Infinite Banking Doesn’t Have to be Complicated
If you spend enough time in the personal finance space, you’ll undoubtedly come across someone talking about the virtues of Infinite Banking. I usually find these people intolerable because they refuse to get to the point. They seem mostly concerned with giving you their editorial opinion about why it’s so amazing or why everyone should be doing it. Why not just tell me what the thing is and let the audience decide? Well, that’s what I will do here.
How Infinite Banking Works
- Get a whole life policy where as little as possible of your premium goes to the death benefit and as much as possible goes to the cash value as soon as possible. The best split I’ve seen is 25% of your premium goes to the death benefit and 75% goes to the cash value.
- Once your cash value is high enough and an investment opportunity arises with a return that exceeds the interest you’d be charged on taking out a loan on the cash value of your policy, take out the loan. Looking around the Web, I see that interest rates range from 5–8%. That means you’d need to have an investment opportunity that returns 6–9% annually to get at least a 1% return.
- Your cash value will (hopefully) be earning a return in two places: within your policy and via the loan for your investment opportunity.
This is basically all there is to Infinite Banking. It baffles me why people try to make it seem so complicated.
Questions to Ask the Agent
Things Infinite Banking gurus will often say is that if the policy is structured right, Whole Life Insurance can be a good look. However, they rarely specify what the insurance policy should look like. Below are some questions, I think you should know the answers to, to increase the likelihood of having a reasonable policy.
- What is the max percentage of my premium I can have go toward my policy’s cash value starting from year one?
- How quickly can I build up my cash value?
- What’s the process for taking out a loan on my policy?
- What’s the interest rate for a loan against my policy? How is it determined? Is it fixed or variable?
- What is the loan term? 5 years, 10 years, as long as I want?
- At what rate should I expect the cash value of my policy to grow annually? Is it tied to an index? If so, which one?
Once you know the answer to all these questions, you’ll know how much you’d need an investment opportunity to return for Infinite Banking to make sense for you.
