What Is Infinite Banking in Life Insurance? (2024) (2024)

Infinite banking is the practice of overfunding a permanent life insurance policy so you can borrow against its cash value. It’s an alternative to taking out a traditional loan as a funding source.

Infinite banking comes with several advantages, including easy access to funds for emergencies, flexible loan terms and potential tax savings. However, it’s a long-term strategy that requires careful planning to reap the benefits. We recommend consulting a trusted financial advisor before making any decision to start infinite banking.

Infinite banking works by taking out a life insurance policy with a cash value component, which can then be accessed through loans or withdrawals. When you choose to take a policy loan from your life insurance policy, you will pay simple interest on the money you loaned from your policy.

This concept takes advantage of several unique features of life insurance:

1. Life insurance cash value has tax-deferred growth.
2. You can make a simple interest payment on the money you loan out from your life insurance policy.
3. The money you loan against your policy will continue to grow even though you received it.
4. Unlike the traditional banking system, you do not need to financially qualify for the policy loan — you simply request it. If you have the funds in your policy, the insurance company sends you the money.
5. The money you receive from a policy loan is tax-free.

Here’s an example:

Let’s say you have been paying premiums into a whole life insurance policy and you have accumulated $5,000 cash value. When you booked your summer vacation, which costs $3,500, you paid with your credit card. You soon realize that your credit card interest rate is 23.99% plus other fees and expenses.

To make the infinite banking concept work for you, simply request a loan from your life insurance policy. This is accomplished by submitting a policy loan request form. Once they verify the funds available in your life insurance cash value, the insurance company sends you a check or processes it electronically. You can often receive this money within a week or so. Then you pay off your credit card used to pay for vacation and enjoy a lower, simple interest payment, with a loan rate often between 5% and 8% simple interest rate (and the money you borrowed from your policy will still grow inside your life insurance policy).

Here is a quick recap of the steps you need to follow to begin the infinite banking concept:

1. Apply through an insurance agent and qualify for a cash value life insurance policy.
2. Name your life insurance beneficiaries.
3. Pay your life insurance premiums.
4. Once your cash value is high enough for your cash flow needs, you can request a policy loan through a policy loan request.
5. Receive the policy loan proceeds tax-free and directly deposited to your bank account.
6. Use these proceeds for your cash flow needs.

How Much Money Is Needed for Infinite Banking to Work?

In order to make IBC work, you will need to have a cash value life insurance policy with sufficient cash value to borrow against. There really isn’t a specific amount of money needed for infinite banking. It depends on your financial goals and needs as well as how soon you need to access money for the concept.

For instance, if you are willing to save over time to grow your cash value for cash flow needs five to 10 years in the future, you may be able to start with lower life insurance premiums compared to someone who wants to use this concept immediately or within five years. As a rule of thumb, a good minimum goal to shoot for is accumulating $5,000 within the time that you will need the cash flow. The monthly premium payment will vary based on the timeline that you need to achieve that goal. For example, if you will need $5,000 three years from now, you will have 36 months to accumulate that amount, which means you would need to contribute about $140 per month.

Which Type of Life Insurance Is Required for Infinite Banking?

In order to make the infinite banking concept work, you will need a cash value life insurance policy, also referred to as a permanent life insurance policy.

These types of policies include:

• Whole life
• Universal life
• Indexed universal
• Variable universal

Since this personal bank concept relies on the policy’s cash value being available when you need it or expect it to be available, dividend-paying whole life insurance is often the most appropriate product recommendation. This is due to guaranteed cash value growth in whole life insurance, plus the non-guaranteed dividend growth within whole life insurance.

If you choose to look at the other cash value insurance policies for this concept, the biggest difference is the risk involved in the cash value growth component and the lack of guarantees.

Benefits and Downsides of Infinite Banking

Yes, the concept of infinite banking is a legitimate personal finance strategy. It works by allowing the policyholder to borrow against their cash value for liquidity while also earning interest on the policy loan balance.

These are real features of life insurance policies, and the concept has been used since the 1950s. However, it is important to note that infinite banking should not be seen as an investment strategy, but rather a way of gaining access to funds when needed.

In addition, it is important to use caution when using this technique so you don’t take out too much money from your policy. The use of this concept should also fit inside your overall financial plan.

If you are looking for an alternative to the infinite banking concept, there are several other ways to access funds when needed. These alternatives can include borrowing against your 401(k), utilizing the margin on an investment account, opening a personal loan or line of credit, taking out a home equity loan, or simply using a savings account.

Each option has its benefits and drawbacks, so evaluate each carefully before deciding. Among the drawbacks, you may need to financially qualify to utilize some of these options. Also, some options may limit the amount of tax-free money you can access.

Ultimately, it is important to ensure that you have access to money when you need it versus potentially being limited by approval processes and external market pressures.

If you decide that infinite banking is right for you, here are a few tips to get started.

1. Evaluate your financial goals and needs: Understand why you want to do the infinite banking concept versus using traditional loans and how much money you need access to (and when). This will help shape your approach and the type of life insurance policy needed.
2. Research and compare life insurance policies: There are many different life insurance policies available, so it is important to understand the features and benefits of each.
3. Consider medical and financial qualification: Because of how life insurance works, companies require that you meet certain medical and financial criteria in order to qualify for your life insurance policy. Make sure you have this process built into your timeline — it can often take a few weeks to complete. There may be some instant decision or accelerated underwriting options worth considering that shorten this process.

Infinite banking allows you to take control of your current and future financial needs while also providing for your loved ones today if something tragic were to happen. This concept might be right for people aged 20 to 60 who have an emergency fund already set up, enough cash flow to afford the required premium payment for the infinite banking goal and a need for life insurance.

The best place to start if you are interested in IBC is to speak with a licensed life insurance agent. Be sure to ask for background information from the agent and, if necessary, the names of customers you can speak with. You can then request quotes from the best whole life insurance companies to find the right policy.