How and what is Infinite Banking used for Real Estate.

[Yoochul C.]

Some of you might have heard of the term Infinite Banking before.  There are the naysayers like Suzy Orman or Dave Ramsey but it is a viable strategy for real estate investing.  The strategy is simple, using a whole life insurance policy when structured correctly can be a viable option to park cash for a future date when you need it for a down payment.  The way it works is that when structuring a whole life policy, you'll want to minimize the premium and maximize what's known as a paid up addition (PUA).  My adding money into the PUA, you'll build up a cash value much faster.  This cash value grows tax deferred and the income you take out is also tax free.  Also the money that is taken out as a loan does not affect the the cash values ability to grow.  It is similar to a home loan, when a home is paid off, the home still grows with inflation and market fluctuations.  When you take out a loan from the home, the home still appreciates at the full value of the home.  You can choose to pay back the loan from the whole life policy or not.  If you do not pay it back, the amount of the loan is subtracted from the death benefit.  In essence this is a great way to grow money tax free.  

[Randall Alan]

@Yoochul C.

Conceptually, infinite banking is a valid concept... BUT... in practice it really only works if you either have a lot of time to wait, or are ultra-wealthy.  If you look at your cash value on any typical consumer type whole life policy, it is going to grow by the hundreds of dollars each year.  So if you want to "borrow from yourself" say $35,000 - ask yourself how long it will take for that policy to acquire that much of a cash value.  It may be 20+ years!

But, if you are uber-wealthy, you can over-fund the policy at its inception - paying maybe $50,000 cash into the policy on a tax advantaged basis.  You now have the ability to borrow against the equity in the policy in a reasonable timeframe where you could make a down-payment on a real estate purchase.  By the way, what do you think the insurance company is going to do with your over-payment?  They are going to go out and invest it in the stock market and earn 7-10% a year, while they let you have some smaller percentage as a gain on your investment within your whole life policy.  So trust me, they know what they are doing too!

The reason that Suzy and Dave are 'naysayers' as you call it is that their audience is typical families and individuals in the $30,000 - $100,000 year income bracket whose disposable income is less than 10% of their yearly total income and they carry a lot of expensive consumer debt. Probably not even 1/10 of 1% of their audience has the money to over-fund a whole life policy to a degree where Infinite banking would even be plausible, so they would never want to point their audience toward such a product. Their whole premise is to get their audience out of debt and make smart use of your money using traditional, understandable concepts (401K, IRA, etc).

You might argue that infinite banking IS smart.  And perhaps it is if you are a multimillionaire... but for the average consumer, it is not an achievable concept within any sort of usable timeframe.  There is nothing special about infinite banking and real estate though.  It's just a way to get an a low interest loan on your own money (if you are rich).  The reason it is low interest is that there is literally no risk to the insurance company - they already hold more of your money than they are loaning you.

Randy