Infinite Banking Concept

[Jarrod Willis]

I have been listening and reading about this “infinity banking concept” and found it really interesting. Anybody currently using this? Pros and cons?

[Mike S.]

Originally posted by @Tony Kim:

So with a $50k per year premium, let's say that after 2 years, I can borrow close to 90K and that will be an interest free loan. I use that to invest in real estate earning 8% a year. 

The advantage here over just saving your money for two years outside of the policy and then investing is that in addition to the life insurance death benefit, your policy's cash value continues to grow tax deferred (i.e., working in two places at once)?

Also, doesn't the cash value go to the insurance company upon the death of the insured?

The cash value of your policy growth uninterrupted while you are using it as a collateral for a loan.

That is the same principle as using a cash out refi. You have an asset (the life insurance or a home) that is growing in value every year (in the case of a home, the value can go down). You are taking a loan that is using the asset as collateral. The asset continues to grow, but you have cash that you can use to reinvest in other assets producing more income. The loan that you are taking is tax free, and the interest that you are paying back to the lender may be also tax deductible if the proceed are use for investment.

So your money is growing at two places at the same time.

When you buy a home for cash, you are paying closing cost, broker fee, stamp tax, etc... If you want to get a mortgage cash out, the lender will not give your 100% of the home value. Usually you may get only 70%. So if you refi every year, it will take a few years of increased home value so the 70% that you can cash out will exceed the initial cash that you put in to buy the home. If you die, when you heirs will sell the home, they will get the proceed of the sale, minus the outstanding loan due.

When you buy a permanent overfunded life insurance, instead of paying a one time amount, you need to put a steady amount of money for at least 5 to 7 years to minimize the cost while meeting the IRS guideline. As soon as you put a premium, only 75 to 85% of the premium you payed will go to the cash value (the rest pays the cost of insurance, and the different front loaded fee). You can borrow around 90% of that cash value immediately. Every year your cash value increase (either by a steady 3 to 5% in a Whole Life insurance, or a variable 0 to 13% in an Index Universal Life). When you die, your heirs don't get the current cash value, but will get the current death benefit minus the outstanding loan. The death benefit is higher than the cash value. It is a lot higher when you are younger, and become closer to the cash value when you reach your life expectancy. And that is a great feature, as if you die young you may have put only $50k in premium, have a $40k cash value, but your death benefit may be $2M. When you reach 80 y/o you may have put $500k in premium, have a cash value of $3M but a death benefit of only $3.5M.

The growth in a permanent overfunded life insurance is not fantastic, but it is tax free, so to compare apple to apple, a 6% conservative IRR of an IUL, or a 4% IRR in a WL may be closer to a 9% or 7% in a taxable account. On top of it you have a life insurance that will protect your family if you die early. But also it is a liquid asset that you can use as collateral to reinvest. When you use it that way, because you are not withdrawing the money from the life insurance, but only using it as collateral, the full value of the life insurance continues to grow uninterrupted. And it you use the proceed to reinvest, you can also deduct the interest of the loan from your investment gains. Cash value loan are easy to obtain, and don't need the long and arduous underwriting that you get for a mortgage. You don't need to pay mortgage insurance, it does not affect your credit score. Life insurance are also asset protected and don't count as asset on a financial aid form.

The Infinite Banking (TM) concept use WL life insurance as part of a way of spending your money. I don't personally believe that you should use this for buying non revenue producing asset (ie spending, buying cars, etc...). Like for velocity banking, it is a framework that works for people who have difficulty managing their spending.

However as a real estate investor, I am 100% behind the use of overfunded life insurance policy as part of my wealth building strategy. It is a complex product and some will prefer the lower guaranteed rate of a Whole Life insurance, while others like myself will prefer the more volatile returns of an Index Universal Life insurance that should outperform the return of a WL in the long run. As an heavily front loaded product, you take a small hit of opportunity cost for the first few years, but after year 5 to 8, you are getting ahead. Like most of real estate investments it's a long term play.