The Infinite Banking Concept enables individuals, families, and businesses to develop financial independence by becoming your own banker. This concept was implemented by R. Nelson Nash in the early 1980s when he was dealing with unfavorable interest rates on several commercial loans.
The story is that Mr. Nash experienced an epiphany when he suddenly realized that he could use cash value in Whole Life insurance policies to create a group of banks that would be his personal funding vehicles and allow him to take control over all of his financing.
Not only did Mr. Nash resolve his funding challenges, but he also went on the create the Nelson Nash Institute whose mission is the educate others on taking control of the finances and reclaim the banking function from outsiders who typically do not put their clients’ interests first and foremost.
Table of Contents
Become Your Own Banker – 6 Steps to Forming Your Bank
To become your own banker, the simplest and most logical method to provide funding is by using whole life insurance. While addressing and completing the following steps for opening your bank for your business, it’s very important to develop a mindset where you think like a banker thinks while using your personal finances just like your neighborhood bank would:
Step 1: Use Cash Value Life Insurance
The first step in your banking journey involves capitalization. No, you do not need to find investors or borrow from friends and family, you need to properly fund a whole life insurance policy that can begin accumulating cash value very early in the process. The time it takes to capitalize your bank depends on the available funds that you will invest in your insurance policy. This process can take several years but when your policy (bank) becomes properly funded, you will have immediate access to your cash value.
It’s important that you use participating life insurance provided by a mutual insurer in order to earn more on your interest than the minimum interest rate your insurer will be charging you to borrow against your policy. Fortunately, IRC section 7702 provides that the interest accrued in your policy and the dividends you receive are not considered taxable income. This allows your cash value to grow rapidly so that you can access it when needed through policy loans. For this reason, you will want to use a top dividend paying Life Insurance Company when you open your bank.
Finally, it’s important that you understand your life insurance policy is for maximizing cash accumulation so the death benefit should be minimized. If a large death benefit is very important to you, simply add a term insurance rider at a much lower cost.
Step 2: Riders to Consider
There are various riders that will be offered to help you broaden your coverage and add more “living benefits” to your whole life insurance policy. Here are some riders you should discuss with your agent:
- Paid-Up Additions – Paid up additions is life insurance that is paid in full at the moment of purchase. This rider allows the policyholder to buy more benefit and boost the cash value growth in the policy. A great method for adding these paid-up additions is to use the dividends paid each year by the insurer.
- Life Insurance Supplement Rider – The supplement rider allows the policyholder to combine affordable term insurance with the permanent life insurance in the policy. As you pay your premiums, the term portion of the coverage is reduced until only permanent life insurance remains.
- Guaranteed Insurability Rider – The GIR provides the applicant the ability to purchase additional life insurance without proof of insurability. This rider is very useful if your circumstances change and you realize that you required more life insurance but have developed some health issues.
- Term Life Rider – The term life rider allows the policyholder to purchase term life insurance that can be converted to permanent insurance at a later date. It is an especially good option for young adults who want to start infinite banking but typically don’t have the budget to purchase a sizeable death benefit.
- Additional Life Insurance Rider – This rider allows the policyholder to increase their premium payments to purchases additional paid-up life insurance which increases their death benefit and increases the growth in cash value.
Step 3: Fund your Personal Bank
Now that your policy is set up you have to fund it by paying the premium. The strategy here is to fund your policy just short of it becoming a modified endowment contract or MEC. If you overfund your insurance policy and allow it to become a MEC, the IRS will treat your policy just like an investment and all loans and withdrawals would be taxable. This defeats the purpose of using life insurance for banking.
Step 4: Borrow from Your Policy to Finance Your Purchases
This is the point where you become your own banker. For your personal banking policy to work correctly, you should borrow your cash value rather than “withdraw” it. When you make withdrawals from a life insurance policy, the cash value is depleted by the amount of the withdrawal. In contrast, when you borrow from your policy (your bank), your cash value account continues to grow for you.
When you take a loan against your insurance policy, the insurance company makes the loan and your cash value is the collateral. The best thing is that although a portion of your account has been collateralized, the entire cash value continues to earn interest on a compounded basis. The best news is, now that you are banking with yourself, you can use the money for any reason you choose.
Step 5: Recapture Your Money with Interest
This is the greatest part about becoming your own banker but you must remain diligent when it comes to recapturing the interest and principal on your loans.
Here’s how bankers get rich on the backs of their customers. When you earn money, you need to keep it somewhere safe. Most people deposit their hard earned money at a local bank who not only charges you a fee but pay a ridiculously small amount of interest on your deposit. Your bank then lends your money to other customers and charges them at least ten times the amount of interest they’re paying you. Between the fees, they are charging and the interesting they are earning, no wonder so many banks do so well.
But, what if you can become the bank, the lender, and the borrower? You get to borrow from yourself and then recapture those funds and the interest by becoming your own banker. Imagine what will happen to your cash value life insurance once you start recapturing the principle and interest on loans you make to yourself. Your bank grows and grows and grows.
Step 6: Rinse and Repeat
With step six you only need to repeat the bank building process over and over again. Imagine having a half of dozen personal banks that you can access whenever an opportunity arises. You will have the resources you need for buying opportunities, investing opportunities, and other purchase for that matter because it’s your bank!
The Benefits of Becoming Your Own Banker
Certainly, you can imagine how becoming your own banker can benefit you financially. Simply put, it removes financial restraints that many of us have to deal with regularly.
- You are in Control – Now that you’ve taken over the banking responsibilities for yourself you remain in charge and in control. Outside influences do not get to share in or profit from your transactions.
- Privacy – In many cases, your financial transactions in the outside world find their way into the public domain. In fact, the three credit bureaus have the power to determine who you can borrow from, the amount interest you pay, and the amount of the loan or credit line. Having and using your own private banking system allows for a virtual firewall and all third parties who want to keep track of your business dealings.
- Reducing Interest Charges – Most people are concerned about the amount of interest banks and credit card companies are allowed to charge, not to mention the various fees for certain services like overdraft protection or late fees. Since you now own your banking system and are assuming the role of the borrower and the lender, you get to control the interest you once paid to an outside lender.
- You can Help Others with Your Personal Banking System – Most people will admit that helping others is the easiest way to make yourself happy. Becoming your own banker and implemented the infinite banking concept affords you the opportunity to help anyone financially.
For example, your newly married daughter and husband are struggling with traditional lenders to purchase their first home. Here is the perfect opportunity for Mom and Dad to step in and save the day. Using your network of personal banks you can lend them the money to buy that dream home and eliminate all the aggravating hoops they were being forced to jump through. You make the loan and then set the terms and conditions that are favorable for both parties. And, most importantly, you get to be your little girl’s, White Knight!
- What Red Tape? – When you become your own banker and assume the role of borrower and lender, there is no more red tape!
What the Naysayers say about Becoming Your Own Banker
History tells us that a lot of people have issues when seeing a new product or service that is not “mainstream” or “traditional.” Just consider the internet and you have all the proof you need. Most people embraced it early on but there were many people who considered as dangerous as voodoo magic simply because they could not wrap their head around how the concept worked. We see the same push back with the Infinitive Banking Concept. Here are some typical responses from the naysayers:
“I refuse to Pay Interest when I borrow My Own Money”
The easy answer here is that you are not borrowing your money. You are getting a loan from the insurance company that not your cash value account. It is a simple process that takes only a few days to complete the transaction. Since you are borrowing “against” your cash value, there is no lengthy application, there are no restrictions on how you use the money, there is no repayment schedule because you aren’t required to pay it back, and your cash value continues to earn interest and dividends.
Since the insurer is making you a loan from its general operating account, the company expects to earn interest on that money so they can pay death claims. Also, since you are paying interest to a mutual insurance company that is owned by its policyholders, the interest the company collects from borrowers will ultimately find its way back to the policyholders in the form of dividends.
“I can get a lower interest rate than what an insurer will charge for a Loan”
The interest rate charged for your policy loan is generally a variable and the bond index your particular policy loan is linked to will be stated in a conspicuous manner in the insurance policy documents. Because of the manner in which the rates are typically calculated, they have a tendency to lag behind the current market rates. So then, when current rates are relatively low, the rates on policy loans are a little higher, but when the current market rates are running high, the interest on policy loans age generally low.
It’s also a good idea to take into other loan acquisitions costs that are associated with a traditional business loan. There are typically broker fees, rate lock fees, and various others that tend to increase what seemed to be the lowest interest rate available. For example, when you are offered Zero percent financing on a new vehicle, do you really think the lender is shelling out money with no chance of a return? More than likely, the cost of the zero interest rate is built into the price of the vehicle.
This Sounds Great! Where can I get More Information?
If you are considering the Infinite Banking Concept and would like to learn more about how you can take advantage of becoming your own banker, we are recommending some books on the subject that will help you understand more about recapturing the money you borrow and the interest you’re paying.
You can also contact an independent insurance agent that is familiar with the infinite banking concept and how to become your own banker. The easiest method to find an independent broker who can educate you on the concept and help you get set up with a mutual insurer that has a history of paying annual dividends is to type “infinite banking concept” into your search engine and look for articles that are not paid advertisements.
For example, InsuranceQuotes2Day is an insurance brokerage that specializes in offering Indexed Universal Life insurance for investors and Whole Life Insurance for prospects wanting to learn more about becoming your own banker.
Which Insurers Pay the Best Dividends on Whole Life Insurance?
With an A+ rating from A.M. Best, American United Life made the top ten because the company is a non-direct recognition company (pays full dividend rates regardless of balances on policy loans).
Standard and Poor’s rating services offered additional information when they awarded American United Life an AA- (4th highest out of 22):
- Strong competitive position, supported by leading market position in niche Care Solutions (combo product) business. The mutual insurance company holds the No. 1 position in annuity-based long-term care (LTC) and No. 2 in the life-based LTC market.
- Exceptionally strong growth, especially in Retirement Services line of business
- Extremely strong capital, demonstrated by ‘AAA’ redundancy
- Exceptionally strong financial risk profile, established by extremely strong capital adequacy, an intermediate risk position, and adequate financial flexibility
Foresters makes the top 10 because it is one of the only participating whole life insurers that does not require a medical exam. The company boasts a very strong dividend history which has remained above 6% over the last 13 years.
Foresters has continually received top ratings from A.M. Best and are considered an innovator in the process of life insurance underwriting.
Guardian has landed in the top ten because of their impressive ratings from A.M. Best (A++ Superior) and their AA+ rating from Standard & Poor’s. They are one of the few insurers that promotes an infinite banking strategy among agents and even though Guardian is a direct recognition company, it has not affected policy performance overall.
Because of Lafayette’s non-direct recognition policy and exceptional company ratings, the company has become a favorite choice for many individuals who are serious about becoming their own banker. Their dividend rate of 5.10% in 2016 remains a strong outlook for several years to follow.
MassMutual appears to be the gold standard for whole life insurance products and is among the favored choices for cash value accumulation and wealth building. They have become a top performer as far as their history of paying dividends with the most recent of 6.7% paid in 2017.
Mutual Trust Life (MTL) is a major player in the infinite banking concept segment of the life insurance market. The company has developed a proprietary dividend option that was designed to provide maximum cash value accumulation. Their Maximum Accumulation Dividend option works alongside the Flex Pay Paid-Up Additions Rider of the Annual Premium Paid-Up Additional Insurance Rider allowing the policy to accumulate maximum cash value on a continuous basis.
Ohio National made our top ten list because of the recognition they receive from all of the major rating companies. They also have a very strong track record of paying out favorable dividends which certainly lends itself to a policy that can deliver maximum cash accumulation – the bedrock for becoming your own banker.
As a non-direct recognition company that offers participating whole life, Security Mutual remains focused on personal banking strategies that are gaining popularity today. The company currently offers for types of whole life insurance products by the most popular for personal banking is their WL4U LP100. This product is payable to age 100 and comes with several riders that be used to broaden coverage and add living benefits.
National Life Group also lands in the top ten because of their solid financial ratings and paying very competitive dividends to policyholders. They whole life product also includes the accelerated benefit riders for critical, chronic, and terminal illness.
Penn Mutual is a well established national insurance company who is continually ranked very high from the national rating services. Recently awarded an A+ by A.M. Best and A+ by Standard & Poor’s, Penn Mutual is a solid performer for consumers considering the infinite banking or Bank on Yourself concept. They historically paid out favorable dividends year over year.