What is Infinite Banking?
Infinite banking is termed as the series of activities or processes through which an individual is able to take up the role of a banker for themselves. This was conceptualized and documented in the book “becoming your own banker” authored by Nelson Nash.
The concept of infinite banking is adapted from the book “Becoming your Banker.” Nelson Nash authored the book. Nash describes the practical application of whole life plan insurance policies that delivers dividends. By taking ownership of such policies, the individuals can dictate their terms and do effective usage of cash flows by leveraging themselves rather than reaching out to the lenders or bankers for the loans.
The infinite banking specifically looks into the surrender value of the whole life insurance. Such surrender value acts as cash collateral for a loan. The policyholder needs to connect with the insurance company, and they can request a loan on the policy. A whole life insurance policy can be termed as the insurance product that provides protection or cover on the life of the individual.
In the event of the possible death of the individual, it provides financial security to its family members. The wholesale policy delivers strong dividends, which are then added to the effective cash value of the insurance policy. As soon as the policy is effective, it contains a cash value on which the individual can take a loan and keep the policy as collateral.
Features of Infinite Banking
- The overall framework depends upon the whole life insurance policy.
- An individual should always pay 10 percent of his regular income towards the maintenance and sustenance of whole life policy.
- The rate of interest offered on loan over the policy is comparatively lower than the conventional loan products.
- The collateral is derived from the cash value or surrender value of the wholesale insurance policy.
How Does it Work?
Usually, the infinite banking performs well when the person entirely relies or bank on themselves. Such concepts work well for individuals who have strong financial cash flows. Such policies should only be taken if the individual is financially well off and can handle premiums of such policies. The policy may ask for monthly, quarterly, or yearly payments.
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It begins when an individual takes up a whole life insurance policy. Such policies may invest in corporate bonds and government securities. Such policies retain their values because of their conservative approach, and such instruments never invest in market instruments.
The individual, therefore, has to make hefty premium payments on the policy to maturity. Such payments may be on an annual or monthly basis. On the advent of the financial crisis, the individual can connect to their insurance policy provider and can request for a loan. Typically, an individual can request a loan on the policy if he has serviced the policy successfully for the period, as stated in the policy.
Example of Infinite Banking
Suppose an individual enrolls for a whole life insurance policy that had a premium paying term of 7 years and a policy period of 20 years. The individual took policy when he is was 34-year-old. Currently, he has serviced seven years of the policy and now age at 41 years.
He paid a premium of $4,999 monthly, and therefore, the individual paid up to $419,916. The individual, if on the advent of any financial crisis, can take a loan of $419,916 or less. Since the policy invests in corporate and government securities, the overall value of the policy may exceed the value of $419,916.
Advantages of Infinite Banking
- Infinite banking as a financial innovation provides an improvement in cash flow or the liquidity profile of the holder of the policy.
- The overall value of the whole life insurance plan is a highly liquid instrument taken up as collateral.
- In the event of financial crises and hardships, such products can be utilized for availing loans, thereby mitigating the problem.
- It offers the lowest cost of finance as compared with the conventional loan product.
- The loan on an insurance policy can also be availed when the person is jobless or is facing health issues.
- The whole life insurance policy retains its overall value, and its performance is not linked with market performance. It can simply put that such products are conservative products.
- The loans availed on such products are tax-free and can be utilized as deferred growth products.
- Infinite banking can be transformed into an estate planning product, and such products can be transferred to dependent individuals as an inheritance.
Disadvantages of infinite Banking
- The individual must be eligible to take the whole life policy.
- The premiums on whole life policy are very hefty, and this leaves a substantial financial burden on the individual, which can then put constrain on its financial resources.
- If the financial hardships continue to linger along for a longer time, then there may be a case that an individual may not be able to service such loans and may even default on them.
- In simpler words, he may not make any adequate payments on the policy.
- If the individual lacks financial planning or has a lack of conviction on how to utilize such loans, then infinite banking is not the right kind of methodology for such individuals.
- Such products only favor those individuals who have a strong financial background.
- They must display good levels of financial discipline.
- Such products do not obey the principle of diversification.
Infinite banking is a concept that allows the holder of the policy to take up loans on the whole life insurance policy. Such loans should only be availed when there is a minute level of the financial burden on the individual and wherein such loans can help them cover the financial burden. The cash or the surrender value of the whole life insurance acts as collateral whenever loans are taken.
This article has been a guide to what is Infinite Banking and its definition. Here we discuss example and how does infinite banking work along with advantages and disadvantages. You may learn more about financing from the following articles –