Infinite Banking – How Policy Loans Work

This post is part of our Frequently Asked Questions resource page.

Life insurance policy loans are one of the least understood aspects of the Infinite Banking strategy. In fact, many insurance agents have been banned from selling insurance through different companies, simply because they portrayed loans incorrectly.

It’s a common belief that, just like a bank account, your policy allows you to take loans from your cash value, and pay yourself back the principle and interest. This, however, is not the case.

The cash value of your policy is simply that… cash value… a value given to the policy based on a variety of factors (time, contributions, health, etc). It is not a cash account, or side fund, of any kind. It is also described as the dollar amount the insurance company will send you if you cancel your policy.

When you take a policy loan, those funds are offered to you by the insurance company with your policy cash value acting as collateral. When you make payments back, they are paid to the insurance company and not to your policy. To clarify even deeper, there is no relationship between those payments and your policy. It is not credited back to you directly in anyway. The funds go back to the insurance company’s resources, and are calculated into the dividend they eventually distribute.

This misconception is unfortunate because paying the insurance company is, in my opinion, in your best interest. It is my experience that you will cheat yourself, and being required to pay the insurance company gives you a greater sense of responsibility. Additionally, when you borrow for certain purposes (like business and investments), the interest can be tax deductible, which would not be an option if you were to, indeed, pay yourself back directly.

Keep in mind this has almost the same outcome as paying yourself, but with slight differences that need to be taken into account when borrowing.

If you are looking for additional information, please contact us, or comment below.

Jake

18 thoughts on “Infinite Banking – How Policy Loans Work

  1. Am i correct that we can only excess the cash value thru loan? When paying the loan to the insurance company increasing principle will cut time but not interest charge by company? Since i am over 70, am i able to make monthly withdrawals?

  2. @Joseph- You can access the cash value through withdrawals if you want to use it as income, but the withdrawals should only be up to your cost basis. After that you will want to take loans to avoid taxation.

    When you pay back the loan to the insurance company it will be the same as any other loan in that extra payments will result in quicker loan payoff as well as less interest charged.

    As for income… The best thing to do is contact your agent and tell him you want to know how to take income. I would hope he knows, but if not, contact the insurance company. They can run illustrations so you know how much you can take out, how long you can take it out, and how to take it out.

    Be aware that the ability to take a successful income stream depends on how long you’ve had the policy, how its structured, and a few other factors.

    Jake

    1. That can depend on multiple factors, depending on the company you have your policy with. The companies that are preferred for this type of strategy are used because their interest rates and dividends are similar (which is why you hear you are paying yourself). Interest rates are determined based on anticipated dividends, and are even slightly lower than the dividend rate. So even though the rate isn’t fixed, its not tied to prime rate, or the federal reserve, and changes very slowly.

      So last year (2012) interest rates were generally around 5%, and dividends just under 6%.

      Hope that helps.

  3. My understanding is some companies will reduce the dividend payment if a policy loan is taken (I believe guardian does this), while others (mass mutual, AUL) do not? If true, are holders of a policy with guardian, or a company that reduces dividend payment, at a significant disadvantage when used as a bank?

    Also, you mentioned that when one pay s back a policy loan with interest the entire amount is credited back to the company and to the individuals account. Why is it then that it is recommended to pay policy loans back with excess interest ( as in nelson nashes book)? It seems based on what you have said you should only pay the loan plus the interest currently being charged by the company?

    Thank you very much for looking at this.

    1. What you are referring to is direct recognition verse non direct recognition. I’m putting together a post to better explain this, but it does not put you at any disadvantage. The decreased dividend is a very insignificant amount less than what it would otherwise be.

      Another thought is this. Guardian (for example) might take a hair of your dividend, but they might have a higher dividend than the other company anyway. So you would still be ahead.

      Another is the loan rate. Every company’s loan rate is different, so what if Guardian’s loan rate is lower? You could come out ahead that way.

      This discussion is no more than a marketing piece that ultimately has little significance. I have polices with both types of companies, and you could never predict which would be better.

      Now I don’t quite understand what you are asking about policy loans, but let me take a stab at it here.

      First of all we aren’t suggesting that the interest will be credited to your policy. It will be paid to the insurance company, and will be part of the dividend you ultimately receive.

      What we are suggesting here is the added interest you pay is just added principle to the loan to pay the loan off quicker. It’s like snowballing it, or forcing yourself to pay more to principle.

      Once it’s paid off, you will still be making payments, which is added to the PUA, or cash value. This can be a little complicated, so we are simply saying pay off loans as fast as you can, and put as much money into your policy as you can.

      Does that help?

      1. Yes it does help, thank you. I realize I miss stated my question, and I do understand the interest paid back on a loan is credited to only the company.

        I guess what I am trying to understand is in Nash’s book it seems the point is made that paying back policy loans with interest allows for greater development of cash value leading to higher death benefit. The volume of loans taken also allows for greater cash accumulation so you can at some point in the future take income from the policy?

        With a policy designed to be funded via PUA to near its MEC limits how would someone ensure it would not become a MEC if it is actively being used for loans and diligently have repayment of loans?

        Thank you.

        1. In simple, the extra interest you pay is just extra premium added to the policy, which yes, does add death benefit.

          When you start looking at extra interest, and how to handle this extra premium without the policy becoming a MEC, you start to make it complicated. That’s why we say it’s easier to look at it this way- when you borrow, pay off loans as quickly as possible. Then put save as much as you can into as many policies as it takes.

          Both ideas produce the same results, one just makes it a little more complicated in my opinion.

  4. I’m still researching the IBC to see if it’s right for me. I came across a vigorous debate in an online forum about policy loans, and the question that kept coming back up (and going unanswered) was this:

    Say I want to buy a $30k car, and I have a fully capatilized IBC policy with well over $30k in cash value. Assume I can borrow from my policy at 6%, or I can get a 5-year car loan from my credit union at 4%. In this scenario, why would I borrow from my policy and not from the credit union?

    I suspect that the answer lies in some of the concepts in your e-book like the velocity of money and the volume of interest, but I can’t wrap my head around those enough to distract me from the fact that the insurance company is basically acting like a bank (as you say, you’re paying the insurance company back, not yourself), and charging you a higher rate than another bank. Yes, it’s true that you could borrow the money from your policy and it would still grow, but that’s also true if you just left it there and borrowed from somewhere else.

    Anything you can do to illustrate why it’s better to borrow from your policy in this example would be greatly appreciated. (Or maybe it’s not better in a low-interest-rate environment like this?)

    Thanks!

    1. Hey Jim,

      Great question, and one, in my opinion, often misunderstood (as you’re discovering).

      When you borrow from the insurance company you have several advantages (competitive rates, flexible payments, etc) but you still pay interest. There is no clever way of it making sense to pay the higher interest of the two.

      In fact, I personally have a car loan from my local credit union because it is cheaper.

      That being said, it is also my experience that you will be more willing to pay the loan off quicker to the insurance company knowing you can pull those dollars back out at any time you’d like, whereas the credit union you are less likely to because you can’t borrow those dollars back out.

      The value of the strategy is that you have the option to borrow anywhere you want to. And though right now rates are low, they’ll change, and that is when loans from your insurance policy will be highly valuable.

      Hope that helps!

      1. Following up to the last question. In light of what was just said, that indeed there are times and cases where NOT utilizing your Whole life policy to finance large purchases makes the most sense….Well then, doesn’t this logic shoot holes in the whole Bank on Yourself concept? I mean, is that not where the magic lies? In utilizing your policy to draw loans to finance purchases that you make and then that is really where the concept of whole life being your own bank beats just investing in mutual funds and shopping around for the best rate on loans for your cars, houses and large purchases.
        I guess for me as I delve deeper and study more and more on the infinite banking concept, I seem to get mired in the details. There are many attractive things about this concept however, when I try to simplify the concept and summarize it for myself so that I can decide if it is right for me, It always feels that it eludes me.
        Your help is appreciated

        1. Ya Chris, that is a great questions, and one I get a lot.

          It can get confusing because, as previously stated, a lot of these agents say you are paying yourself back.

          While that’s not entirely true, it doesn’t really matter. You will recoup a majority of the interest paid to the life insurance company, if not all or more.

          But no, that really isn’t where the magic happens. The magic is happening in the life insurance policy itself. The fact that you have money growing, with compound interest, tax-free, minimum guarantees, and buying you a death benefit is where the magic happens. The fact is, you will not find a place where you can get a higher interest rate of return on your money with basically no risk.

          The fact that you can borrow your money is just an addition. But, like stated in the article, you can put money inside your whole life policy that you would normally put into a bank account… ie. emergency funds, money you would use to buy a car, finance toys, pay for college. All of these things that you would normally keep in a bank, earning little to no interest, can be put in a life insurance policy where it is going to have greater earnings and it will give you all these added benefits.

          So, now you can put more money into your life insurance policy because you know that money will be safe. That’s the point.

          Now, if you use the money you borrow from the life insurance company for your business (as I know you are thinking of doing) you will get a tax write off for the interest paid. Same goes for an investment.

          The fact is, your money is in a safe place where you have access to it. The magic is in constantly and consistently earning compound interest. You don’t lose money. Then, when you have something useful to do with your money, you take a loan out. This way your principle continues to earn interest with nothing interfering.

          So more money, earning a higher and safer interest rate of return, gives you a whole lot more money in retirement.

          If your money in your life insurance policy is earning 5%, and you have the choice of borrowing money from the life insurance company at 5% or the bank at 3%, which one will cost you less money?

          It’s pretty simple, the loan doesn’t help you make magical extra money, it only allows you to have access to money while your money compounds. The volume and compounding of your money is what matters.

          Hopefully that makes sense. The details are confusing when you read all these other people’s information online because it strays, in my opinion, from the actual point of all of this. They try to make it sound like you are getting free money, it’s not the case.

  5. Quick Question? The policy loan you take out, which is used as collateral, your own cash value account or your death benefit if you don’t pay the loan back. Let say my death benefit is $250,000 and i have an outstanding loan to be payed back to the insurance company of $30,000. If i die, will the loan balance be deducted from my death benefit? ( death benefit now $220,000). So if you pay the loan off (which of course is the best option) you are somewhat essentially paying the loan back to yourself via the death benefit?

    1. hey Ryan,

      Not sure exactly the question… but you are correct in that if you die, the loan is paid first, then everything else is paid to your beneficiary.

  6. The one question I have has to do with the one thing that makes this whole idea sound too good to be true. How is the insurance company still able to pay the same amount of dividends while there is an outstanding policy loan. Say you have 30,000 dollars paid in and you take a 10,000 dollar loan. Do you still earn dividends on the 30,000? or Do you receive dividends on the 20,000 cash balance?

    It seems the dividends are paid on the cash-value of the policy and not directly on the amount of money you have in at any one point in time. Could you please explain how this works? How is a company able to make dividend payments on money which they are not in possession of (that is money they have loaned out). It seems for me this is the make or break point for the whole deal.

    1. Hey Roberto,

      Thanks for stopping by, we get this question all the time. Any non-direct recognition company will pay dividends regardless of outstanding loans. A direct recognition company will pay a reduced dividend if there are outstanding loans.

      As stated in the post above “When you take a policy loan, those funds are offered to you by the insurance company with your policy cash value acting as collateral.”

      In other words your cash value never goes anywhere, it is simply used to collateralize the loan given to you by the insurance company from their general fund.

      There is no magic happening here – you receive a loan from the insurance company and you pay the insurance company back plus interest. In the meantime your full cash value has the ability to earn interest and dividends.

      Hope this helps!

      1. I am just starting to read about this concept and have a related question about the interest. Let us say I take a policy loan from the insurance company to make a down payment on a real estate investment. Say, although the insurance company is charging me 4% , I choose to pay 10%. I heard that when I file taxes I can claim the 10% I chose to pay as my business expense.
        So company is charging me 4%. I pay 10%. 6% gets added back to my cash value and I still get to deduct the full 10% as expense? Something about this looks confusing.

        Is this is true, is an an upper limit to what interest rate I choose? Where exactly do I get to say, “I choose to pay 10%”. Is there some paperwork for that?
        –KR

  7. Hi, when the US economy goes belly up at some point in the not too distant future due to the QE program by the FED, what impact will have on Whole Life Insurance companies? In other words, in 2008 with the world economic crisis most savers had huge percentages wipe off their life savings 401Ks etc and bank interest rates plummeted meaning any cash in the bank was earning very little interest (and that’s still the case at the end of 2013). If i decide to use the infinite banking concept and put my money into a Whole Life Insurance policy, how will it be protected against a second (and probably much worse) economic crisis? Am i not safer leaving my money in one of the global banks, especially one of the ones which behaved more sensibly prior to the 2008 economic crisis and was better able to weather the storm? If hyper-inflation kicks in what exactly will the Whole Life Insurance policies have done to guard against problems for themselves and their clients?

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