Banks make money by investing your money and earning returns. So if you ever need a loan, the banks take other people's money, give it to you, and you pay interest as you pay it back. To incentivize people to store their money with banks, banks offer guarantees that the money will be safe, convenient and easy ways to access the money and make payments (direct deposit, ATMs, debit cards), and sometimes a paltry amount of interest.
Banking is a multi-billion dollar industry. Bank of America, Wells Fargo, and Citigroup made a combined $53.2 Billion in profits in 2017.
If you set up your estate plan right, you can be your own bank, which means you can take that portion of the bank's profits they would have earned from lending you money and keep it for yourself.
Infinite banking, also referred to as "being your own bank," is not a product, but rather a method through which you can use your whole-life insurance account to turn yourself into your own banker.
Here's how it works. First, you have to set up a whole-life insurance policy. As you put more money into the account, the cash value grows tax-free.
As that cash value grows, so does your power as a banker because you can take out loans against the accumulated cash value of the policy.
Let's assume the current cash value of your policy is $200,000, and it is earning interest at 4% per year, guaranteed (this is a typical guaranteed rate). Depending on outside factors, you will probably also be earning non-guaranteed dividends on top of the interest.
You find yourself needing $100,000. Instead of going to a bank to get a loan, you can borrow against the cash value of the policy from the insurance company at a lower insurance rate than what your policy is earning. So you can borrow the $100,000 at, say, 4% interest (which is also typical).
Because you are using the cash value of your policy as collateral—you are not withdrawing the money itself—it continues an uninterrupted earning of interest. So while the $200,000 in your policy is continuing to grow by 4% ($8,000 in a year), you are paying interest on the $100,000 ($4,000 in a year), which means the loan you have taken out actually has a net gain in interest rather than a net loss.
Using this strategy, you can put your money to work for you. And just like the banks leverage every dollar they have multiple times, you can use your dollar (1) to earn interest, and at the same time (2) use it as collateral for a loan. You're basically using the same dollar twice—just like banks do.
But it gets even better.
Let's say the $100,000 you borrowed was to purchase a $70,000 apartment, which you are going to renovate for $30,000 and flip and sell for $120,000. If you borrow the money from the bank, you have to pay the bank interest, then pay taxes on the $20,000 you earned from flipping the house. That really cuts into your profits.
Using the infinite banking concept, however, you're much better off. See, the IRS requires that when you take out a loan, you charge a reasonable rate of interest. So you could charge yourself 20% annual interest on the loan, which means if you pay it back after a year, you're paying $20,000 in interest. (Except you're paying it to yourself, so you don't mind.)
Because you've earned $20,000 from flipping the house, and paid $20,000 in interest, on paper, you're breaking even, which means you don't have to pay taxes on the $20,000. And although $4,000 of the $20,000 of interest went to the life insurance company for the loan, because you've actually earned $8,000 in that same time period (because you only borrowed half the total cash value), you're actually ahead there, too.
And the next time you want to do this, you're going to make even more interest because a year later the cash-value of your account has grown by the interest ($4,000), money you've been depositing into the account (perhaps another $40,000) and probably dividends, too (maybe another $1,500), That means if you want to do the same thing again the next year, you'll still be paying $4,000 in interest for the loan, but now you're going to be earning $9,820 in guaranteed interest because your cash value is no longer $200,000; now it's $245,500.
Seems like a no brainer, right?
This example is from hypothetical numbers. Curious what the numbers will look like in your situation? Give us a call, and we'll run an illustration for you based on your circumstances and goals.