Life Insurance As A Checking Account: Is It Possible?

Life insurance is an asset that can be used for long-term financial planning. While it is commonly used to provide financial support to loved ones after the policyholder's death, it can also be used as a financial asset during the policyholder's life. This is known as infinite banking or being your own banker, where the policyholder treats their life insurance as a personal bank account. This strategy involves taking out a whole life insurance policy, which accumulates cash value over time, and then borrowing against this cash value to fund purchases or investments. Proponents of this strategy argue that it offers a way to sidestep traditional banks and create wealth, but it is important to note that it is more complicated than it may seem and may not be suitable for everyone.

Pros and cons of using life insurance as a checking account

Using life insurance as a checking account, or "infinite banking", is a strategy that involves treating a life insurance policy as a personal bank. This strategy is promoted as a way to sidestep traditional banks and lenders and create wealth. However, it is more complicated than it may seem and has both pros and cons.

Pros of Using Life Insurance as a Checking Account:

• Tax advantages: The cash value within a permanent life insurance policy generally grows tax-free, and loans against that cash value aren't taxed. Life insurance payouts are also typically tax-free.
• Guaranteed returns: Whole life insurance offers fixed returns that are not tied to the market. The cash value growth is set by the insurer, and policies from mutual life insurers may also pay dividends.
• Easier access to loans: With infinite banking, there are no applications, credit checks, or set repayment dates. Policyholders can borrow against their cash value without meeting credit score requirements since they are borrowing their own money.
• Flexible repayments: There is no specific date by which a cash value loan must be repaid, and policyholders may even choose not to repay it at all. This flexibility can be appealing, although interest on the loan is not tax-deductible.

Cons of Using Life Insurance as a Checking Account:

• High cost: Whole life insurance is expensive due to the cash value component and the fact that it typically offers lifelong coverage. The cost can be upwards of $125 to more than $200 a month, depending on age, health profile, and the amount of the death benefit.
• Time to build cash value: It can take a long time, often 10 years or more, for the cash value to build up enough to take out a loan. Infinite banking is not a quick way to create wealth, and overfunding a policy can be costly.
• Complex and risky: Using life insurance as an investment and source of liquidity is nuanced and requires discipline. Policyholders must carefully monitor their cash value to ensure they maintain their life insurance coverage.

How to use life insurance as a financial asset

Life insurance can be used as a financial asset during your lifetime, much like an IRA or mutual fund. Permanent life insurance policies, such as whole life and universal life insurance, allow the owner to build cash value over time and provide access to this cash value. Here are some ways to use life insurance as a financial asset:

Take out a Whole Life Policy

The first step in using life insurance as a financial asset is to take out a whole life insurance policy. This type of policy is designed to accumulate cash value over time, which can be accessed for various purposes.

Add Necessary Riders

To maximize the benefits of your whole life policy, consider adding riders such as the Paid-Up Additions Rider, which allows you to purchase more death benefit and increase the policy's cash value growth. Another rider to consider is the Term Life Rider, which offers additional term life insurance coverage that can be converted to permanent coverage in the future.

Fund Your Policy

Once you have your policy in place, it's time to fund it. You will want to over-fund your policy to maximize the cash value accumulation and growth. Just be careful not to put too much money into the policy, as it may be considered a tax haven by the IRS.

Finance Your Purchases

One of the key benefits of using life insurance as a financial asset is the ability to borrow against the cash value of your policy. You can use this money to finance purchases such as real estate, large-ticket items, or even loan money to your business. By borrowing from your policy, you can recapture the interest that you would have paid to a traditional bank.

Recapture Your Money

It is important to repay the loans you take out against your policy. This step is crucial in growing your financial asset and maintaining discipline in your financial strategy. By repaying your loans, you can continue to build your banking policy and store up cash that can be utilized for tax-free income via loans.

Repeat the Process

Once you have repaid your loans, you can repeat the process and continue to build your financial asset. Each time you go through the steps, you will have more capital to work with, creating a positive cycle of wealth accumulation.

Plan Your Estate

Finally, it is important to plan your estate to ensure that your family receives the full extent of your disciplined work. Proper estate planning will help you pass on your legacy and ensure that your cash value continues to grow, even after your death.

Life insurance as a source of liquidity

Life insurance can be used as a source of liquidity, but it is not the same as a checking account. Life insurance policies that accrue cash value, such as whole life and universal life insurance, can be tapped into for loans or withdrawals while the policyholder is still alive. This strategy, known as "infinite banking", involves treating a life insurance policy as a personal bank and borrowing against the cash value of the policy instead of taking out loans from traditional lenders.

Here's how it works:

Step 1: Choose the Right Type of Life Insurance Policy

To use life insurance as a source of liquidity, you need to choose a permanent life insurance policy that accrues cash value, such as whole life or universal life insurance. Whole life insurance offers a fixed monthly premium, a fixed rate of growth for your cash value, and a guaranteed death benefit amount. Universal life insurance offers more flexibility in terms of premiums and death benefits but has less guaranteed cash value accumulation.

Step 2: Design Your Policy for Maximum Cash Value

To maximize the cash value of your policy, consider adding riders such as the Paid-Up Additions Rider, which allows you to purchase more death benefit and increase the policy's cash value growth, or the Additional Life Insurance Rider, which allows you to make increased premium payments to increase the policy's death benefit and cash value.

Step 3: Fund Your Policy

Once you have the right policy in place, you need to fund it by paying additional premiums over and above the amount required for basic coverage. This will help you build up the cash value of your policy faster and maximize your early access to the equity inside your policy.

Step 4: Use Your Policy as Collateral

With a properly funded policy, you can use the cash value as collateral to secure loans from the insurance company or other lenders. This way, you can access liquidity for large purchases or investments while still keeping your cash value balance growing inside your policy.

Step 5: Repay Your Loans

One of the key advantages of using life insurance as a source of liquidity is the flexibility it offers in repaying loans. You can choose to pay principal and interest on your own schedule, make interest-only payments, pay nothing until you can make a balloon payment, or even let the death benefit pay off the loan when the insured passes away.

Step 6: Repeat the Process

As you repay your loans, you can continue to build up your cash value and repeat the process of borrowing against your policy to create a cycle of wealth generation.

Step 7: Plan Your Estate

Finally, with a sizeable estate built up over time, proper estate planning is critical to ensure that your family receives the full extent of your disciplined work.

It is important to note that using life insurance as a source of liquidity has its pros and cons. On the positive side, it offers tax advantages, a guaranteed rate of return, and the ability to access liquidity without qualifying for a traditional loan. However, whole life insurance policies can be expensive, and it may take a long time to build up significant cash value. There is also a risk of policy lapse if you borrow too much or fail to maintain the minimum cash value level.

Whole life insurance as a personal bank

Whole life insurance is a type of permanent life insurance that offers a death benefit and allows the policyholder to accumulate cash value. This cash value can be used as a personal bank, providing access to funds that can be used for various financial needs. Here are four to six paragraphs explaining the concept of using whole life insurance as a personal bank:

Whole life insurance policies combine a death benefit with a cash value account, which grows over time. This cash value can be accessed by the policyholder during their lifetime, providing a source of funding for various expenses. This concept, known as "infinite banking," involves "overfunding" the policy and treating it as a line of credit. Policyholders borrow against the cash value instead of taking out traditional loans.

The idea of infinite banking was introduced by insurance agent Nelson Nash in the 1980s and further explained in his book, "Becoming Your Own Banker: Unlock the Infinite Banking Concept." It encourages individuals to contribute extra money to their whole life insurance policies to boost the cash value and then borrow against it when needed. This strategy aims to reduce reliance on traditional lenders and lower the overall interest paid on loans.

To implement infinite banking, individuals should consider the following steps:

• Start a Whole Life Policy: Take out a whole life insurance policy, ensuring you meet the medical requirements. It is important to choose a policy that allows for overfunding and has the necessary riders, such as a Paid-Up Additions (PUA) Rider and a Term Insurance Rider.
• Policy Design and Add-ons: Opt for a Participating Whole Life Insurance Policy from a mutual insurance company. This type of policy provides dividends and stable growth rates. Additionally, include the necessary riders mentioned in the previous step to maximize cash value growth and early access to funds.
• Proper Funding: Pay more than the required premiums to accelerate cash value growth. By overfunding the policy, you can take advantage of the tax benefits and quickly build a substantial amount that can be borrowed against.
• Utilize Cash Value: Withdraw or borrow against the cash value to fund expenditures or invest in other opportunities. The flexibility of a whole life insurance policy allows for various loan options, including policy loans, outside financing, or a Cash Value Line of Credit (CVLOC).
• Loan Repayment: Repay the loan on your own terms. Whole life policy loans are private and do not appear on credit reports. You have the flexibility to pay principal and interest, make interest-only payments, or defer payments until a later date or the death of the insured.

It is important to note that using whole life insurance as a personal bank has its pros and cons. On the positive side, it offers tax benefits, guaranteed returns, easier access to loans, and flexible repayment options. However, whole life insurance is more expensive than term life insurance, and building cash value takes time. Overfunding a policy can be costly, and the concept of infinite banking is complex, requiring careful monitoring to maintain coverage. Therefore, it is essential to consult a fee-based life insurance advisor to determine if this strategy aligns with your financial goals and budget.

Using life insurance as your own bank

Step 1: Choose the Right Type of Life Insurance Policy

The best type of life insurance policy for infinite banking is a high-cash-value whole life policy from a mutual insurance company. This type of policy is designed to maximize cash value and minimize the initial death benefit, allowing more of your premium to go into the policy. Paid-up additions riders and term insurance riders can also help to supercharge cash value growth.

Step 2: Fund Your Policy

To make the most of your policy, you will need to over-fund it by paying more than the required premiums. This will help to maximize cash value growth and give you early access to the equity in your policy. Just be careful not to put too much money into the policy, as this may trigger tax consequences or cause the policy to be classified as a modified endowment contract (MEC).

Step 3: Use Your Policy as Collateral

Once you have built up enough cash value in your policy, you can use it as collateral to secure a loan from the insurance company. This way, you can borrow money at a favourable interest rate while your cash value continues to grow inside the policy.

Step 4: Finance Your Purchases

With the money you borrow, you can finance large purchases, such as a vehicle or education, or invest in cash flow assets, such as real estate. By using your policy as collateral, you can often get a better interest rate than you would with a traditional loan, and you can recapture the interest you pay by returning it to your policy.

Step 5: Recapture Your Money

One of the most important steps in infinite banking is to repay your loan, including interest, to your policy. This step is crucial because it allows you to continue building your cash value and taking advantage of the benefits of infinite banking.

Step 6: Repeat the Process

Once you have repaid your loan, you can repeat the process and continue to build your wealth. Each time you go through the steps, you will have more capital to work with, allowing you to create even more wealth.

Step 7: Plan Your Estate

Finally, don't forget to plan your estate to ensure that your family receives the full benefit of your disciplined work. With proper estate planning, you can leave a lasting legacy for your loved ones.

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