We’ve all heard the old adage, “You have to spend money to make money.” The Infinite Banking Concept helps you spendless moneyto make money by recouping lost interest. The value of your ‘bank account’ continues to earn aguaranteed rate of returnregardless of outstanding loans. In other words, you can borrow a dollar and earn interest on that dollar at the same time. Often, the value of your account accumulates a greater value than the cost of loan interest,netting positive growtheven while paying off a loan. Table of Contents To illustrate the Infinite Banking Concept at work, the example below demonstrates how using Infinite Banking helps grow wealth compared to a traditional bank loan or cash payment for a rental property: Purchasing a rental property with cash means the buyer doesn’t have to pay any mortgage interest, and will earn nearly $100,000 more than a buyer using traditional bank financing, as a result. However, the buyer using the Infinite Banking Concept who takes out a loan from their personal ‘bank’ with a value of $100,000 earns a guaranteed rate of return (4.5% in this example) that nets $384,700 additional dollars over the 30-year mortgage. The buyer is borrowing their own money ($100,000) and earning interest on it at the same time, making it a more lucrative option than buying the property in cash. In fact, the buyer using the Infinite Banking Concept earns nearly $200,000 more than the cash buyer. Infinite Banking is not a rapid money making scheme. Infinite Banking in its truest form is control over your money and the elimination of unnecessary money leaks from your own personal economy, so that you can utilize your money to grow and increase your assets. Infinite Banking requires you to take responsibility for your own financial future, and for the goal-oriented individual it can be one of the best financial tools you’ll ever find. Here are the advantages of Infinite Banking: Arguably the single most beneficial aspect of Infinite Banking is that it improves your cash flow. You don’t need to go through the hoops of a traditional bank to get a loan; simply request a policy loan from your insurer and funds will be made available to you. Whole life insurance is an extremely liquid asset compared to other assets like real estate, stocks, bonds, or qualified plans like your 401(k) or IRA. Because whole life insurance is liquid, it can make up a valuable part of your financial foundation, acting as your emergency savings. Whether you run into unforeseen medical bills, job loss or costly home repairs, policy loans offer peace of mind. You can even use your insurance policy to pay yourself an income if you decide to go on sabbatical, return to school or take time off work to care for loved ones. At Paradigm Life, we advocate funding a whole life insurance policy as a savings vehicle before considering other investment strategies like real estate or the stock market as part of our Perpetual Wealth Strategy™, and refer to this type of portfolio structure as The Hierarchy of Wealth™. Dividend-paying whole life insurance is very low risk and offers you, the policyholder, a great deal of control. The control that Infinite Banking offers can best be grouped into two categories: tax advantages and asset protections. One of the reasons whole life insurance is ideal for Infinite Banking ishow it’s taxed. In addition to tax-free policy loans and tax-free growth of interest and dividends inside your whole life insurance policy, the death benefit of a whole life policy is tax-free to your beneficiary and often is exempt from estate taxes as well. When you use whole life insurance for Infinite Banking, you enter into a private contract between you and your insurance company. This privacy offers certainasset protectionsnot found in other financial vehicles. Although these protections may vary from state to state, they can include protection from asset searches and seizures, protection from judgements and protection from creditors. Plus, any policy loans you utilize won’t affect your credit score.The Infinite Banking Concept At Work
What Are the Advantages of Infinite Banking?
Liquidity
Control
Tax Advantages
Asset Protections
Protection Against Volatility
Whole life insurance policies are non-correlated assets. This is why they work so well as the financial foundation of Infinite Banking. Regardless of what happens in the market (stock, real estate, or otherwise), your insurance policy retains its worth.
Too many individuals are missingthis essential volatility bufferthat helps protect and grow wealth, instead splitting their money into two buckets: bank accounts and investments. The problem with this approach is that, while money in a bank account is safe, it offers a very low rate of return. Market-based investments grow wealth much faster but are exposed to market fluctuations, making them inherently risky. What if there were a third bucket that offered safety but also moderate, guaranteed returns? Whole life insurance is that third bucket.
Regardless of how diversified you think your portfolio may be, at the end of the day, a market-based investment is a market-based investment. In the event of a market downturn, you lose money. Maybe a lot. Maybe a little. Maybe your value doesn’t decrease but your returns do. With Infinite Banking using properly structured whole life insurance, your returns are guaranteed and your cash value won’t decrease.
Certainty
Not only is the rate of return on your whole life insurance policy guaranteed, your death benefit and premiums are also guaranteed. These certainties are another reason why properly structured whole life insurance is the ideal tool for Infinite Banking.
Consider other assets, like those associated with your 401(k) or IRA. In the event you pass away with money left in either of these qualified plans, the remaining funds will be passed onto your beneficiary—but first it will be taxed. You can guarantee your beneficiary will receivesomethingbut you can’t be certain how much, due to future tax rates.
While there are other types of permanent life insurance, whole life insurance is guaranteed to have the same premium for the duration of the policy. You can be certain your premium won’t increase as you get older. This is invaluable when it comes to setting and achieving your financial goals.
Cash Flow
Many individuals rely on Infinite Banking for atax-free retirement. Because insurance policies are paid for with after-tax dollars, you don’t have to worry about your future tax rate like you would with a 401(k). So long as you utilize the policy loan feature of your whole life policy, you don’t have to pay taxes on the growth of your cash value. Simply fund your retirement with policy loans and your insurance company deducts the outstanding loan from the death benefit after you pass away.
When your retirement funds are linked to market-based investments, running out of money in retirement is a very real and valid concern for millions of Americans. Infinite Banking using properly structured whole life insurance can ensure you won’t run out of money in retirement, because your cash flow won’t be at risk if the market experiences a downturn. For this reason, some individuals opt to stop funding qualified plans like 401(k)s or IRAs all together and rely solely on the Infinite Banking strategy for retirement.
Legacy
Infinite Banking with whole life insurance is aproven method for building generational wealth, in part because the death benefit is tax-free and generally not subject to estate taxes.
In the case of large estates where federal or state estate taxes may kick in, it’s possible to utilize Infinite Banking inside of anIrrevocable Life Insurance Trust (ILIT). By naming the trust as the policyholder of your whole life insurance policies, even the largest of estates can be eligible for tax advantages that provide significantly more wealth to future generations.
What Are the Disadvantages of Infinite Banking?
Infinite Banking isn’t a one-size-fits-all strategy. It’s highly customizable and its effectiveness depends largely on your financial goals. Here are three aspects of Infinite Banking to consider when deciding if it’s right for you:
Qualification
Because Infinite Banking uses whole life insurance as its “bank”, it isn’t an option for everyone. You must be able toqualify for a life insurance policy. Qualification is based on your health and age.
At Paradigm Life, Wealth Strategists work with the nation’s top mutual insurance companies and can help match individuals interested in the Infinite Banking strategy with insurance companies most likely to approve their application. While it’s recommended to apply for a policy when you’re young and healthy, it’s possible to get insured even in retirement—you’re never “too old” to pursue the Infinite Banking strategy.
Cost
Compared to term life insurance, the premiums for whole life insurance are significantly higher. Keep in mind that you’re not just paying for insurance; you’re effectively committing to contribute a set amount into “savings” inside your insurance policy to be used by you whenever you choose while still earning a guaranteed interest rate and potential dividends.
That said, Infinite Banking isn’t ideal for someone living paycheck to paycheck. It requires an individual who is comfortable with saving a significant amount of income and who is focused on long-term financial goals.
Remember, when you utilize the Infinite Banking strategy using whole life insurance, your insurance policy’s primary purposeisn’tthe death benefit, it’s the living benefits. Your main goal isn’t protecting your loved ones financially if something were to happen to you—that’s an added bonus. What you’re really protecting is your income. You’re shielding your wealth against bank interest rates and financing, market volatility, creditors, and taxes.
Mindset
Infinite Banking is a proven concept for growing and protecting wealth, but it’s not mainstream. You need to be comfortable with taking your financial future into your own hands and have a clear outline of your financial goals. You also have to be a good banker!
If you don’t pay back your policy loans (with the exception of using policy loans to fund retirement), you won’t see your wealth grow over the course of your lifetime and you be able to create generational wealth.
Does Infinite Banking Really Work?
Yes. The strategy behind Infinite Banking—using dividend-paying whole life insurance as your own personal bank for growing and protecting wealth—is proven to work, and has been used by families for hundreds of years. As with any financial tool, the benefits are largely dependent upon how the tool is used and requires clearly outlined goals to measure success.
For the fastest growth and optimal benefits, it’s recommended to pair dividend-paying whole life insurance with supplemental insurance called aPaid-Up Additions rider (PUAR).
A PUAR allows you to “overfund” your insurance policy right up to line of it becoming aModified Endowment Contract (MEC). When you use a PUAR, you rapidly increase your cash value (and your death benefit), thereby increasing the power of your “bank”. Further, the more cash value you have, the greater your interest and dividend payments from your insurance company will be. You can then reinvest those dividends to purchase more Paid-Up Additions.
By adding a PUAR to your whole life insurance policy, you front load it to maximize its potential over the course of your lifetime.
Disclaimer:The Infinite Banking Concept® is a registered trademark of Infinite Banking Concepts, LLC. Paradigm Life is independent of and is not affiliated with, sponsored by, or endorsed by Infinite Banking Concepts, LLC.
Why Whole Life Insurance?
Permanent life insurance, whole life included, features a unique asset that term life insurance doesn’t offer. When you buy permanent life insurance, a portion of your annual premium is reflected in a built-in savings account called cash value. You can withdraw your cash value during your lifetime, or you can borrow it from your insurance company tax-free. In addition to your premium payment, your cash value also earns a rate of return. Depending on the type of permanent insurance you buy, this rate of return may be calculated based on sub-accounts or market indexes (like with universal life insurance), or it can be a guaranteed rate set by your insurance company (like with whole life insurance). The reason whole life insurance is preferred for an infinite banking system is that a guaranteed rate of return helps protect your cash flow from market volatility and promises steady growth.
The Wealth Maximization Account
A Wealth Maximization Account takes infinite banking with whole life insurance two steps further than a typical whole life insurance policy. First, Wealth Maximization Accounts utilize participating whole life policies from mutually funded insurance companies. Mutual insurance companies work in the best interest of the policyholders. When the company is profitable, it extends these profits to policyholders in the form of dividends. So when you use a participating whole life insurance policy from a mutually funded insurance company you not only earn a guaranteed rate of return, you also have the potential to earn dividends—further growing wealth and supporting a robust infinite banking system. The mutual insurance companies we work with at Paradigm Life have historically paid out dividends for over 100 years.
Since 1983, all life insurance policies have had a requirement called the 7-pay test. The 7-pay test measures the amount of money paid into a policy over the course of seven years, relative to the amount of insurance coverage or death benefit. If a policy passes the 7-pay test, the cash value grows tax-deferred and can be accessed tax-free. If it doesn’t pass the 7-pay text, it is classified as a modified endowment contract (MEC). Wealth Maximization Accounts tow the line just below MEC classification, far outperforming traditional whole life insurance in terms of growth while still receiving the same tax advantages.
Second, Wealth Maximization Accounts are designed with paid-up additions (PUA) riders that create instant liquidity. A paid-up additions rider allows the policyholder to “overfund” their policy in its early years to maximize growth and supercharge the policy’s earnings over the life of the account. The design of the policy, specifically how much PUA can be added, adheres to the Internal Revenue Code Section 7702, which defines maximum contribution level of a life insurance policy without the growth being taxed. (A Wealth Maximization Account is also known as a 7702 Account or a 770 Account.)
Infinite banking is becoming increasingly popular among American families as people look for ways to diversify wealth away from the stock market and reduce exposure to market volatility. Cash value whole life insurance is a proven strategy for growing and protecting wealth, and one that has been used by banks and corporations for decades. While any cash value life insurance policy could be used for infinite banking, there is one type of policy structure that reigns supreme when it comes to optimizing growth with a guaranteed rate of return and potential dividends. So if you’re interested in how to start infinite banking to help accomplish your financial goals, here’s what you need to know before you schedule a consultation with an insurance agent.
Types Of Cash Value Life Insurance
When you purchase a cash value insurance policy, it provides guaranteed coverage for life, a death benefit for your heirs, and a number of living benefits for you. Those living benefits typically include liquidity, policy loans, increased cash flow, tax advantages, and certain asset protections. When you pay your insurance premium, a portion goes toward your death benefit (the face value of the policy) and administrative fees. The remainder is reflected in the policy’s built-in savings account, called cash value. Depending on what type of cash value life insurance you buy, you cash value grows based on one of the following: A guaranteed rate of return (whole life)
Indexes, like the S&P 500 or Nasdaq (universal life)
Sub-accounts selected by your insurer, comparable to mutual funds (variable life)
The type of cash value policy you choose determines how much risk your “bank” is exposed to. With a universal or variable policy, growth is linked to market factors. While you might outperform the growth of a whole life policy in some years, other years could see your cash value stagnate. If you’re looking for reliable and predictable growth, a whole life policy is best suited for infinite banking.
Participating Vs. Non-Participating Whole Life Insurance
Just about any insurance agent will happily sell you a whole life policy, but not all whole life policies grow the same way. While any will provide a guaranteed rate of return, only participating whole life policies earn dividends. A participating whole life policy is one issued by a mutual insurance company. These types of insurance companies prioritize their policyholders and pay out non-guaranteed dividends in addition to a guaranteed rate of return. The mutual insurance companies we work with at Paradigm Life have historically paid out dividends for over 100 years. What’s more, dividends are usually tax-free and can be used to pay your insurance premium or even buy additional insurance in the form of paid-up additions.
The Paid Up Additions Rider
Insurance riders are supplemental insurance that help customize your policy to deliver maximum lifetime benefits based on your financial goals and your insurance needs. When you start infinite banking, one of your priorities should be to grow the cash value in your “bank” as quickly and exponentially as possible. The paid-up additions rider allows you to do that. In the early years of your policy, it allows you to buy additional insurance with premium payments that go directly toward cash value. Once you earn sufficient dividends with your participating whole life policy, they can be used to pay for your paid-up additions. This feature is ultimately what allows an infinite banking strategy to work so well that its growth is comparable to gains from mutual funds or qualified retirement plans after their associated taxes and fees. When your policy is structured with a paid-up additions rider, it functions more like a wealth building strategy and less like life insurance. The paid-up additions rider allows you to supercharge your policy for rapid growth and maximum wealth over the life of the policy. It’s crucial to the success of an infinite banking strategy, so it’s imperative that you work with an insurance agent who is familiar with this type of insurance rider. They also must know how to perform the 7-pay test (adhering to Internal Revenue Code Section 7702) to safeguard your policy from becoming overfunded to the point that it becomes a modified endowment contract, or MEC, and loses its tax-advantaged status.
The Policy Loan
You can access the cash value of your whole life insurance policy at any time, for any reason, including real estate purchases, tuition, other investment opportunities, business capital, emergency expenses… you name it. But to take full advantage of the Infinite Banking concept, it’s best to use your cash value in the form of apolicy loanrather than a withdrawal.
When you utilize the policy loan feature of your whole life insurance policy, your cash value continues to grow in spite of the loan. Every dollar you borrow still earns interest and potential dividends. When you pay back your policy loan, you recapture the interest—not a bank. This is the backbone of the Infinite Banking concept; your wealth continues to grow, even as you borrow against it. You are basicallyborrowing from yourself.
Additionally, policy loans are tax-free. You can use the interest and dividends you’ve earned without paying taxes on that money. Comparatively, if you withdraw your cash value, any amount over your basis—the amount you’ve contributed in insurance premiums—will be taxed.
In terms of paying back your policy loans, you function as your own banker and get to decide the payment schedule. Any unpaid loans will be deducted from your death benefit.
Infinite Banking And The Hierarchy Of Wealth
A participating whole life insurance policy structured with a paid-up additions rider—also known as a Wealth Maximization Account™—is the best tool for infinite banking. But it’s just the foundation of your wealth strategy, not where all your wealth is stored. The Hierarchy of Wealth is an outline for classifying assets in terms of risk and control, offering the highest benefit for each class (rate of return). The more control you have over an asset, the less risk you have. When you start infinite banking with a Wealth Maximization Account (WMA), you’re getting optimal control, protection, and a great return. Aim to put 15-20% of earned income, or 6-24 months of living expenses into the cash value of your WMA to secure your foundation, or Tier 1 assets. Once you’ve established your Wealth Maximization Account, you can move on to higher tiers on the Hierarchy of Wealth. Tier 2 seeks out investments that offer control, collateral, cash flow, and consistency. These investments could include your own personal development to make more money, investing in your business, or hard assets like residential real estate. Tier 3 investments offer no guarantees and no control, or are investments where control is relinquished to a professional like a financial planner or broker. They provide higher returns, but come with higher risk. Examples include hard money lending against collateral, or syndicated funds for hard assets such as real estate or commodities. Tier 4 investments also offer no guarantees. These are speculative investments where you risk losing 100% of your investment. This tier comes after at least 90% of your assets are in their respective Tiers 1, 2, and 3.
When you employ the Hierarchy of Wealth with a Wealth Maximization Account as your foundation, it will make you wealthy. It’s the opposite of the approach most people take with their wealth, where the riskiest assets have become their financial foundation. When a recession or market downturn comes, most people risk becoming financially wiped out, while those with an infinite banking strategy are able to take advantage of opportunities and do very well.
How To Fund Your Infinite Banking System
Although participating whole life insurance is the preferred vehicle of a successful infinite banking system, it’s important to understand your primary goal isn’t the policy’s death benefit. Yes, you’re buying insurance, but the idea is to purchase the smallest death benefit possible while contributing the maximum-allowed amount by the IRS and retain tax advantages. You’re using insurance as your bank first and as an insurance policy second. Whole life insurance is substantially more expensive than term life insurance of the same face value, but with whole life insurance, only a portion of your premium is going toward paying for the death benefit. The rest is in your “bank” as cash value, earning interest and dividends. Plus, where term insurance is a “use it or lose it” financial tool, participating whole life insurance provides lifetime guarantees. A Wealth Maximization Account functions as your financial foundation. Instead of cash sitting in a bank, it will be in an account that earns a greater rate of return. Unlike a qualified retirement plan, it retains liquidity and you won’t be penalized for accessing your cash value, regardless of your age or how much wealth you’ve accumulated. If you need to borrow against your insurance policy to take advantage of a purchase or investment opportunity, it comes with a guaranteed loan provision, of which you determine the pay-back schedule. And when you pass away, there is a death benefit payout. A Wealth Maximization Account by itself won’t make you wealthy. But when you factor in the benefits, including tax benefits, low costs, liquidity, rate of return, protection from market volatility, protection from creditors and no limit to yearly contribution amounts (like with a 401k), it’s easy to see why executives, banks, corporations, and wealthy individuals rely on the infinite banking system to help grow and protect their wealth.
Infinite Banking With Paradigm Life
The expert Wealth Strategists at Paradigm Life not only understand how infinite banking with a Wealth Maximization Account works, they own WMAs themselves and have first-hand experience using whole life insurance as a financial foundation. They’ve worked with thousands of clients to set up participating whole life policies properly structured to help them reach their financial goals. Now it’s your turn. Request a free consultation with a Paradigm Life Wealth Strategist today to find the right whole life insurance policy to help you achieve your financial goals.
