What Is Infinite Banking? Could You Be Your Own Banker?

The object of infinite banking is to become your own bank. There are risks you should know about before you decide to try out this banking concept.
By Chris Kissel

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A man manages his finances using his laptop while talking on phone

When you need money fast, getting it can be challenging. It takes time to successfully apply for a personal loan or a home equity line of credit. Turning to a credit card is quicker, but it can leave you saddled with high-interest debt that grows with each passing month.

But what if you could get your hands on a lot of money simply by making a quick phone call? Proponents of a concept known as “infinite banking” promise just that.

In essence, infinite banking allows you to become your own banker. To use this strategy, you purchase a whole life insurance policy and use the cash surrender value as collateral for a loan.

When you need cash, you call the insurance company and request to take out a policy loan. No credit checks or application forms are needed.

What Is Infinite Banking?

The roots of the infinite banking concept stretch back to the 1980s when Nelson Nash outlined them in the book “Becoming Your Own Banker: Unlock the Infinite Banking Concept.”

Nash described how savers with whole life insurance policies that accrue equity can use the vehicles as dividend-paying assets.

When you purchase a whole life insurance policy, part of your premium goes toward cash-value savings. As time marches on, this pot of savings grows, giving you ready access to cash that you can spend however you see fit.

Infinite banking allows you to tap into this cash quickly and for virtually any reason.

How Does Infinite Banking Work?

With infinite banking, policyholders avoid turning to banks and instead tap their own cash-value accounts to fund expenses such as:

  • Financing a home or car
  • Funding a new business
  • Investing to build personal wealth

For example, if you have a sudden and expensive health expense, you can simply call your insurer and get a check to cover the cost.

If you need to buy a new car but fear your bruised credit will keep you from getting the best loan terms, you can skip the entire loan application process and use your own funds to pay for the vehicle.

The cash value from an insurance policy also can help you pay bills if you suddenly are laid off and need funds to tide you over while you search for a job.

What Are the Pros of Infinite Banking?

If infinite banking sounds complex to you, you’re not alone. But people who swear by this method of wealth management list several advantages, including:

  1. Proponents of infinite banking tout the advantage of not having to qualify for and apply for a loan with a bank. No credit checks are necessary, and withdrawals are tax-free.
  2. The speed of accessing cash is another perk of infinite banking. In many cases, policyholders can get a check within 24 hours.
  3. There is little pressure to pay back the loan quickly. You determine how and when you will return the money to your life insurance cash-value account. In fact, you do not have to pay back the loan at all, although making this decision means the benefit paid at your death will be reduced.

What Are the Cons of Infinite Banking?

If it all sounds too good to be true, you may not be far off the mark. Infinite banking also comes with several potential drawbacks, which add up way faster than the pros. The cons include:

  1. To use infinite banking, you must purchase a whole life insurance policy. This type of policy remains in effect until your death as long as you pay the monthly premiums.
  2. While whole life insurance policies provide financial protection for you and your loved ones, these policies typically are expensive to maintain.
  3. Premiums are much higher than those for a term life policy, which only lasts for a period, such as 30 years. Whole life policies also tend to offer much lower death benefits when compared to what you would get from a term life policy.
  4. When you take a loan from your cash value, you will be charged an interest rate for the privilege.
  5. Withdrawing money from your cash value can put your entire policy at risk. Any money you fail to pay back will reduce the death benefit paid out to your heirs.
  6. If you withdraw all the cash value, you essentially surrender your entire policy, leaving no benefit for your heirs. If this happens, you may also owe income taxes and surrender fees.
  7. Some people in poor health may not qualify for a whole life insurance policy, while others may simply find that a policy is too expensive.
  8. Another potential drawback is that it is possible that the money you pour into a whole life policy could earn better returns elsewhere, such as in a standard stock market brokerage fund.

Frequently Asked Questions

How do I know if infinite banking is right for me?

Anybody who plans to use the infinite banking strategy must be prepared to make a major commitment to the concept.

Whole life insurance policies are not cheap. In fact, it is common for policyholders to spend at least 10% of their annual income to fund such a policy, according to the Corporate Finance Institute, which provides online financial analyst certification programs.

That fact alone may put infinite banking out of the reach of many.

It also is important to know your spending habits and to gauge your ability to handle money responsibly:

  • If you withdraw money from your cash-value savings, will you be able to pay it back?
  • Will you avoid withdrawing all of your cash value, so that you do not end up putting the entire policy at risk?

How can I build the best infinite banking strategy?

If you plan to use the infinite banking concept, there are several things you can do to increase the odds that the venture will be a success.

For example, the younger you purchase a whole life insurance policy, the less expensive your premiums are likely to be for the rest of your life.

It is also important to select a reputable life insurance company when purchasing your policy. You probably want to choose an established company with a strong reputation that will be around for the long haul.

What are the alternatives to infinite banking?

As mentioned above, infinite banking has some significant drawbacks. So, you might want to consider alternatives to this strategy.

For example, simply building a large emergency fund and keeping it in a savings account or certificate of deposit will give you a pot of money you can turn to whenever you need it.

Also, if you do not mind taking a bit more risk, investing in mutual funds or individual stocks can give you bigger returns over time than an infinite banking strategy.

About Author
Chris Kissell the founder of Words At Work, LLC, a writing, editing and consulting company based in Colorado. He was previously a senior editor at Bankrate and senior managing editor at Insurance.com. He's written for and worked closely with U.S. News & World Report, GOBankingRates, CreditCards.com, and many other websites and publications.