The Misunderstandings of Infinite Banking – Borrowing From Yourself
I could write a whole book on how many ways Whole Life Insurance gets misunderstood. Fortunately, others already have! Assuming you have a basic understanding of the fact that one can borrow against the cash value of a whole life policy, this discussion will make more sense. I would encourage the reader to go back and read previous articles on IBC and Whole Life either way.
Interrupted Growth & Paying Interest
Someone once said to me, “Why would I want to borrow my own money and pay interest on it?” Valid question. Answer: You wouldn’t want to... necessarily. Fortunately, that is not really how it works inside a properly structured policy.
Maxwell calls his insurance carrier and asks them how much cash value he has available to borrow against. They look at his cash value and tell him he can borrow $188,000. Let’s say in this instance he borrowed $20,000 against his policy and the carrier is going to charge him 5%. It is an unstructured loan, so they let you decide how much and how often you are going to pay that back. Now you think to yourself, “I can get a loan from Bob-The-Loan-Guy for 3% so why would I borrow from here?”
Defining the terms.
Uninterrupted compounding is the basic principle where something (your money), and its gains, are growing continuously on top of each other over time. Contrast that with standard compound growth where each time you pull money out, or investment growth declines, that growth is interrupted. Inside of your policy, the cash value is growing uninterrupted. The insurance carrier is loaning you the money from their pile, not your pile. That’s why we use the term ‘borrow against’ instead of ‘borrow from’ when talking about taking loans inside a life insurance policy. Since they are loaning you their money, yours will continue to grow uninterrupted.
Back to the story. Our friend, Maxwell, borrowed $20,000 against his policy. He was 8 years into the life of his policy, and it was projected to grow by $25,000 in cash value that year. In nearly all outside situations, qualified money included, when you borrow $20,000 from a pile of money, you have then interrupted that growth. It is only growing on what is left in the pot. Logically, it would only be growing off the remaining $168,000 in the policy, but in fact, it is growing from the original $188,000. Why? Because the insurance carrier is loaning you their money, not from your pile of money. In this scenario his policy grew from $188,000 to $215,000 that year ($27,000 growth!). He was paying a premium of $20,000 per year, so his net growth was $7,000.
Maxwell could have borrowed the entire $188,000 and his policy still would have had a net growth of $7,000 that year. This is the power of uninterrupted compounding. Also, it should be noted that the $7,000 in growth is not taxable by the IRS when structured property.
Maxwell made out in a few ways:
• He activated uninterrupted compound growth in his policy.
• He had income tax free growth happening inside of his policy
• He loaned his real estate investment business the money, thus was able to deduct the interest.
• He paid himself back instead of a bank & recaptured that money to be able to use over and over.
• He had an unstructured loan to himself and decided his own loan terms.
• He had a substantial death benefit tied to the policy that would pay everything back and plenty left over to leave a legacy.
• He will build up a large enough cash value to retire from his policy, instead of a qualified retirement account.
Where else can this be done? Let us show you how to set up your own private family banking system and create a legacy that can last for generations to come.