Infinite Banking Explained: Become Your Own Banker | [Your Brand Name]

Infinite banking refers to a process by which an individual becomes his or her own banker. The infinite banking concept was created by Nelson Nash. In his book, “Becoming Your Own Banker,” Nash talks about the use of whole life insurance policies that distribute dividendsDividendA dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. and how owning such policies allows individuals to dictate the cash flow in their lives by borrowing against/from themselves instead of depending on banksRetail Bank TypesBroadly speaking, there are three main retail bank types. They are commercial banks, credit unions, and certain investment funds that offer retail banking services. All three work toward providing similar banking services. These include checking accounts, savings accounts, mortgages, debit cards, credit cards, and personal loans. or lenders for loans.

Digging Deeper into the Infinite Banking Concept

In Nash’s infinite banking concept (IBC), the cash surrender value(s) of whole life insurance policies act as collateral for a loanLoanA loan is a sum of money that one or more individuals or companies borrow from banks or other financial institutions so as to financially manage planned or unplanned events. In doing so, the borrower incurs a debt, which he has to pay back with interest and within a given period of time.. The individual simply needs to call the insurance company and ask to take out a policy loan.

A whole life insurance policy is meant to cover the entirety of an individual’s life, not simply to assist family/friends in the event of the individual’s death. As such, the policy is eligible to pay out dividends, meaning it generates a form of income that increases the cash value of the policy over time.

As soon as the policy is active, it possesses value and can be borrowed against so that the individual can take money out of the policy as a loan (using the policy as collateral) to use for handling unexpected or significant expenses that occur during the individual’s life.

Advantages of Infinite Banking

The most outstanding positive of the infinite banking concept or process is the sheer improvement in liquidity or cash flowCash FlowCash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. There are many types of CF. The value of a whole life insurance policy acting as collateral is far more liquid than, for example, equity in real estate, because the loan can be taken out more quickly and the individual can secure cash in hand faster and usually at lower interest rates than those available from traditional lenders.

The improvement to an individual’s cash flow can be significant, especially in times of financial hardship or unforeseen expenses, such as medical bills or the need to buy a new car. An insurance policy loan can also come in handy if an individual happens to be without work for a time, whether due to health issues, a death in the family, or simply the loss of a job. Because whole life insurance policies are non-correlated assets – meaning they’re not tied to the whims of the stock market – they are set to retain their worth.

Disadvantages of Infinite Banking

Infinite banking is not without its drawbacks, however. An individual must qualify for a whole life insurance policy. And even if the individual qualifies, the financial burden that often comes with paying for the policy can be weighty.

It’s common and recommended practice for an individual to put at least 10% of their regular income into their whole life policy. For certain families, that large a financial commitment simply isn’t an option. If the policyholder should fall upon hard times and take out a loan against their policy, they run the risk of being unable to make adequate payments on it later on down the road.

In the end, the infinite banking concept and practice are not for individuals without financial conviction and the ability to think clearly and see the process through into the future. The concept requires an individual who is financially sound, and who is willing and able to make a long-term financial play. It’s important to consider all of the aforementioned factors before becoming your own banker.

More Resources

Thank you for reading CFI’s explanation of the infinite banking concept. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

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