Infinite Banking Explained

Infinite Banking Explained

How to Build Wealth and Finance Your Dreams with Whole Life Insurance

When most people think of life insurance, they think of a necessary expense to protect their loved ones in the event of their untimely death. While this is certainly an important aspect of life insurance, it’s not the only one. In fact, there’s a way to use dividend paying whole life to create a system of borrowing at a low modest interest rate while the principle and dividends continue to compound tax exempt allowing you to finance your dreams and build wealth over time. This is the concept of infinite banking, and in this article, we’ll explain how it works and why it might be a smart financial move for you.

1. How Infinite Banking Works

At its core, infinite banking is a way to use the cash value of a participating whole life insurance policy as a source of low-cost financing. When you purchase a participating whole life insurance policy, a portion of your premiums goes toward building cash value, or in other words equity, within the policy. This cash value compounds tax-deferred over time and can be accessed through policy loans or withdrawals.

The idea behind infinite banking is to use the cash value of your policy as collateral for a loan from the insurance company. Because the loan is secured by the policy, the insurance company is contractually obligated to provide, upon request, a loan of up to 90% of the current cash value at a modest interest rate. This could be lower than the interest rate you would pay on a traditional loan from a bank or other lender.

The beauty of this system is that while you’re borrowing against the cash value of your policy, the principle continues to compound within the policy. This means that you’re essentially paying yourself back, rather than paying it to a bank or other lender. Over time, this can lead to significant wealth accumulation, as the cash value of your policy grows and you continue to borrow against it to finance your dreams.

2. An Example of Infinite Banking in Action

Let’s say you want to purchase a new car for $40,000. You could take out a traditional car loan from a bank at an interest rate of 6%.  Over the course of a 3-year loan term, you would end up paying $3808 in interest.

Alternatively, you could use the cash value of your whole life insurance policy to finance the purchase. Let’s say the policy has a cash value of $80,000 and is earning a dividend interest rate of  6%. You could take out a policy loan for $40,000 at an interest rate of   6.5%. Over the course of the 3-year loan term, you would end up paying only $4,135 in interest. You only need to request it from the insurance company as it can’t be refused as long as your policy is in good standing unlike banks etc. who require you to provide your current financial information. Also, it is completely private and is not reported to a credit agency.

But here’s the kicker: while you’re paying interest on the policy loan, the cash value of your policy continues to compound at 6%. This means that after 3 years, the cash value of your policy would have grown to $95,734. Even though you borrowed $40,000 against the policy, the principal continued to grow, earning interest plus dividends, and increasing your overall wealth. Your cash value grew by $15,734 meaning you’re ahead by $11,599. Pretty nice, yes? Also, there is no required repayment plan so you can repay as you see fit, unlike the normal mandatory payments required by other lenders.

3. Tax Savings with Infinite Banking

In addition to the modest interest rates and wealth-building potential of infinite banking, there are also tax benefits to consider. In Canada, the cash value of a whole life insurance policy grows tax-deferred, meaning you don’t pay income tax on the growth unless you cancel or withdraw it from the policy and the cash value, at that time, is higher than the adjusted cost base of the policy (roughly total premiums paid less the net cost of the insurance).

This can be a powerful tax planning tool, as you can use policy loans to finance your dreams without triggering a taxable event. Additionally, upon death, the total death benefit less any outstanding loan amount at that time is paid totally income tax-free to the beneficiary. This can help you save on taxes over the long term, while still enjoying the benefits of using your dividend-paying whole-life policy as a source of financing.

In summary; Infinite banking is a compelling financial strategy that offers both wealth-building and financing benefits. By utilizing the cash value of a participating whole life insurance policy as collateral for loans, you can finance your dreams while the principle continues to grow and compound within the policy. In addition to the financial advantages, there are also tax benefits to consider. Overall, the infinite banking concept is a unique approach that can help you achieve your financial goals and build long-term wealth.

Starting to See the Power of Infinite Banking?

So now that you see the importance and power of Infinite Banking, here are a couple of suggestions as to what you might do next.

  1. Watch this video on “Unlocking the secrets to financial prosperity.” Two IBC practitioners talk about how the need for traditional banking is greatly diminished.
  2. Download a copy of our new eReport “How Canadians Can Beat Inflation.
  3. Reach out to one of our licensed IBC practitioners near you. Click here to request a no-obligation consult.
Picture of Will Moran

Will Moran

Will has published numerous articles as well as two books on Infinite Banking and taking back control of the money you are giving away to everybody else. His most recent book is Think Like a Banker.

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