While you may already know about the peace of mind and assurance life insurance can provide, it can also act as a savvy financial tool, especially when you use your policy as an infinite banking resource. Infinite banking life insurance is a strategy that allows policyholders to use the cash value of a permanent life insurance policy as a source of financing rather than relying on traditional banks.
By overfunding a permanent life insurance policy, you’re able to build up a cash value that you can then borrow against, as opposed to borrowing funds from a traditional bank. In this article, we’ll explore how infinite banking life insurance really works and weigh the pros and cons of this approach so you can confidently determine if it’s the right choice for you.
How does infinite banking life insurance work?
You can take advantage of infinite banking by utilizing the cash value of your life insurance policy as a personal banking system. When you purchase a permanent life insurance policy, for example, whole life insurance, it will accumulate a cash value over time. Then, you can overfund the policy by paying more than the required premium, which helps maximize the cash value. You then have the option to borrow against the accumulated cash value, similar to a personal line of credit, without triggering tax liabilities.
The borrowed funds can be used for various purposes, such as investments, education, emergencies, or any other financial needs. It’s important to keep in mind that you’ll pay interest on the borrowed amount, but this amount is typically lower than traditional loan rates. Repayment of the loan can be flexible, allowing you to choose how and when to repay the borrowed amount. However, borrowing against the policy can potentially reduce the death benefit or result in the loss of the insurance policy.
Pros and Cons of Infinite Banking Life Insurance
If you’re debating whether to use your life insurance coverage as an infinite banking resource, it’s important first to consider the pros and cons of this option. Here’s an overview of the advantages of infinite banking life insurance:
Investment potential: Infinite banking allows you to use your life insurance policy as an investment tool, potentially earning gains on your borrowed cash value.
Flexibility: You can borrow against your policy and use the funds for various purposes, such as investments, education, or emergencies.
Tax advantages: Policy loans are generally tax-free, allowing you to access funds without tax liabilities.Note: this is different than interest; loans are not typically interest-free.
Control: With infinite banking, you have more control over your funds compared to traditional banking systems.
Alternatively, some of the setbacks of this strategy include:
Cost: Whole life insurance, which is often used for infinite banking, can be more expensive than other types of insurance, such as term life insurance.
Time to build cash value: It may take a significant amount of time for the cash value of your policy to accumulate, limiting your immediate access to funds.
Overfunding costs: Overfunding your policy to maximize cash value can lead to additional expenses. Insurance companies typically set maximum premium limits based on the insured's age, health, and the death benefit amount. If the premium payments exceed these limits, the policy may be considered a Modified Endowment Contract (MEC).
Risk of reducing death benefit: Borrowing against your policy can potentially reduce the death benefit or even result in the loss of the insurance policy if the loan isn’t repaid.
Interest payments: When you borrow against your policy, you will need to pay interest on the loan, which can affect the overall returns.
SelectQuote Can Answer Your Questions About Infinite Banking Life Insurance
Understanding how to take advantage of your life insurance policy options can be confusing. Fortunately, if you have questions about infinite banking life insurance, we can help. We can walk you through the ins and outs of permanent life insurance, helping you understand your options and what’s right for you. Then, we’ll search a variety of carriers in just minutes, comparing permanent life insurance quotes and plans on your behalf. With the help of our experienced licensed insurance agents, you’ll feel confident in your coverage and informed about what policy options and strategies are available to you.
