Infinite Banking is a powerful financial strategy that enables individuals to leverage a specially designed whole or Index Universal life insurance policy as a tool for personal banking. By becoming their own bank, individuals can gain greater control over their finances, optimize wealth accumulation, manage cash flow more effectively, and potentially transfer their wealth tax-free.
To understand the concept, let's consider how traditional banks operate. Banks accept deposits from customers in exchange for a relatively low interest rate, for example, 1% (saving account rate). They then lend out that money to borrowers at a higher interest rate, let's say 7%. This allows banks to profit from the positive arbitrage of 6% on the deposited money.
With Infinite Banking, individuals become their own bank and capture the positive arbitrage that banks would typically make on their money.
How does it work? Inside a properly structured permanent policy, you build cash value, which serves as collateral for borrowing. The cash value remains in the account, earning interest, as the borrowed funds come from the insurance company. It continues to grow inside the policy, earning interest, even while you borrow at a lower interest rate. This arrangement enables you to capitalize on positive arbitrage and become your own bank, acting as the depositor, the bank, and the recipient of the loan. Consequently, your money keeps working for you, earning interest, while you leverage the borrowed funds for personal or business purposes.
In essence, Infinite Banking allows individuals to effectively use their money twice – once by allowing the cash value to grow and earn interest while simultaneously borrowing against the policy's cash value and using the money elsewhere. This strategy provides individuals with enhanced financial flexibility, potential tax advantages, and the opportunity to optimize the growth and utilization of their assets.