value is not the investment.

1. You are wrong about the borrowing In a properly-designed policy, you can borrow immediately upon issue. Further, a properly-designed policy should have about 85% cash value to premium. So a $50,000 annual premium would allow for an immediate loan of about $42,500.

2. Who says it has to be consumer debt? Be aware that point of The Double Play is to put your money to work in two places at one time. Use a policy loan, or better yet, a cash value line of credit from a bank, to invest in real estate. Now you are putting your money to work in two places at once. 

3. Understand that because of the tax advantage of this structure, you are earning a higher combined rate of return. This means that you will quickly catch up to and surpass where you would have been had you simply invested your cash directly in real estate. 

You don't need to be a mathematician to know that this makes sense.

So with a $50k per year premium, let's say that after 2 years, I can borrow close to 90K and that will be an interest free loan. I use that to invest in real estate earning 8% a year. 

The advantage here over just saving your money for two years outside of the policy and then investing is that in addition to the life insurance death benefit, your policy's cash value continues to grow tax deferred (i.e., working in two places at once)?

Also, doesn't the cash value go to the insurance company upon the death of the insured?

Interest free loan, really? How does the money within the insurance policy continue to grow - can it be invested in anything desired? I haven’t looked into insurance policies as an investment vehicle because I’ve heard it’s not a good strategy.

I think borrowing from 401k/IRA is done by people who are really desperate or are gullible enough to be sold on that, because the interest paid to the 401k/IRA is by the person themselves (i.e. the interest income is not new money). Besides the fact that money doesn't continue to grow within the 401k/IRA because it has been taken out of the 401k/IRA. Unlike margin loans in brokerage accounts (right now can borrow at 1.6% interest rate for balances over 5 mm$) where the borrowed money is deployed in investments outside the brokerage account and continues to grow within the brokerage account too (e.g. invested in index funds) because they were not really pulled out of the brokerage account.

Policy loan interest is not zero.

Hypothetically, if the cash value is earning 5% and you can get a loan at 4%, then anything you do with that 4% money is adding value on top of the 5% the cash value is earning. Plus there is a tax advantage of being able to deduct the interest as a business expense. 

This means that you will earn more over time utilizing The Double Play and leveraging the cash value to invest in real estate than by simply taking the same money and investing directly in real estate. 

Originally posted by @Mike S. :
Originally posted by @Tony Kim:

So with a $50k per year premium, let's say that after 2 years, I can borrow close to 90K and that will be an interest free loan. I use that to invest in real estate earning 8% a year. 

The advantage here over just saving your money for two years outside of the policy and then investing is that in addition to the life insurance death benefit, your policy's cash value continues to grow tax deferred (i.e., working in two places at once)?

Also, doesn't the cash value go to the insurance company upon the death of the insured?

The cash value of your policy growth uninterrupted while you are using it as a collateral for a loan.

That is the same principle as using a cash out refi. You have an asset (the life insurance or a home) that is growing in value every year (in the case of a home, the value can go down). You are taking a loan that is using the asset as collateral. The asset continues to grow, but you have cash that you can use to reinvest in other assets producing more income. The loan that you are taking is tax free, and the interest that you are paying back to the lender may be also tax deductible if the proceed are use for investment.

So your money is growing at two places at the same time.

When you buy a home for cash, you are paying closing cost, broker fee, stamp tax, etc... If you want to get a mortgage cash out, the lender will not give your 100% of the home value. Usually you may get only 70%. So if you refi every year, it will take a few years of increased home value so the 70% that you can cash out will exceed the initial cash that you put in to buy the home. If you die, when you heirs will sell the home, they will get the proceed of the sale, minus the outstanding loan due.

When you buy a permanent overfunded life insurance, instead of paying a one time amount, you need to put a steady amount of money for at least 5 to 7 years to minimize the cost while meeting the IRS guideline. As soon as you put a premium, only 75 to 85% of the premium you payed will go to the cash value (the rest pays the cost of insurance, and the different front loaded fee). You can borrow around 90% of that cash value immediately. Every year your cash value increase (either by a steady 3 to 5% in a Whole Life insurance, or a variable 0 to 13% in an Index Universal Life). When you die, your heirs don't get the current cash value, but will get the current death benefit minus the outstanding loan. The death benefit is higher than the cash value. It is a lot higher when you are younger, and become closer to the cash value when you reach your life expectancy. And that is a great feature, as if you die young you may have put only $50k in premium, have a $40k cash value, but your death benefit may be $2M. When you reach 80 y/o you may have put $500k in premium, have a cash value of $3M but a death benefit of only $3.5M.

The growth in a permanent overfunded life insurance is not fantastic, but it is tax free, so to compare apple to apple, a 6% conservative IRR of an IUL, or a 4% IRR in a WL may be closer to a 9% or 7% in a taxable account. On top of it you have a life insurance that will protect your family if you die early. But also it is a liquid asset that you can use as collateral to reinvest. When you use it that way, because you are not withdrawing the money from the life insurance, but only using it as collateral, the full value of the life insurance continues to grow uninterrupted. And it you use the proceed to reinvest, you can also deduct the interest of the loan from your investment gains. Cash value loan are easy to obtain, and don't need the long and arduous underwriting that you get for a mortgage. You don't need to pay mortgage insurance, it does not affect your credit score. Life insurance are also asset protected and don't count as asset on a financial aid form.

The Infinite Banking (TM) concept use WL life insurance as part of a way of spending your money. I don't personally believe that you should use this for buying non revenue producing asset (ie spending, buying cars, etc...). Like for velocity banking, it is a framework that works for people who have difficulty managing their spending.

However as a real estate investor, I am 100% behind the use of overfunded life insurance policy as part of my wealth building strategy. It is a complex product and some will prefer the lower guaranteed rate of a Whole Life insurance, while others like myself will prefer the more volatile returns of an Index Universal Life insurance that should outperform the return of a WL in the long run. As an heavily front loaded product, you take a small hit of opportunity cost for the first few years, but after year 5 to 8, you are getting ahead. Like most of real estate investments it's a long term play.

Excellent summary Mike!

One thing I want to clarify is your use of the "heavily front loaded" statement.

I don't believe life insurance is heavily front loaded. If you analyze the costs in a perfectly-designed, maximum over-funded policy, you'll find that:

1. In the years that you are paying premium, the expenses work out to be about 15% of the premium. Turned around, that means that about 85% of every premium dollar goes to the cash value. [Note: you may see an illustration showing 90%, but just realize it is including the first year dividends/interest crediting]

2. In the years after you stop paying premium, the load on the policy's cash value is about 0.25% =/- 

Originally posted by @Thomas Rutkowski :

One thing I want to clarify is your use of the "heavily front loaded" statement.

I don't believe life insurance is heavily front loaded. If you analyze the costs in a perfectly-designed, maximum over-funded policy, you'll find that:

1. In the years that you are paying premium, the expenses work out to be about 15% of the premium. Turned around, that means that about 85% of every premium dollar goes to the cash value. [Note: you may see an illustration showing 90%, but just realize it is including the first year dividends/interest crediting]

2. In the years after you stop paying premium, the load on the policy's cash value is about 0.25% =/- 

While in the later years the cost is around 1/4 of a % (way lower than many mutual fund or advisors fee), the 15% hit in the first years is high. There is not a lot of other products that have such a high fee initially. And one can be scared by it if not reminded that it is a life long product and it should be evaluated on its long term Internal Rate of Return, not the initial cost.

Some people argue that the cost of money for these initial years does not make the product worth. It is no different than investing in a syndication where your principal is unavailable for 5 years. With a permanent life insurance, it will take a few years to get the cash value exceed the total amount of premium paid. Again you need to focus on the long term IRR. There is not a lot of other products that are safe (no loss of capital with a minimum guaranteed growth), liquid (you can get loan immediately from the cash value), tax free (no tax on the death benefit to your beneficiary, no tax on loan), and asset protected (can not be touched by creditor).