Whole Life Insurance: Your Personal Bank, Your Rules

Whole life insurance is a financial strategy that allows you to take control of your finances by borrowing against the cash value of your policy, creating your own personal banking system. This approach, known as the infinite banking concept, gives you flexibility and control. Your cash value continues to grow even as you borrow, allowing you to build wealth while funding major expenses without the high interest and restrictions of traditional loans.

Choose a whole life insurance policy designed for infinite banking

Infinite banking is a strategy that involves using a whole life insurance policy as a personal bank. It is important to choose the right whole life insurance policy to ensure that it is designed for infinite banking. Here are some key considerations when selecting a policy:

• Mutual Insurance Company: Look for a mutual insurance company that offers dividends and has a strong reputation for paying dividends on whole life insurance policies. Mutual companies are owned by policyholders and share their profits with them in the form of dividends. This is crucial for the non-correlated, steady growth of your cash value.
• High Ratings: Choose a company with very high ratings from all the national rating agencies. This indicates strong financial stability and performance.
• Non-Direct Recognition Policy: Opt for a non-direct recognition policy so that your dividends will not be impacted by any outstanding loans against the policy.
• Paid-Up Additions: Select a policy that allows you to receive dividends as paid-up additions. This creates additional "mini-policies" that earn interest and dividends, accelerating the growth of your cash value.
• 10-Pay Periodic Premium: Consider a policy with a 10-pay periodic premium option to quickly grow your cash value account and enable early borrowing.
• "Cash Value" Rider: Choose a policy that offers a "cash value" rider, which ensures that your designated beneficiaries receive the death benefit plus the cash value of your policy.

When selecting an insurance company for infinite banking, some of the top choices include Mutual Trust, MassMutual, National Life, Ameritas, and Penn Mutual. These companies stand out for their strong dividend performance, financial stability, and policy flexibility.

Build up the policy's cash value

The cash value of a whole life insurance policy is a savings component that the policyholder can use for various purposes, such as borrowing or withdrawing cash. It is an investment savings account within the policy that grows over time through interest accruals and dividends.

To build up the cash value of your policy, you need to fund it by paying premiums. Whole life insurance premiums remain level for the duration of the policy, so you need to ensure you have a steady income to cover these payments. When you make premium payments, a portion of the payment is allocated to the policy's death benefit, another portion covers the insurance company's operating costs and profits, and the rest contributes to the policy's cash value.

In the early years of the policy, a higher percentage of your premium payments goes towards the cash value. This percentage decreases over time as the cost of insuring your life increases with age. Therefore, to maximise the cash value of your policy, you should aim to pay premiums when you are younger and healthier, as you will be paying lower premiums.

You can further increase the cash value of your policy by adding riders. A Paid-Up Additions Rider, for example, allows you to purchase more death benefits and increase the policy's cash value growth. Another rider to consider is the Term Insurance Rider, which blends term life insurance with permanent life insurance. This can substantially bring down the overall cost of the total death benefit needed to support overfunding.

It is important to note that cash value accumulation is not uniform across different types of policies. Whole life policies provide guaranteed fixed cash value accounts, while universal life policies accumulate cash value based on current interest rates and investments. Variable life policies, which are more risky, invest funds in subaccounts that operate like mutual funds.

Before implementing this strategy, it is crucial to understand the financial commitment involved and ensure you have clearly defined financial goals. Building up the cash value of your policy takes time and discipline, but it can provide you with financial flexibility and security in the long run.

Borrow against the policy

Borrowing against your whole life insurance policy is a key part of the 'be your own bank' concept. This is because, when you borrow from your insurance company, your cash value remains in your policy and continues to grow. This is in contrast to a withdrawal, where you would be depleting your cash value.

When you borrow from your insurance company, you are using your cash value as collateral. The insurance company is happy to lend to you because your cash value is guaranteed to grow every year, so they are confident they will get their money back. This means that you can borrow at a very low interest rate, and the interest you pay goes back into your policy, further increasing your wealth.

You can borrow from your whole life insurance policy to finance large purchases, such as a car or education, or to invest in real estate or your business. By using your policy in this way, you can avoid taking out loans from traditional banks, which often charge much higher interest rates.

It is important to note that, while you are not required to pay back your policy loan, it is in your best interest to do so in order to maximise your wealth. You have flexibility in how you repay the loan, with options to pay principal and interest, interest-only, or nothing at all until you can make a balloon payment. You can even choose to have the death benefit pay off the loan when you pass away.

By borrowing against your whole life insurance policy, you can access the cash value of your policy while still benefiting from the compound interest that grows your wealth over time. This is a powerful tool for building financial security and independence.

Repay the loan at your own pace

One of the most appealing aspects of using a whole life insurance policy as your own bank is the flexibility it offers when it comes to loan repayment. Unlike traditional loans from banks or other financial institutions, a whole life insurance loan does not come with a strict repayment schedule. This means that you can repay the loan on your own terms and at your own pace.

However, it is important to remember that while the insurance company may not impose a specific repayment schedule, interest will continue to accrue on the loan balance. Therefore, the longer you take to repay the loan, the more interest you will ultimately pay. Additionally, if you fail to make regular payments, your policy may lapse, especially if the amount you owe exceeds the policy's cash value.

To avoid these potential pitfalls, it is generally recommended to set up a personal repayment schedule and make timely loan repayments. Even if you can only afford to make interest payments initially, this will help to keep the loan balance from growing out of control. Ultimately, the flexibility to repay the loan at your own pace is a significant advantage of using a whole life insurance policy as your own bank, but it is important to exercise discipline and not neglect your repayment obligations.

Reap the long-term benefits

The long-term benefits of using whole life insurance as your own bank are significant, providing both short-term flexibility and long-term wealth-building potential. Here are some of the key advantages you can expect:

Financial Control and Flexibility

You are in complete control of your finances when you become your own banker. You decide when to borrow, how much to borrow, and how quickly to repay, without seeking approval from a bank or undergoing credit checks. This flexibility allows you to manage your money according to your own terms and goals.

Build Wealth Over Time

When you borrow against the cash value of your whole life insurance policy, the interest you pay goes back into your policy, allowing your money to work for you in two ways. You can cover expenses while simultaneously continuing to grow the cash value. Over time, this creates a compounding effect, significantly accelerating your wealth accumulation.

Tax Advantages

The cash value in a whole life insurance policy grows tax-deferred, and you can access it without triggering taxes. This makes the "be your own banker" strategy a tax-efficient way to access funds for large expenses, investments, or emergencies. Additionally, the death benefit of the policy ensures that your beneficiaries receive a lump sum, creating a lasting financial legacy.

Liquidity and Accessibility

With traditional banks, accessing large sums of money often involves paperwork, delays, and fees. In contrast, the "be your own banker" strategy provides easy access to the cash value in your policy whenever you need it, offering liquidity without the hassle.

Protection and Security

Whole life insurance policies are backed by insurance companies and offer a guaranteed return on the cash value, shielding your money from market volatility and providing financial security, even during uncertain times. Many policies also include dividend payments, further enhancing your returns and protecting your financial future.

By following the steps to become your own banker using whole life insurance, you can gain financial independence and maximize the advantages of this strategy. You will be able to build a robust self-financing method, cover large expenses without relying on traditional lenders, and create a long-term approach to wealth accumulation.

Frequently asked questions