What is the Infinite Banking Concept?
A Brief Overview
Below, I present what I consider are the financial fundamentals of this concept so that you’re equipped to do further research.
The IBC is a strategy for managing cash-flow. Everyone has cash-flow, even those who don’t work (income and expenses are both cash-flows). The IBC is particularly for those with positive cash-flow, that is, people who are making more than they’re spending. It answers the question, “what do I do with the money I make that I don’t need to spend right away?” You might also say it addresses the question: “what’s the best way to save?”
Modern conventional wisdom suggests that you have two options: accumulate cash in your private possession or bank account, or invest. The IBC is a third option. It’s for people who want to do more than keep cash at home or in the bank, to complement their investing, and (importantly) to address their need for financing purchases — i.e. using credit, loans, or capital (including cash) — throughout life.
It works like this. You purchase a particular kind of life insurance that’s designed in a specific way. It’s called dividend-paying whole life insurance. The specific design has to do with the relative levels of the two types of premium you can pay towards this type of life insurance.
These premium levels are set so that the policy owner builds what is called cash surrender value (or just cash value) much faster than he would with a policy without any special design. This cash value is equity similar to what you might build in a house. However, cash value is a unique type of equity in that it is guaranteed against loss and guaranteed to grow. Why exactly this is true goes beyond the scope of this introduction, but suffice to say that these guarantees are explicitly stated in your policy documents.
This cash value (equity) can be used as collateral on loans taken from the issuing insurance company. These loans are called policy loans. The power of IBC lies in the dynamics between the cash value and policy loans.
Policy loans are an extremely unique type of debt. There are no lengthy applications, additional collateral assignments, or restrictions on the use of the borrowed funds. The use of policy loans does not impact the continual growth of the cash value. Furthermore, all of the cash value growth is tax-deferred (no tax on the “build-up”) and policy loans collateralized by the cash value are tax-free (let that sink in for a minute).
There is no magic here. You should repay the loans you take out and when you do, you will pay interest to the insurance company. And if you don’t repay the loans then that interest will compound the growth of your loan balance. If you (or whoever the insured party is) pass away before repaying the loans, then the outstanding balance is deducted from the death benefit before it is sent to the beneficiary. Interest payments on policy loans received by the company contribute to the company’s overall financial performance, which policy owners (who are also company owners) participate in through the receipt of annual dividends.
The IBC is a strategy to optimally manage savings though one or more specifically-designed, dividend-paying whole life insurance policies. These policies are custom-built so that they build up equity (cash value) early in the life of the policy — like within days. This equity grows guaranteed and can be leveraged through policy loans that have extremely favorable — incomparably favorable, in fact — terms for the policy owner. Because we are talking about life insurance, the equity growth and the policy loans are uniquely tax-favored compared to all other financial instruments.
What these technical dynamics mean is that the IBC is the best way to build capital — an idea I expand on in this article.
The numerous, robust features of whole life policies in general and especially those that are designed to build high cash value (as you do with the IBC) are so good that Congress, encouraged by special lobbying interests from within the financial industry, came after them. This resulted in regulations in the 1980s that complicate the construction of IBC policies. However, the power of the Concept and of whole life insurance as I’ve explained above persists. Yes, whole life is good, even Congress couldn’t kill it.
As you read more about the IBC (hopefully in Nelson’s book Becoming Your Own Banker) and discuss it with your friends and family, you may come across a couple questions. I’ve dealt with some high-level criticisms of the IBC in this post, but there are a couple ground-level items to cover here.
First, the IBC is not about investing. Whole life insurance is not an investment, nor does it replace investment. The only reason IBC works the way it does is because it’s implemented with whole life insurance (and life insurance is not an investment).
Second, the IBC is not a tax-dodge scheme. Premiums are paid on a post-tax basis (Uncle Sam gets paid… once). However, the guaranteed increases in cash value over time are not taxable (just like home value appreciation is not taxable). The guarantees and the tax-treatment combine to mean that the cash value growth compounds. Compounded growth is also known as exponential growth. It requires positive, consecutive increases across the entire time period examined. This means that whole life insurance is the only financial asset in the world that is legitimately characterized by compounding growth. All other financial assets rise and fall in value, and any reduction in value interrupts compounding.
Third, it will be no secret to an informed financial agent that some version of “banking on life insurance” is possible. When choosing someone to answer your questions about the IBC or how to use whole life insurance in this manner, consider that you wouldn’t go to a dentist to repair a broken collar bone, even though dentists and orthopedic surgeons are both doctors. Choose an expert. Check out the Nelson Nash Institute’s Practitioner Finder for a group of people that have been specifically trained to design these policies. My own NNI profile is here.
I hope you now have an idea of what the IBC is. For more information, consider Dr. Robert Murphy’s short article “An Introduction to the Infinite Banking Concept.” Of course, nothing on the IBC compares to Nelson Nash’s book Becoming Your Own Banker.