Infinite banking is a new concept but is it a scam?
Infinite banking is all about utilizing high cash value whole life insurance to become your own banker and manage your own financial outcomes with a liquid, safe investment strategy. At first, many who offer these policies make it seem too good to be true.
On the other hand, those who have an agenda to sell other financial products create false or misleading information to make whole life insurance or, Infinite Banking, seem impossibly bad. This leads to many myths and misinformation about Infinite Banking as a retirement planning and savings method.
Let’s look at some of these myths surrounding the Infinite Banking Concept and find some of the truth behind this concept and the realty of this investment strategy.
What is the Infinite Banking Concept?
The term Infinite Banking is fairly new but the concept has been around for much longer. Cheerleaders of the idea promote it as a way to ‘become your own banker’ through the dividend-paying portion of a whole life insurance policy.
The idea behind Infinite Banking is to use your own assets for big cash needs instead of loans from a bank or other creditors. When you pay premiums on a whole life policy, you build up a cash value which can be borrowed against. You can then borrow on this cash value from the account for big purchases like a home or wedding costs.
When you borrow from the policy, your cash value is used as collateral on the loan instead of other assets. Rates on the loan may be lower than other types of loans because the insurance company knows it can take the collateral quickly and easily if you don’t make payments. You also don’t have to worry about your car being repossessed like with other loans or high rates on payday loans.
Pros and Cons of Infinite Banking
We’ll cover the five biggest myths of infinite banking next but there are some advantages and disadvantages of the concept you should understand. Like most tools, you need to understand how to use infinite banking or you can smash things up something terrible.
Pros of Infinite Banking
- Interest rates on a loan against your life insurance policy are usually lower than other types of loans
- Your home or car is not placed as collateral so you don’t have to worry about repossession
- Applications and approval for a infinite banking loan are generally faster than other loans
Cons of Infinite Banking
- You first need to qualify for a whole life policy and build up the cash reserve which can take several years
- Whole life policies are more expensive than term life insurance, usually several thousand more a month than term life
- The cash you build up in a whole life policy is probably only earning a 3% or 4% return which is well under most dividend stocks
- While the interest rate is lower on infinite banking than some other loans, it can still be as high as 10% according to data from the Federal Reserve and Wells Fargo
Loan Alternatives to Infinite Banking
- PersonalLoans – I've used the site twice for personal loans and it's the one that comes most recommended by readers. Low rates and terms for up to five years.
- Upstart – Uses a special credit scoring system to approve borrowers with a college degree for a lower rate.
How Much More Expensive is Whole Life Insurance
The disadvantages of the Infinite Banking Concept really come down to the extra expense in a whole life insurance policy and the return on your money.
For example, monthly premiums for a whole life policy are often from $1,500 to $3,000 more compared to a term life policy with the same benefit. Not all of that additional premium goes into building your cash value in the account. In fact, for the first year or two, much of that additional premium goes to paying the insurance agent that sold you the policy.
Once you do have a cash value built up, and it can be many years before you have much saved, your cash is not going to be earning much of a return. Most whole life policies pay less than 4% return on cash value. That’s well under what you can earn through bonds, peer-to-peer lending or dividend stocks.
You can read through the myths people have in Infinite Banking but might consider an alternative strategy. I’m not suggesting that you neglect life insurance which is very important if anyone counts on your income. Instead, choose the less expensive term life policy and then invest the difference.
- Most people can get a $250,000 benefit term life policy for premiums of less than $300 a month
- If you’re looking for ways to make extra money and avoid loans for those big purchases, check out these videos for 20 side hustle ideas that work fast
- Invest in a portfolio of dividend stocks to build a cash value you can use without a loan. Follow our 2019 Dividend Portfolio Challenge, up over 20% in two months, for great investing ideas.
If you still need a loan for big purchases, consider a personal loan of up to $40,000 which requires no collateral – Check your rate here and get approved in minutes
Myth #1 – Infinite Banking Is A Scam
There are many investment options out there such as real estate, stocks, bonds etc., and they all provide a way to increase your wealth. And there are risks involved.
Infinite Banking is merely a safe way to increase your wealth with less risk and no loss provisions.
However, because of how many promote Infinite Banking, it has often been deemed the Infinite Banking scam by outside investors.
The reason many see it as a scam is because they think it sounds too good to be true. The truth is, Infinite Banking, and whole life insurance, offer a safe investment alternative that grows at a slow but competitive rate. It is not a magic bullet, and it will not make you a millionaire overnight. It's different from some of the outright loan scams you see in the market.
Infinite Banking utilizes tax advantages, safety, death benefit, and growth to create an investment strategy that works for those who want to minimize losses that can come from stock market and mutual fund investments.
The Infinite Banking Concept requires strict discipline and must be implemented for a long period of time to see worthwhile results. It will not work as a short-term investment, or a get rich option.
This long term implementation lets investors increase their wealth by earning between 4-6%, or even higher, per year compound interest tax-free.
This money is also transferred income tax-free to our beneficiaries at death.
Infinite Banking is not a scam, however, if it seems to good to be true, then you are probably being misled. Infinite Banking resembles a high growth savings account more than a risk based investment. However, money is liquid and can be used to make smart financial investments when the time is right. Infinite Banking is about options.
Myth #2 – Whole Life Insurance is an Awful Investment
Many radio entertainers claim that whole life insurance is a bad investment. However, they are also sponsored by term life insurance providers, which could be seen as a conflict of interest.
Whole life insurance, when structured properly, offers competitive growth and safety that cannot be found anywhere else.
When compared to other safe investment options, like bonds and cds, there is good financial evidence to support Infinite Banking offering a smarter alternative.
For those who can earn 10%+ consistently on investments, as I do in my p2p account, there is probably very little alternative that makes more sense. However, those that find themselves losing money, or breaking even, may find that Infinite Banking and whole life insurance offer a better alternative investment solution to their current portfolio.
Myth #3 – Infinite Banking has High Fees
Infinite Banking policies pay the agent in the first few years after they are created. In year one, when compared to other investments, this can make it seem like Infinite Banking has higher fees.
When compared to the lifetime of fees that are often associated with other investment options, these fees often become more reasonable, and can even be much lower.
Because of the way whole life insurance is structured, the fees are different. This does not make them better or worse, just different. Understanding how the fee structure works within the Infinite Banking Concept and whole life policies will help you better make the decision about fees and whether Infinite Banking is right for you.
Myth #4 – I Don’t Get My Cash Value When I Die
Another myth is that, when we die, the cash value is completely eliminated and all the beneficiary gets is the death benefit. Many opposed to Infinite Banking use this argument to try to paint a false picture about Infinite Banking in order to stir up anger and emotions in those who are studying the concept.
The truth is, cash value inside a life insurance policy is already included in the death benefit. Cash value, by definition, is the portion of the death benefit that is able to be liquidated at any given time.
If the beneficiary received the cash value and the death benefit they would be, in essence, receiving free money. If that were the case everyone would buy Infinite Banking policies and we would all be earning free money.
Mathematically that would never work, obviously. Infinite Banking policies produce a competitive level of return, especially on the death benefit. The math is there. There is no free money. Don’t get bogged down by emotional arguments that don’t make sense.
Myth #5 – Infinite Banking Takes Too Long
Infinite Banking is a long-term strategy. Many who argue against Infinite Banking say it takes too long.
However, at the same time, they do not take into account that the available balance inside of a 401k is, relatively, zero dollars. 401ks and most other government sponsored plans cannot be used, and, if the government ever decided to change policies, these could potentially be wiped out.
This is probably unlikely, but not impossible. We can make bad and unlikely arguments for days and get nowhere.
Infinite Banking is a long-term strategy with its advantages and disadvantages. Once again, emotional arguments do nothing for the individual. If you are not planning on utilizing Infinite Banking for the long-term, then it will not work. It does take time, but too long is relative to the individual, not the investment.
Does Infinite Banking Work?
Infinite Banking, like any investment, has its downsides. It will not work to meet everyone’s needs and goals. However, these myths do nothing for the individual investor. Setting your own goals, and then finding the best solution for those goals, is the smartest way to approach investing. If you do not have specific goals, then many investments options will sound alluring.
Always study any investment alternative thoroughly before making a final decision regarding your long-term investment strategy. If you’re thinking about using the Infinite Banking concept, make sure you understand the high cost and low return of the whole life insurance policy. Many people will be better off with a less expensive term life policy and then just investing the difference in an account on a stock platform.
So, Should I Pursue Infinite Banking?
Unless you have an extremely strong cash flow, infinite banking may not be the most efficient way for the average person to do their banking. Now, just because it is inefficient, does not mean that they shouldn’t pursue it, it just may not be the most logical choice for someone who already has their time allocated to various other things in their day-to-day life.
If you do happen to be a very high-income individual, infinite banking may be something you want to consider as it does come with some advantages. Whole of life policies will protect high net worth individuals from their assets being garnished in a lawsuit and it will also aid in asset protection, particularly in estate planning, which can often be a daunting task if the correct measures aren’t already in place.
With this being said, even if infinite banking isn’t the best route for you right now, don’t put it on the backburner too quickly because you may want to revisit the topic in 10-20 years when your financial situation is more solidified.
If you’re still wanting to learn more about infinite banking, you can also consider talking about this to your fiduciary financial advisor as they will be able to provide high-level insights after taking a deep look into your income and expenses. It’s important to get a well-rounded picture of your financial situation before going ahead with infinite banking because you need to know that you can afford the higher premiums on the whole of life policies.
In the meantime, if you’re looking to get some quick cash, be sure to check out PersonalLoans.com. You don’t need to put up any collateral, and the loans are available for up to $35,000 on a 1-7 year repayment plan. Most borrowers can get approved in less than a day and can see money in their bank account within a week.
Click through to PersonalLoans.com if you’re ready to start your loan process and get your money in less than a week.
Read the Entire Investing Series
- How to Start Investing in 2021
- 7 Penny Stocks that Pay Dividends
- 3 Secrets Experts Want You to FORGET about the Stock Market
- Ultimate Guide of Free Resources to Learn about Stocks
- How to Get Rich in a Year: 7 Things Worth Investing Your Time
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.