Do you know that people have been using life-insurance policies to self-finance their purchases for the last 100 years or so? Contrary to the popular belief, infinite banking is not a new concept and has been around for well over a century.
While some may find learning about infinite banking to be a daunting task, it should be on your to-do list. For the right person, it is totally worthwhile so one must at least learn its basics in order to comprehend the benefits attached to it.
Breaking the Mind from Bondage
Even the most fiscally responsible person tends to spend 30% of his income on loans and interests and is able to save only 10% of it. It is about time that you take control of this process. Not only will you be able to use your money in the most effective way during your lifetime but also be able to pass down your wealth to your loved ones.
In infinite banking, you use your dividend-paying whole life insurance to bank your money. You tend to grow your money while protecting it from tax-liability and enjoying the profits of the dividend. The top advantage is that you can access your money at any time unlike many annuities, trusts, and cash deposits.
What is Infinite Banking?
In simple words, infinite banking allows you to be your own banking system through your life insurance. It lets you take control of all your everyday banking functions and gives you complete power over your finances.
Before you indulge in it, you must know that whole life insurance is different from life insurance and can be more expensive in a number of ways. Since the insurers are at a high risk of paying out the death benefit, the value of premiums rise.
The cash value of a whole life insurance is increased because of the dividend-paying portion which acts almost like a savings account. As the insurance company is paying you the dividends, it is almost like that you have invested in the company. Nonetheless, there is no denying that it is going to be a bit expensive for you.
How Infinite Banking Works?
The cash value of the insurance plan becomes your very own banker. The minimum rate on the cash value guaranteed by the banks is between 3 to 5 percent. Additionally, your company is going to gain on annual dividend based on its performance. This is called over-payment of premium that is free from all the taxes.
The borrowing takes place against your policy and you can take money from the cash value to use for any purpose. Despite this, your cash value is still going to earn dividends by the end, it works in the same way as a conventional bank but you are using your own money instead of that of the bank for financing purposes.
Pros and Cons of Infinite Banking
There are a number of names which have been given to infinite banking including family banking concept, perpetual wealth strategy, and becoming your own bank among a lot of others. Going through both the pros and cons will help you in deciding whether this banking system works for you or not.
Firstly, we’ll focus on the pros, which are:
- Non-Correlated Asset: The whole life insurance policy remains a non-correlated asset and has nothing to do with the market fluctuations. The last two stock crashes occurred in 2000 and 2008 respectively and led to around 50% losses. The current political situation has also put the economy to risk thus, making infinite banking a very safe option.
- Improved Cash Flow: Above all the advantages, you have an unhindered flow to your whole-life insurance policy’s cash value. You can receive a check within a few days without any hassle.
- Tax-Advantaged Growth: Taxes are the number one killer of wealth and a well-structured infinite banking policy will help you to get rid of them.
- Guarantees: There are a number of guarantees including cash value accumulation, fixed premiums, death benefit, and compounding interest growth rate. Apart from the guarantees, there is an opportunity of earning dividends as well.
- Tax-Free Loans: The loans which you get through life-insurance are not taxable. The money grows at 4% a year and the dividends add another 2-3% so, you are able to yield 6-7% compound income on money which is tax-free.
There are a few obstacles in infinite banking too but we cannot term them as drawbacks:
- CostProhibitive: It does require a significant investment because you will be putting 10% of your income into it.
- Disciplined: The price which you pay for all the perks of infinite banking is a disciplined approach to it. All you need is a strong conviction that you are going to see the fruit of your policy.
- Putting All Eggs in One Basket: Since all your money will be in the life insurance policy, you are breaking the first law of investment laid by the financial experts who always chant diversify, diversify, and diversify!
Is Infinite Banking for You?
Before you proceed into this, know that infinite banking requires a lot of dedication and discipline. It comes with its set of sacrifices which you need to make before you can actually start enjoying the rewards. However, once you have done all the things right, there is no ending to all the rewards.
Can you imagine such an asset which has limited drawbacks and continues to grow even when you borrow against it? It is indeed infinite banking which earns better as compared to other investments while limiting the taxes.
The policy can never lose money because irrespective of what happens to the market, only the interest rates will go up and down with nothing happening to the cash deposit. There are a few risks involved, especially since you are not relying on diversification but on the whole, this investment method is worth a try.