What is Infinite Banking?
Infinite banking is the process by which an individual becomes his or her own banker. Infinite banking is a concept created by American Nelson Nash. In his book, “Becoming Your Own Banker,” Nash talks about the use of whole-life insurance policies that distribute dividends and how owning such policies allows individuals to dictate the cash flow in their lives by borrowing against/from themselves instead of depending on banks or lenders for loans.
Digging Deeper into the Infinite Banking Concept
In Nash’s infinite banking concept (IBC), the cash surrender value(s) of whole-life insurance policies act as collateral for a loan. The individual simply needs to call the insurance company and ask to take out a policy loan.
A whole-life insurance policy is meant to cover the entirety of an individual’s life, not simply to assist family/friends in the event of the individual’s death. As such, the policy is understandably eligible to pay out dividends, meaning it generates a form of income that increases the cash value of the policy.
As soon as the policy is active, it possesses value and can be borrowed against so that the individual can take money out of the policy (using the policy as collateral) to use for unexpected or otherwise significant expenses that occur during the individual’s life.
Advantages of Infinite Banking
The most outstanding positive of the infinite banking concept or process is the sheer improvement in liquidity or cash flow. The value of a whole-life insurance policy acting as collateral is far more liquid than, for example, equity in real estate, because the loan can be taken out more quickly and the individual can secure cash in hand faster and usually at lower interest rates than those available from traditional lenders.
The improvement to an individual’s cash flow can be significant, especially in times of financial hardship or unforeseen expenses, such as medical bills or the need to buy a new car. An insurance policy loan can also come in handy if an individual happens to be without work for a time, whether due to health issues, a death in the family, or simply the loss of a job altogether. Because whole-life insurance policies are non-correlated assets – meaning they’re not tied to the whims of the stock market – they are set to retain their worth.
Disadvantages of Infinite Banking
Infinite banking is not without its drawbacks, however. An individual must qualify for a whole-life insurance policy. And even if an individual qualifies, the financial burden that often comes with paying for whole-life insurance can be weighty.
It’s common and recommended practice for an individual to put at least 10% of their regular income into their whole life policy. For certain families, that large a financial commitment simply isn’t an option. If the policyholder should come into hard times and take out a loan against their policy, they run the risk of being unable to make adequate payments on it later on down the road.
In the end, the infinite banking concept and practice are not for individuals without financial conviction and the ability to think clearly and see the process through into the future. The concept requires an individual who is financially sound and is willing and able to make a long-term financial play. It’s important to consider all of the aforementioned things before becoming your own banker.
Thank you for reading CFI’s explanation of the infinite banking concept. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: