Financial advice is trending, with the TikTok hashtag #fintok accumulating 1.5 billion views alone. Chances are a video promoting “infinite banking” might have caught your eye, hailing it as “the secret of the rich” and promising the ability to use a whole life insurance policy to “become your own bank.” So is it a scam? Let’s just say it’s a lot more complicated than what some influencers have been portraying.
Here’s what infinite banking is, how life insurance plays into it, and information to help you make an educated financial decision.
Infinite banking and whole life insurance
To understand infinite banking, you first need to understand how whole life insurance works. So bear with us — we’ll get there, promise!
What is whole life insurance?
Whole life insurance is part of a family of life insurance products called “permanent” or “cash value” life insurance. With a whole life insurance policy, you pay premiums (usually monthly amounts) to the insurance company. In return, you get two benefits: a death benefit and a cash value.
The death benefit
The death benefit is the money your beneficiaries should get if you die. It’s “permanent” in that this benefit stays active as long as your policy stays active, which can be, as the name indicates, your whole life. Permanent life insurance is opposed to term life insurance, which lasts for a pre-defined period of time—for example, 10 or 30 years—and is meant to protect your family when they need you the most, at a much more affordable price.
The cash value benefit
Unlike term life insurance, whole life insurance also has a cash value benefit. The premiums you pay minus charges and fees go towards your “cash value,” which grows at a tax-free guaranteed minimum rate and may include non-guaranteed dividends as well.
It’s important to note that when you die, your beneficiaries will not receive any money from the cash value, only the death benefit. The insurance company will most likely retain anything that remains of your policy’s cash value.
A whole life insurance scenario
Let’s look at a typical whole life scenario: Nora is a healthy 35-year-old and gets a whole life insurance policy with the goal of protecting her family and building savings for her retirement. She pays $775 every month until she is 65 for a $500,000 death benefit* for her family (in contrast, the same death benefit for a 20-year term life policy would cost her less than $30 a month**).
Now let’s look at the separate cash value component. Due to charges and fees, it will take Nora 10 years for her cash value to “break even.” That means that after 10 years, she will have paid $93,000 in premiums ($775 a month x 12 months x 10 years), and her cash value will also be worth $93,000. From there she will start seeing positive returns relative to her paid premiums.
For now, note that this typical whole life insurance scenario will not help you with infinite banking, which generally requires a large up-front premium payment in order to quickly build up a cash value.
Borrowing money from your whole life insurance
As your cash value grows, you can start borrowing from it. It works like a regular loan: you take money out and have to pay interest until you repay it in full.
This concept of “borrowing from yourself” is central to the idea of infinite banking (more on that in a minute). But it’s also quite misleading. Keep in mind that Nora did not gain access to new large amounts of capital; she’s simply taking out money that she’s put in in the first place and has grown moderately over time—and paying for the right to do so.
It’s also very important to note that Nora’s outstanding loans, plus any interest owed, directly reduce her death benefit. So if she dies before the loan is paid back, her loved ones will be left with less money. Eventually, if the loan is not paid back, the whole policy could lapse.
So what is infinite banking?
If you have access to a large sum of cash, the idea is to park it in a whole life insurance policy via a large lump sum premium payment. From there, you can borrow the policy’s cash value and invest it in other places, so that your money works in two places at once: earning dividends in your whole life policy and potentially generating revenue wherever else you’ve invested it. It's a bit like buying a house with cash, then borrowing against the house and putting the money to work in the market. Because the house theoretically keeps appreciating, you are now earning in two places instead of one. If you keep repeating this process “infinitely” you are leveraging yourself and “infinitely banking.”
To recap, infinite banking is NOT:
- A magical hack for becoming rich
- A conspiracy of the rich
- A way to dodge the financial system, as insurance companies are, after all, some of the biggest actors in our financial system
- A good strategy to protect your family if you die, as the goal is to borrow money that may compromise the death benefit.
But it can be a way for some people with significant resources to leverage their own money over time.
How does infinite banking work with whole life insurance exactly?
If you still want to go for it, know that not any whole life insurance policy will work for infinite banking. The policy needs to be structured such that:
- You keep earning dividends even on the money you borrow, which is key to the idea of your money working in multiple places.
- The dividends generated by your cash value are greater than the cost of borrowing against the cash value—otherwise, the point is moot
- You are able to front-load the policy to accelerate your cash value growth and start borrowing from it.
In general, pay close attention to the policy provisions. For example, some won’t even allow loans for a certain number of years.
Why term life insurance may be a better fit for you
If your goal for getting life insurance is to protect your family if you die unexpectedly, term life insurance might be better suited for you. It has one job: to help your family be financially resilient—whether that’s paying off the mortgage, supporting kids while they’re young, or building savings—if you die too soon.
You can think of it as a financial safety net, stretched over a given amount of time, or a “term,” of your choosing, often between 10 and 30 years. You make the same payment every month, and if you die within that term, your beneficiaries will receive a predetermined payout. For example, a healthy man in his 30’s can expect to pay $1 to $2 per day for $500,000 of coverage and a 20-year term. Just like auto, health, or home insurance, you hope you never have to actually use it. But that safety net is there—and it can make all the difference in the world to your loved ones.
If you have questions about term life insurance, our support team is reachable by email, phone, or chat to help. Ready to get started with a term policy? Use our Life Insurance Calculator to see how much coverage you need.
* Monthly price from Policygenius for MassMutual valid as of 9/08/2022, based on a 35-year-old female rated Preferred, individual rates may vary based on individual circumstances.
**Based on a 35-year-old female rated Preferred-Plus for a $500k policy with a 20-year term. Actual prices may vary. Rate valid as of 9/8/22. 230412-2842492
