Infinite Banking?

[Leland L.]

Last week I met with a local financial adviser. I informed him that I'm a real estate investor, so he suggested Infinite Banking as possible financing option. The infinite banking sounds similar to using $401k or IRA to invest in real estate. The difference is that infinite banking is a life insurance product. Does anyone have actual experience with this? I'd love to hear your personal opinion. Thanks.

[Jon Holdman]

A little research leads me to conclude there are two approaches to this strategy: whole life insurance and 401k. Either buy a whole life policy or put money into your 401k. Then borrow against that. The interest goes back to yourself.

I actually can't find much where it talks about the 401k aspect of this, so that's really speculation based on the description of using whole life and the fact that 401k plans usually allow loans.

Lots of description about the whole life approach, though consistently accompanied by 10x as much repetition of what Ken says above.

Also found out "Infinite Banking Concept" is a name trademarked by Nelson Nash. He travels around educating insurance agents on the concept. I'm sure insurance agents like the idea because its a way to pitch high priced, high commission whole life policies that have otherwise been debunked as a reasonable "investment".

In reality, the concept of borrowing from a whole life policy is nothing new. That's been touted for many years as an advantage to these plans. Nevertheless, much more cost effective to buy a term life policy at a much cheaper and use the money you safe, which will be something like 75+% of the cost of the whole life policy, for your source of funding.

Borrowing from a 401K has pluses and minuses. The biggest minus, IMHO, is that many plans require you to pay it back if you leave the company. The fund managers will argue you're giving up the returns you would have gotten. But, if you think you can do better than the funds they offer, that's not much of an argument. Getting a fixed 6-7% on your money vs. plunging stock markets looks pretty good.

However, the maximum loan is $50K, and that requires having $100K in your 401k. And the maximum term is five years except for the purchase of your primary residence in which case its 10 years. Even so, much shorter (i.e., higher payments) than is common for property loans.

Now, maybe this really works. I would urge, however, that you compare the total cost of buying a big whole life policy and then borrowing back the cash value to spending much less on a term policy with the same death benefit and just using the money directly. If you want to collect the interest, structure it as a loan between you and yourself. That way you're paying the interest and collecting it, too. Which is exactly the point of using a whole life policy or a 401k loan. And, you cut out the insurance company middleman, who, you can rest assured, it taking a cut out of your loan.