Infinite Banking Concept in Life Insurance Explained

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Picture of By <span>Matthew Roberts</span>
By Matthew Roberts

Updated on October 29, 2024

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Picture of By <span>Matthew Roberts</span>
By Matthew Roberts

Updated October 29, 2024

Visit author page

3 minute read

Article Contents

While a life insurance policy provides unmatched peace of mind, it can become a financial burden for individuals who can’t afford the premiums. However, you can borrow from it instead of cancelling your policy altogether. 

Infinite banking in life insurance has become popular with Canadian retirees and seniors, but it isn’t for everyone. Learn more about the infinite banking concept and whether it’s the right option.

Infinite Banking At a Glance

  • Infinite banking is like a reverse mortgage—you can borrow against an appreciating asset and repay the loan at your convenience.
  • Infinite banking is most appropriate for individuals who’ve already taken advantage of traditional strategies. It requires a high level of investment knowledge and may require assistance from a tax or investment professional.
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How Infinite Banking in Life Insurance Works

As its title suggests, infinite banking allows policyholders to treat their life insurance like a “bank” and act as their own banker. American economist R. Nelson Nash developed the concept in the 1980s and published the IBC in the US in 2000. 

With infinite banking, individuals can build value in a whole life insurance policy and borrow this amount through a private contract with the insurance company. Individuals repay the loan to the policy.

The Pros and Cons of Infinite Banking

While similar to a personal loan, infinite banking has its advantages:

Easier to qualify:

If you already have a life insurance policy, borrowing money from its cash value will be easier than applying for a loan. It also offers more flexible repayment options, which can be more accommodating for unexpected expenses. 

Tax benefits:

Because life insurance policies are tax-free, so is the interest growth. In addition, death benefits are tax-free and often exempt from estate taxes. 

Protected assets:

Because the borrower (the policyholder) will enter a private contract with their insurance company, they can be protected against creditors, judgments, searches, and seizures. In addition, borrowing against your insurance policy won’t impact your credit score. 

Easier to pay back:

Borrowing against your insurance policy won’t subject you to credit checks or additional requirements, and you can pay back the amount at your convenience.

Infinite banking is an excellent financial strategy for wealth-building, but it may only be appropriate for some people. Here are some of the disadvantages of consider:

Difficulty choosing and applying for the right policy:

Not all whole life insurance policies accrue the same cash value. For the loan to be worth it, you must obtain the appropriate plan with premiums you can manage. 

Challenges maintaining the plan:

Compared to term life insurance, whole life insurance is more expensive, as it comes with higher premiums. If you fail to settle these premiums, the policy can lapse and become void.

Potential for misinformation:

Infinite banking can confuse first-time policyholders, leaving little room for misunderstanding. If you’re new to the concept, it’s best to consult a qualified tax or legal advisor.

Complications from excessive contributions:

Contributing more to the cash value aspect of your insurance policy than necessary can turn your plan into a Modified Endowment Contract (MEC), which may void your tax benefits.

The Pros and Cons of Infinite Banking

What is the Best Whole Life Insurance Policy for Infinite Banking?

Determining the “best” whole life insurance policy for infinite banking is challenging, as your choice will depend on your financial circumstances, goals, and risk tolerance. Ultimately, you should base your decision on the following factors: 

  • Strong cash value growth potential
  • Low expenses and administrative fees
  • Flexibility with premium payments and loan options
  • Favorable tax treatment 
  • Reputable insurance company

Tips for Managing an Infinite Banking Plan

The complexity of infinite banking requires careful management to provide worthwhile returns. Here are some tips for managing your infinite banking plan:

Understand the basics:

Research is vital in managing an infinite banking plan. Factors like your insurance company and where you live can influence how infinite banking works in your policy, so it’s essential to understand its nuances and implications. 

Analyze your current finances:

Infinite banking is a long-term investment requiring precise and thorough financial management. It only works with whole life insurance, which demands higher premiums than its term life counterpart.

Work with a qualified insurance professional:

With infinite banking, it can be easy to make mistakes. A financial advisor can help you understand the complexities of infinite banking and develop a personalized strategy.

Alternatives to Infinite Banking

While infinite banking provides unique and tax-free benefits, it isn’t the only approach to financial planning. Here are alternative routes to consider:

You can enjoy tax-deferred growth with a Canadian RRSP or IRA. Roth IRA withdrawals are tax-free during retirement.

Brokerage accounts and index funds can provide higher returns by investing in assets like stocks, bonds, or mutual funds.

If you’re looking for higher returns, you can earn more from rental properties or provide exposure to real estate without direct ownership through a Real Estate Investment Trust (REIT).

Fixed annuities provide guaranteed interest rates and can generate passive income in your retirement.

Key Advice From MyChoice

  • Before you try infinite banking, ask yourself the following questions: when do you need the funds? How easily can you access your funds? How much can you comfortably borrow, and when will you repay the funds? 
  • If considering alternatives to infinite banking, think about your financial goals and risk tolerance. Also, consider the costs associated with each option. 
  • You should understand the differences between infinite banking in Canada and the US. In the US, you can borrow money without paying taxes, whereas in Canada, you may have to pay taxes if you borrow more from the policy than you paid. 

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