“Infinite banking” means using the cash value of a permanent life insurance policy as your own source of loans, instead of a bank. It can work, but only if the policy is built to grow cash value rather than to maximize the death benefit, is funded steadily for years, and is managed so the loans never cause it to lapse.
The idea is sound when the policy is designed for the job. Most of the disappointment comes from policies that were not.
How does borrowing from a life insurance policy work?
You borrow from the insurer using your policy’s cash value as security. There is no bank approval and no business assets are pledged. Interest builds up against the policy instead of requiring monthly payments. Any loan still outstanding when you die is repaid from the death benefit, so your heirs receive less.
While the policy stays in force and is not a modified endowment contract (MEC), policy loans are generally not taxable income. If the policy lapses with a loan outstanding, the gain can become taxable all at once. That is why the loans have to be watched.
Why does the policy design matter so much?
The same premium can be set up two ways. A maximum death benefit design sends more of each dollar to insurance charges. A maximum non-MEC design keeps the death benefit as low as the tax rules allow, so more of each dollar builds cash value.
An illustration from Financial Fortress: Isidore. Isidore owns a shoe factory. He bought a policy at 40 with $15,000 a year for 30 years, set up for maximum death benefit.
| Same $15,000 a year for 30 years | Starting death benefit | Cash value at 75 | Death benefit at 75 |
|---|---|---|---|
| Maximum non-MEC design | $675,647 | $1,507,454 | $1,909,144 |
| Maximum death benefit design | $1,904,556 | $826,763 | $1,904,556 |
Hypothetical illustration from the book, not a client. Assumes a 6.47% average annual index return before policy charges. Actual results depend on caps, participation rates, fees, the carrier and policy design. Not a guarantee.
By 75 the death benefit is almost the same either way. The cash value is not: the design built for cash value has about $680,000 more to use. If you need more protection while you are working, term insurance usually provides it far more cheaply, and the two can be combined.
What can the cash value be used for?
In the book, the same policy is shown in four different versions of Isidore’s life after 65:
- Business expansion. He borrows $1,000,000 for a second factory without a bank loan, collateral or monthly payments.
- A bridge for Roth conversions. After selling the business, he borrows $120,000 a year for seven years to live on while converting his IRA to a Roth at low rates. The loans do not show up as income on his tax return.
- A partner buyout. At 80 he borrows $1,650,000 so his children can buy out his partner, without selling investments.
- Leaving it alone. He never touches it, and at 90 the death benefit of about $3.67 million passes to his heirs income-tax-free.
Hypothetical scenarios from the book. Loans reduce the death benefit and cash value and accrue interest. Tax treatment assumes the policy is not a MEC and stays in force.
A policy designed for one moment cannot serve a life that changes. A policy designed for flexibility can.
What are the risks of infinite banking?
- It takes years. Cash value builds slowly at first, and surrender charges apply in the early years.
- Loans are not free. Interest accrues, and unpaid loans reduce what your heirs receive.
- Lapse risk. If loans and interest grow faster than the cash value, the policy can lapse and the gain can become taxable.
- MEC rules. Putting in too much too fast turns the policy into a MEC, and loans then lose their favourable tax treatment.
- Index returns are not guaranteed. Indexed policies credit interest based on an index, subject to caps and participation rates.
Where does the idea of infinite banking come from?
The term was made popular by R. Nelson Nash in his book Becoming Your Own Banker. His idea was to use a whole life policy as a pool of money you can borrow from and repay on your own terms, instead of a bank. Today the same approach is often built with indexed universal life as well.
Is infinite banking legitimate or a scam?
It is legitimate. Policy loans are a contractual feature of permanent life insurance, and the tax treatment is set by law. The problem is how it is often sold. Phrases like “be your own bank” or “earn interest twice” skip over the costs: the loan interest is paid to the insurer, cash value builds slowly at first, and a poorly designed policy can take many years to break even.
Who is infinite banking right for, and who should avoid it?
It can suit people with high, steady income who already fund their retirement accounts, need permanent life insurance anyway, and can commit to the premiums for many years. Business owners who want access to money without a bank are a common fit.
It is usually the wrong choice if you have no emergency fund, carry high-interest debt, have uneven income, or need life insurance only for a set number of years.
How long before the cash value can be used?
It depends on the design. A policy built for cash value can have usable money within the first few years, though surrender charges apply early on. A policy built for the death benefit may take ten years or more before the cash value equals what you have paid in.
What are the alternatives to infinite banking?
- Term insurance for protection, with the difference invested.
- Funding 401(k)s, IRAs and Roth accounts first.
- A home equity line of credit, or a line of credit secured by an investment account.
Each is cheaper in the early years. None gives a death benefit and tax-advantaged borrowing in one place.
Triathlon Partners’ insurance professionals earn commissions on the life insurance policies they place.
Frequently asked questions
How much money do I need to start infinite banking?
There is no fixed minimum, but the approach needs a premium you can keep paying for many years. Most of the benefit comes from steady funding over a long time.
Are infinite banking policy loans taxable?
Generally not, as long as the policy stays in force and is not a modified endowment contract (MEC). If it lapses with a loan outstanding, the gain can become taxable.
What happens if I stop paying the premiums?
Depending on the policy, the cash value may cover the charges for a time, the death benefit may be reduced, or the policy may lapse. Ask for an illustration of exactly this before you buy.
What is the difference between direct and non-direct recognition?
With direct recognition, the insurer credits a different rate to the part of the cash value you have borrowed against. With non-direct recognition, the borrowed part is credited the same as the rest.
Questions to ask your advisor
- For every permanent policy I own, is it set up for the job it needs to do today, or the job it was bought for years ago?
- If I needed $500,000 tomorrow for a buyout, a care event, a Roth conversion or an opportunity, where would it come from, and what would it cost in taxes?
- What happens to this policy if I borrow from it and returns come in lower than illustrated?
Related: What Is IUL? How Indexed Universal Life Insurance Works · Insurance solutions
Related questions
Want an existing policy checked against the job it needs to do?
Schedule a conversation or read Chapter 1 of Financial Fortress.
This page is general education, not advice for your situation. Life insurance policy values are hypothetical and not guaranteed; guarantees depend on the issuing insurer’s claims-paying ability. Ira Koyner is a licensed insurance agent and may earn a commission on insurance products. Triathlon Partners LLC is a registered investment adviser in Connecticut and New York. Registration does not imply a certain level of skill or training.