What Is The Infinite Banking Concept (IBC)?

The Infinite Banking Concept (IBC) created by R Nelson Nash is a strategy that involves the intentional growth of the available liquid cash value inside a properly-designed participating whole life insurance policy and borrowing against it to fund major expenditures, emergencies, and outside investment opportunities. The Infinite Banking Concept is a financial strategy  that can only be implemented effectively through the use of a specially designed whole life insurance policy and when executed properly, can allow the policy owner to set up their own personal banking system.

After spending decades advocating liberty, free markets, sound money, and the Austrian school of economics, Nelson Nash discovered and developed IBC as a means to get as close to those ideals as possible and squeezing out the middle man (the banker) at the same time. The goal is to create a self-contained system that provides individuals with control over their money and the ability to leverage it for their financial needs while still earning interest on the policy’s cash value.

What are the characteristics of a typical participating whole life insurance policy?

A typical participating whole life insurance policy is structured where the policy owner pays regular premiums into the policy, which typically remain level throughout the life of the policy in order to provide a death benefit that is paid out to the beneficiaries named on the policy upon the death of the insured.

Since participating whole life insurance policies are structured mathematically using actuarial probability, the insurance company is able to share the present value or “cash value” of that future death benefit now based on the age, health details and other factors that an applicant shares with the insurance company when applying for whole life insurance.

While most understand that the cash value of a whole life insurance policy is the amount that they would receive if they were to cancel their whole life insurance policy and move on, what few recognize is that a policy owner has the ability to borrow against the cash value of their whole life insurance policy through policy loans. This means that the owner of a whole life insurance policy can request up to 90% of the cash value of their whole life insurance policy via a policy loan without any sort of financial qualification, application or credit check.

Of course, there is an interest rate charged to the policy owner, however there are no terms for repayment as the life insurance company knows that the whole life insurance policy is as solid of an asset as any out there. Just think: a typical lender will only fund a mortgage up to 80% of the value of a home after a pretty thorough credit check and approval process, while a life insurance company will allow a loan up up to 90% of the cash value of a policy without the need of an application process, credit check or otherwise. 

A bonus to the typical structure of a participating whole life insurance policy is an annual dividend payment that every policy owner receives to boost the cash value of their policy generated from the profits the insurance company generated over the last year with the premiums from their policy owners. Win-win!

Why Doesn’t My Whole Life Insurance Policy Seem This Awesome?

The fact is: most whole life insurance policies issued today are structured to solve the same problem they were originally designed to solve back in 1847 here in Canada (but likely earlier in other countries): to provide a guaranteed death benefit to the beneficiary named in a whole life policy. 

Unfortunately, structuring a whole life insurance policy to solve this particular problem makes premiums very high and cash value very low – especially in the early goings. Whole life insurance policies structured in this way is likely why many ‘gurus’ in the financial advisory community such as Dave Ramsey and Suze Orman are often cited as “hating” whole life insurance.

The fact of the matter is that few life insurance agents or life insurance brokers are experienced enough to both understand the Infinite Banking Concept (IBC) as well as the necessary characteristics required to construct a whole life insurance policy that emphasizes the cash value of the policy as a means to create both a personal banking system as well as a means to minimize income taxes.

How should one structure the participating whole life insurance policy to implement the Infinite Banking Concept (IBC)?

To implement the Infinite Banking Concept (IBC) effectively, a participating whole life insurance policy must be structured to minimize the base premium of the policy, while overfunding the policy to maximize the cash value in the early years to a point just before the whole life insurance policy would be deemed an “investment” instead of “life insurance”. 

Structuring a policy in this way will actually reduce the death benefit in the earlier years as a trade-off to receive a higher cash value and ultimately put the policy owner in a position to have access to more of their policy premiums paid in the early years than one would receive if they had set up a traditional whole life insurance policy.

While participating whole life insurance policies have been criticized for their lack of flexibility,  the reality is that many participating whole life insurance policies offer a significant amount of flexibility related to premium payments and features that can be helpful to ensure that one can leverage the Infinite Banking Concept (IBC) even if a situation in life changes and plans for continuing the policy must change with them.

What are the tax advantages of an Infinite Banking Concept (IBC) participating whole life insurance policy?

The Infinite Banking Concept (IBC) can provide certain tax advantages, including:

1. Tax-Deferred Growth: The cash value growth within a participating whole life insurance policy is tax-deferred, meaning that policyholders do not owe taxes on the growth as long as it remains within the policy. This can allow the cash value to accumulate and compound over time without immediate tax consequences.
2. Tax-Free Policy Loans: Policy loans taken from the cash value of a participating whole life policy are generally tax-free. These loans are not considered taxable income since they are collateralized by the policy’s cash value, not treated as a distribution or withdrawal.
3. Tax-Free Death Benefit: The death benefit paid out to the beneficiaries upon the insured’s death is typically income tax-free. This can provide a tax-free inheritance to beneficiaries.
4. Tax Efficiency of Dividends: Dividends received from a participating whole life policy may be eligible for favorable tax treatment. These dividends are often considered a return of premium and not subject to income tax.
5. Potential Estate Tax Benefits: The death benefit proceeds of a life insurance policy are generally not included in the insured’s taxable estate. This can be advantageous for estate planning purposes, as it can help mitigate potential estate tax liabilities.

Is it true that well-known wealthy families use whole life insurance to preserve generational wealth?

Several wealthy families have utilized participating whole life insurance as a strategy to create and preserve generational wealth.

Some notable examples include:

The Rockefeller Family

The Rockefeller family is known for its extensive use of whole life insurance policies as a wealth preservation tool. They have employed these policies to protect and grow their wealth across multiple generations.

The Rothschild Family 

The Rothschild family has utilized participating whole life insurance policies to preserve and transfer wealth within their family for centuries. These policies have played a role in their comprehensive wealth management strategy.

The Walton Family

The Walton family, founders of Walmart, has leveraged participating whole life insurance as part of their wealth preservation and estate planning efforts. These policies have been used to facilitate the transfer of wealth to future generations while providing tax advantages.

The Mars Family

The Mars family, known for their confectionery empire, has used participating whole life insurance policies to create and maintain generational wealth. These policies have helped them protect and grow their assets while minimizing tax implications.

It’s important to note that while these families have been associated with participating whole life insurance, the specific details of their strategies and policies may vary. However, what is hard to argue is how whole life insurance can be a component of a comprehensive wealth management plan for affluent families, providing benefits such as tax advantages, asset protection, and estate planning opportunities.

… but I thought all the financial gurus said that participating whole life insurance a waste of money?

While it is not accurate to say that all financial advisors hate whole life insurance, there are many very vocal financial advisors that have been known to be very outspoken when it comes to the suitability of whole life insurance for the average person.

Here are a few reasons why some financial advisors may have reservations or concerns about whole life insurance:

Cost: Whole life insurance policies tend to have higher premiums compared to other types of life insurance, such as term life insurance. Some advisors argue that the high costs associated with whole life insurance make it less attractive, especially for individuals who prioritize affordability or need coverage for a specific period.

Complexity: Whole life insurance policies can be complex, with various components, riders, and fees. Some advisors believe that the complexity makes it challenging for clients to fully understand and evaluate the policy, potentially leading to confusion or misunderstanding.

Limited Flexibility: Whole life insurance policies often have limited flexibility in terms of premium payments, death benefit, and cash value accumulation. Advisors who prefer more flexibility in financial strategies may view this lack of flexibility as a disadvantage.

Opportunity Cost: Critics argue that the cash value growth of whole life insurance policies may not provide attractive returns compared to other investment options available in the market. They contend that individuals could potentially achieve higher returns by investing in alternative vehicles, such as stocks, bonds, or real estate.

Suitability: Financial advisors consider the specific needs and goals of their clients when recommending life insurance. Some advisors may believe that for many individuals, simpler and more affordable options like term life insurance adequately meet their coverage needs without the added complexity and costs associated with whole life insurance.

While some of the challenges or objections shared above may come up in various situations when exploring participating whole life insurance as a tool for improving your financial landscape, a properly structured policy that minimizes the death benefit and maximizes the cash value in the early years will ultimately eliminate the common objections listed above. 

Next steps for those interested in implementing the Infinite Banking Concept (IBC)

While this article is a great start to getting yourself acquianted with the Infinite Banking Concept (IBC) through participating whole life insurance, we suggest that you continue your journey by reading R Nelson Nash’s book, Becoming Your Own Banker and consider reading some of the other related books on our Invested Teacher Booklist.

Of course, we would also love to help you in your journey.

Don’t hesitate to reach out and receive support as you begin this journey!

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