Infinite banking lets customers act as their own bank using a whole life insurance policy to access funds on-demand. By accessing the cash-value portion of whole life insurance, policyholders can avoid common bank frustrations, such as fees for service and limited loan repayment periods.
But is this banking approach a good idea for everyone? Here’s a look at the basics of infinite banking, along with some of its potential advantages and disadvantages.
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What is Infinite Banking, and How Does It Work?
The concept of infinite banking was created in the 1980s by economist Nelson Nash. Instead of using a traditional bank account to store, withdraw, and manage money, infinite banking uses the cash value of whole life insurance policies as collateral for loans.
Also known as permanent life insurance, these policies have no term limits or end dates. Premiums are paid each month until the policyholder dies or the policy is canceled. A small part of these premiums pays for the operational costs of maintaining the account. Larger portions go toward the policy’s death benefit and the cash-value component, which is held in a savings account. This savings portion accrues interest over time, meaning that its cash value grows as policyholders pay into their policy.
As a policyholder, you can access money from this account at any time by contacting your insurance company and asking to take out a loan. You can borrow cash as needed and pay it back at whatever pace works for you. Essentially, this allows you to act as your bank, borrowing from and paying yourself back on your schedule.
What Does Infinite Banking Cost?
Because they never expire as long as you make payments, whole life insurance policies are more expensive than their term life counterparts. Costs for these policies vary based on factors such as current age, health, and lifestyle. For example, the premium cost for a 25-year-old in good health with a low-risk job may be significantly lower than for a 45-year-old with a chronic heart condition who works in a high-risk field such as logging, truck driving, or roofing.
In addition, you’ll pay interest on charges on money borrowed from whole life accounts. While rates on these loans are lower than those of credit cards or personal loans through banks, interest remains a consideration.
It’s also worth noting that available funds increase over time as you pay more premiums and interest accrues. This means that the sooner you purchase a permanent policy, the better. It takes several years of premium payments before cash-value accounts have enough money to make withdrawals worthwhile, but buying later in life may bring higher premiums that further delay infinite banking efforts.
Advantages of Infinite Banking
The big draw of infinite banking is cutting out the middleman. Instead of applying for loans and hoping for approval from the bank, policyholders get direct access to their money on demand. Let’s explore these advantages in depth.
No Bank Fees
While banking has become more convenient thanks to online account management and mobile applications, you’ll still pay fees for the use of your own accounts. In the first three quarters of 2022, banks earned $5.8 in overdraft and non-sufficient fund (NSF) fees. Other common fees include monthly service, out-of-network ATM, paper statements, and account closing fees.
With infinite banking, meanwhile, funds are available directly through your whole life insurance policy rather than a bank account, meaning these fees no longer apply.
Funds on Demand
Borrowing money from a cash-value account is simple. Policyholders contact their insurance company, say how much they want to withdraw, and the money is sent. Funds can be paid back over time, in a lump sum, or some combination of both. There is no fixed schedule for repayment. While interest is charged on cash-value loans, these loans have lower interest rates than those offered by traditional banks.
No Credit Checks for Borrowing
When you borrow money from a bank or financing company, you may be subject to a credit check. These checks can take time, and if multiple checks are made in quick succession, they may negatively impact your credit score.
Borrowing from a whole life insurance policy requires no credit check because the money already belongs to you.
Cash Value Continues to Accrue
The cash value of your insurance policy continues to accrue over time. Even if you borrow all of the available funds, part of your insurance premiums are still deposited into the cash-value account.
Potential Infinite Banking Pitfalls
While infinite banking offers more control, it also requires more discipline. Because there is no set repayment period for loans, insurers do not set up payment schedules. Borrowers are responsible for ensuring funds are paid back — if not, death benefits may be reduced. Infinite banking also comes with these and other pitfalls.
Loans Can Default
While loans from life insurance accounts have lower interest rates than those from banks, you can still default if you stop paying loan interest. If you do not remedy the issue, your insurance provider could cancel your insurance coverage.
Funds Take Time to Accrue
Since only part of your monthly premium goes into your cash-value account, funds take time to build up. If you cannot afford to wait, consider a more traditional lender such as a bank or finance company.
Higher Monthly Premiums
Compared to term life insurance, whole life policies have higher premiums. This is because your premiums pay your eventual death benefits and your growing cash-value account.
Cash Value May Be Absorbed
Unless you make specific arrangements, cash-value accounts may default back to insurance providers when policyholders die. While beneficiaries receive the death benefit, the cash value is lost.
So Is Infinite Banking a Good Idea?
Suppose you can afford the monthly premiums that come with permanent life insurance and can wait a few years for funds to build up. In that case, infinite banking offers a way to avoid bank fees, skip credit checks, and continually grow your insurance benefits.
On the other hand, if your current age or life circumstances make it challenging to obtain whole life insurance, or if you are worried about defaulting on higher premiums, you may want to stick with traditional banking.
It’s worth noting that this does not have to be an all-or-nothing choice. Rather than relying on a whole life policy for all of your banking needs, you could use insurance accounts for big-ticket purchases such as new vehicles or home renovations, in turn letting you avoid interest payments and take your time repaying the loan.
The bottom line? Infinite banking is a viable alternative to traditional banking that can help reduce fees, cut out interest payments, and grow cash value over time, but it’s not suitable for everyone.