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Quite simply, the strategy requires that you take out a whole life insurance policy on yourself if you can qualify medically for it. If not, you can purchase a policy on someone close to you to be your own bank with.
Warning: Insurance companies hate STOLI (stranger-owned-life-insurance) and so does the IRS.
However, here are the types of relationships insurance companies will sometimes issue a whole life policy on for you to own and control as your own bank:
- Business partner
- Key employee
- People you have loaned significant amounts of money to
Note: With proper documentation, other scenarios may be possible to become your own banker using other people as the insured for your infinite banking life insurance.
Once you have identified who to buy insurance on, what’s the next step?
Step 2 – Whole Life Policy Design Necessities and Add-ons to Become Your Own Banker
Now you shouldn’t get any type of life insurance policy as your private family bank.
Nelson Nash’s book “The Infinite Banking Concept – Becoming Your Own Banker” and Pamela Yellen’s “Bank on Yourself” books insist that it must be a Participating Whole Life Insurance Policy from a mutual insurance company.
Although we are also big fans of using certain Whole Life insurance policies for the infinite banking concept, we also recognize that certain Indexed Universal Life insurance (IUL policies) may also work if structured properly. However, since there is additional risk associated with these types of policies, we recommend that you fully understand all the pros and cons of Indexed Universal Life before using IUL to be your own bank.
Getting back to using the time-tested & true Whole Life insurance to become your own banker, we fully agree that it’s of utmost importance to get your policy from a Mutual Life Insurance Company (as opposed to a stock insurance company). This is critical since mutual companies are owned by policyholders and share their profits with Whole Life policyholders in the form of dividends. It’s what makes Whole Life insurance cash value a true non-correlated asset with solid steady growth rates, unlike “high-yield” savings accounts or CDs.
In order to maximize cash value growth and early access to the equity inside your own bank, you also will need to make sure your Whole Life policy includes these 2 key riders:
- Paid-Up Additions (PUA) Rider: this is how to turbo-charge your “banking engine.” (more on this below)
- Term Insurance Rider: this would be like the titanium frame that holds the turbo-charged engine in place.
FAQ: “But wait, a term insurance rider? I thought you needed Whole Life for IBC banking?”
Answer: When becoming your own banker, you do need Whole Life. However, blending it with this additional term rider can substantially bring down the overall cost of the total death benefit needed to support overfunding. It also increases the amount of Paid-Up Additions you can buy in the early years, which is like the turbocharger that will greatly accelerate ongoing growth inside the whole life policy as your own bank.
Watch our “Whole Life’s Growth Components & Riders” video to fully understand the proper construction of an infinite banking life insurance policy.
Now that you know who to buy insurance on, where to buy it from, and which features you want add, what’s the next step to be your own bank?
Step 3 – Properly Funding Your Policy So You Can Become Your Own Banker
Now I realize that it seems completely counterintuitive to pay any more than you absolutely need to pay when it comes to insurance. So, prepare to have your paradigm shifted and your mind blown!
The way to outrun the internal costs of a Whole Life policy is to pay additional premium over and above the amount required for the basic coverage. In fact, you will want to pay substantially more when becoming your own banker… as much premium as the IRS will let you.
[Hint: When the IRS regulates anything, doesn’t that usually mean that they’re trying to limit something good going on there?]
Here are the 4 reasons you want to pay the maximum amount of Whole Life insurance premium to be your own bank:
- The commission paid to the agent for the additional overfunding payments is peanuts
- 90-95% of this additional premium goes straight to your cash surrender value (in other words these overfunding payments become immediately accessible inside your private family bank)
- The other 5%-10% of this extra payment which doesn’t go toward building immediate equity goes to buying a little slice of extra permanent death benefit (called a Paid-Up Addition or PUA). What’s nice is that no further premiums will be due on a PUAs since it is contractually paid-up with this one-time payment, hence the term Paid-Up Addition. PUAs immediately increase your Whole Life policy’s guaranteed cash value as well as entitle you to a bigger cut of future dividend pools from your mutual insurance company.
- These Paid-Up Additions get stacked onto your cash value which contractually starts growing at a favorable guaranteed rate of return (even if no dividends were ever paid again).
Now that you’ve got your banking engine in place, you’ve filled it with fuel, and the engine is humming, now what…?
Step 4 – Use Cash Value to Be Your Own Bank and Fund Expenditures and Fuel Outside Investments
Using our car analogy, it’s time to take your infinite banking life insurance policy for a ride. Most people don’t want to accumulate wealth simply just to have an impressive set of ink dots on an annual statement. You want to become your own banker to buy things, to build wealth, to invest for your retirement and legacy.
Now you can utilize the equity inside your own bank to do these things at any time for any reason using one of these 4 methods:
- Withdraw your cash surrender value or…
- Borrow against your cash surrender value using the guaranteed policy loan feature for maximum flexibility
- Increase your total borrowing capacity by using outside financing without even having to pledge your policy (i.e.: 1.9% Auto Loan)
- Pledge the policy as collateral to a Cash Value Line of Credit (CVLOC) program when you can often get a better rate than a policy loan (or for convenience when you own multiple policies).
Now I know that most of you just cringe and see RED when you hear the words BORROW and LOAN.
That said, even though you are technically borrowing funds when becoming your own banker, your entire cash value balance continues growing within your Whole Life insurance policy, including the amount you borrowed.
You see, some people mistakenly think they are “borrowing out” the cash value from the policy and “paying themselves back with interest.” That’s not true at all and is often used as a deceptive sales pitch.
Your cash value never actually leaves your Whole Life policy even when you take a loan and “borrow against” it. You see, the mutual insurance company is happy to give you a loan out of their general account because they’re always holding your cash value as collateral and it’s guaranteed to grow every year no matter what!
That’s why it seems like you pay yourself back the interest.
Again, this is important:
None of your cash value ever leaves your Whole Life policy when you borrow! Your entire cash value balance continues to grow inside your banking life insurance policy INCLUDING the amount you borrowed.
Question: “What if I don’t ever want to pay back the darn loan?”
Answer: “You don’t have to, but you may want to. And you have the ultimate flexibility in how you do that.”
Step 5 – Pay Down the Loan ON YOUR TERMS with your Own Private Family Bank
Thankfully, a Whole Life policy loan is a private loan between you and the insurance company, so it doesn’t show up on any credit report. Also, since the mutual company is holding your growing cash value as collateral, there’s no stringent payment structure in place with your own bank. Here are your options for repayment:
- Pay principal and interest on whatever schedule you want
- Make interest-only payments
- Pay nothing until you can make a balloon payment for the entire balance
- Pay nothing (hoping the cash value growth keeps pace with the loan interest that’s rolling up into the loan balance) then eventually have the Whole Life death benefit pay off the loan when the insured passes.
Needless to say, there’s no other institution (or even a mafia loan shark) that offers this kind of flexibility to be your own bank with. Obviously, you should schedule some sort of regular loan maintenance, but it’s certainly not required by the insurance company.
In fact, I have contractor clients who bid jobs and have to come out of pocket for materials and labor costs. They float a Whole Life policy loan for close to a year and then pay it off in one fell swoop when they get paid for the entire job. We encourage them to pay whatever minimum interest maintenance is needed to maintain simple interest on a flat loan balance while earning compound interest on an increasing cash value balance. However, when a banking life insurance policy is performing well as your own bank, the minimum required loan payment may be nothing at all.
A lot of people hear how about paying interest on the loan and think, “Ah see, I knew there was a catch! I knew it was too good to be true.”
But think about it – even if you just kept your cash in a bank account and made a withdrawal for every single purchase, don’t you start making deposits shortly thereafter to true up the account for the next purchase?
So if you apply the exact same “save-spend-replenish” routine but instead funnel the exact same cash flows through a properly designed Whole Life insurance policy as your own private family bank, you will often see that the difference in net wealth is staggering when practicing what they call the infinite banking concept.
Here are the 3 reasons why becoming your own banker using life insurance works:
- Your cash value usually earns a much better growth rate than any bank account, CD, or even safe bonds (with minimal fluctuating values)
- The growth, as well as any lifetime distributions, are immune from income tax as long as some small amount of whole life insurance death benefit stays in place until the insured passes away.
- When you borrow rather than make a withdrawal, your full cash value continues growing inside the policy despite any loans you have against the policy with the insurance company.
That’s it! And that third factor is huge. Believe it or not, the combination of these 3 factors can contribute to vastly more wealth for the policyholder if this banking strategy is employed properly.
What I mean by that is that you should pay your loans back as soon as you can so you can continue to practice the banking concept throughout your Whole Li