There is a thing called “Infinite Banking,” or using cash-value whole life insurance as an holding pattern for money until an investment opportunity arises, then taking a loan against your whole life policy’s cash value for whatever use you wish. I do not have a horse in this race and I currently do not have a whole life insurance policy, but the conversation appears to be of value.
The very, very long thread posted above has 2 basic sides: skeptical investors who view whole life insurance as at best confusing or at worst a scam, and people (mostly insurance agents) who are adamant that a whole life insurance focused on cash value is amazing for every investor. This is a tricky situation because in fields like dentistry we have to defer to the subject matter experts like expert clinicians and researchers, but when it comes to insurance, the subject matter experts are insurance sales people. Now it might be unfair to portray all insurance sales people as dishonestly trying to generate more money, however there is some skepticism that will always remain for some investors. I myself have not jumped head first into cash value whole life insurance because of how vocal some folks are about whole life insurance being a scam. No doubt you’ve heard the phrase “whole life insurance is a bad investment, go for cheaper term life insurance and invest the difference.” Even some insurance agents in the thread above completely agree whole life is a waste of money, but infinite banking (a whole life insurance policy focused on cash value) is completely different and may be massively worth it. I admit for most of my life I was convinced that whole life insurance was a scam. It seems that there is an opportunity for it to be useful if done correctly, and I love to be challenged with evidence that can help my path to FIRE.
Below I have pulled some of the most legitimate arguments for and against infinite banking based on the conversation thread on bigger pockets. To be clear these are not my opinions, but opinions expressed in the thread:
|Case For Infinite Banking||Case Against Infinite Banking|
|Create a place for money to grow tax-free||I have my IRA for that|
|Allow you to take a loan out against your cash value, then you pay it back with interest||Infinite banking is so complicated, you’re just hoping everything is “as advertised”|
|Interest charged is simple interest, but your cash value amount continues to grow at compound interest rates because you never actually withdrawal your money – just take a loan against your cash value amount as collateral||Insurance companies do this for a reason, and undoubtedly the reason is to make money|
|Loans are tax free, so money can be accessed and used without creating a taxable event||“I could just invest in Roth IRA or other tax advantaged accounts even if I can’t access the money anytime soon.”|
|Breakeven point is about 7 years into the policy – costs are mostly up-front. After that, it’ll continue to grow without paying principle.||Waiting 7 years to compound money is not that different from other long term holds. Also, Whole life insurance has a higher cost than term life insurance|
|Cash invested can be accessed before the 7 year mark (when you have made more money than you have personally put in), but you normally cannot access all of your money immediately (i.e. 70-90%). 100% access to invested money after the breakeven point.||Limited access to invested money could hurt in the short term / missed investment opportunity and opportunity cost if I want to start a practice.|
The point of this post is not necessarily to persuade you one way or the other on infinite banking, but to present and summarize the cases of both sides in an extremely long, ongoing discussion (and hopefully save you some time). I recommend speaking to a trusted person in your life / fiduciary (person who must look out for your financial best interest) before committing. It appears that Infinite Banking could be a viable way to help generate wealth for some people when used properly, and I may consider using it in the future myself.