Infinite banking: pros, cons and who it is worth it for

What infinite banking is, in one sentence

It is a way of using a whole life insurance policy, not a separate product. You buy a participating policy, usually from a mutual insurance company (according to the NAIC glossary, a private insurer owned by its policyholders), and it is designed so that a large part of what you pay builds cash value. Over the years, that value serves as collateral to borrow from the insurance company when you need money for something big.

A paid-up additions (PUA) rider is often added. According to Lafayette Life, that rider uses dividends to buy additional coverage that is already paid up, which can increase both the cash value and the death benefit.

The pros of infinite banking

When it is well designed and well funded, these are the real advantages:

• Cash value guaranteed by contract: in whole life, the value grows according to the policy’s guaranteed table, without depending on the stock market.
• Loans against your cash value: the contract lets you borrow up to that value without applying for a bank loan.
• You set the pace for repaying the loan: you can pay it back on your own plan, although it keeps charging interest as long as it is unpaid.
• Favorable tax treatment as long as it is not a MEC: under the Internal Revenue Code (section 72(e)), loans from a policy that is not a MEC are not treated as taxable withdrawals while the policy stays in force.
• Your family stays protected: it is life insurance; the death benefit is generally not taxable income for the person who receives it.
• Possible dividends: in a participating policy, the insurance company may pay dividends that, according to the NAIC, can be used to buy paid-up additions or lower the premium.
• In Florida, the surrender value is protected from creditors by law (Statute 222.14), unless the policy was taken out for the benefit of that creditor. In other states the protection is different.

The cons you need to know

These are the ones you need to understand before you sign:

• It costs more: for the same benefit, whole life has a much higher premium than term life insurance.
• It takes years: in the first years the cash value is low, as the Florida guide warns; it grows more the longer you keep the policy. It is not for quick results.
• Dividends are not guaranteed: the NAIC explains that dividends and values can vary and the company does not guarantee them.
• Loans charge interest: if you do not repay them, the insurance company deducts the loan and its interest from your family’s benefit, as the Florida Department of Financial Services guide explains.
• Risk of the policy lapsing: if the loan and its interest grow larger than the cash value, the policy can lapse, and that can trigger taxes, as the Tax Court held in Sanders v. Commissioner (2010).
• The MEC limit: if you put in more money than the 7-pay test allows (section 7702A), the policy becomes a MEC: its loans are taxed first on the gain, plus an additional 10% on that part before age 59½.
• Canceling early is expensive: if you drop it in the first years, you may get back much less than you paid.

Be wary of anyone who promises that “you become the bank” without explaining these downsides. A good explanation always includes the costs, the timelines and the scenario where the policy does not make sense.

Who is infinite banking worth it for?

It usually makes sense if:

• You have a stable income and can pay the premium for 10 years or more without stretching yourself.
• You already have an emergency fund and are not carrying high-interest credit card debt.
• You need life insurance for your whole life and also want a cash value you can use.
• You own a business or make large purchases from time to time (equipment, vehicles, inventory) and want your own source of loans.
• You have the discipline to pay back what you borrow.

When it is not a good fit

It is usually not a good fit if your income changes a lot from month to month, if you need the money in one or two years, if you have expensive debt to pay off first, or if all you need is to protect your family for a set period at the lowest cost. In those cases, term life insurance plus separate savings usually works better.

It does not replace your retirement plan at work either. If your employer matches your 401(k) contributions, that match is extra money your employer adds, as the Department of Labor explains.

What a well-built design looks like

A serious design starts with your real budget, not with the largest possible amount. You choose a mutual insurance company with a dividend history, combine the base premium with paid-up additions without going over the MEC limit, and plan how you will use and repay the loans.

Before you sign, ask to see the illustration with the guaranteed and non-guaranteed values shown separately. The guaranteed values are the ones the contract ensures; the others depend on dividends that can change.

Frequently asked questions