Skip to content
IAM Money Management
← Advanced Concepts
Wealth & legacyRetirement & income

Infinite Banking

Using a specially designed whole life policy's cash value as a source you can borrow against.

About a 5-minute read

What it is

Infinite Banking is a strategy popularized by Nelson Nash's book "Becoming Your Own Banker." It uses a dividend-paying whole life insurance policy, usually designed to build cash value faster than a standard policy. Over time, you can borrow from the insurance company using your cash value as collateral, use the money for large purchases or opportunities, and repay the loan on your own schedule. Supporters describe it as "becoming your own banker." It's really a life insurance policy with a borrowing feature, and it only works as well as it's designed, funded and managed.

Who it's often for

  • People with a strong financial foundation already in place: steady income, an emergency fund, manageable debt and adequate life insurance protection.
  • People who can commit to funding a policy for many years.
  • People who value lifelong coverage, and who want predictable, guaranteed cash value growth and access to it through policy loans.

In IAM's Foundation First approach, this is a Build or Legacy strategy, not a first step.

Who it's usually not a fit for

  • Anyone carrying high-interest debt, without an emergency fund, or on a tight monthly budget.
  • Anyone who may need the money in the next few years.
  • Anyone who is mainly looking for the most death benefit for the lowest cost (term insurance usually does that better).

How it works

Scene 1

The flow at a glance

You pay premiums into a policy with a base and paid-up additions, and its cash value grows. The insurance company lends to you using that cash value as collateral. You use the money and repay the loan with interest, which restores what you can borrow. Any loans and interest left unpaid reduce the death benefit.
  1. 1Design: A whole life policy is typically structured with a smaller base premium and a paid-up additions rider, which puts more of each payment toward cash value.
  2. 2Fund: You pay premiums consistently. Cash value grows on a guaranteed basis, and a mutual insurance company may also pay dividends, which aren't guaranteed.
  3. 3Borrow: When you need money, you take a policy loan. The insurance company lends to you using your cash value as collateral; your cash value stays in the policy.
  4. 4Repay: You repay the loan with interest on a schedule you set. Repaying restores your borrowing capacity.
  5. 5Legacy: At death, the death benefit is paid to your beneficiaries, minus any unpaid loans and interest.

Scene 2

Premiums paid vs cash value, over time

Cash value usually starts well below the total premiums paid and only crosses above them after a number of years. Illustrative shape only. Actual values depend on the policy, carrier, age, health and dividends.

What to watch out for

  • Slow start: Cash value is usually much lower than the premiums you've paid in the early years, and it can take many years to catch up. Surrendering early often means getting back less than you put in.
  • It's a long-term commitment: Missing premiums or underfunding can undermine the strategy.
  • Loans cost money: Policy loans charge interest. If loans and interest aren't repaid, they reduce the death benefit and can grow over time.
  • Dividends aren't guaranteed: Illustrations show guaranteed and non-guaranteed values. Always look at the guaranteed column.
  • Lapse risk: If loans and interest grow larger than the cash value, the policy can lapse. A lapse with an outstanding loan can create a large, unexpected income tax bill.
  • MEC limits: If a policy is funded too quickly, it can become a Modified Endowment Contract (MEC). Loans and withdrawals from a MEC are generally taxed as income first, and may face a 10% penalty before age 59½. Good policy design stays below MEC limits.
  • Tax treatment: Cash value generally grows tax-deferred, and policy loans are generally not taxable while the policy stays in force and isn't a MEC. That depends on keeping the policy in good standing.
  • It isn't a bank: Cash value is not a bank deposit and is not FDIC-insured. Guarantees depend on the issuing carrier's financial strength.
  • Design matters: How the policy is structured has a big effect on results, and the carrier's loan and dividend terms matter.
  • Indexed universal life versions: Some people use IUL for this strategy. IUL has different risks, including caps, participation rates and policy charges that can rise, so it should be evaluated separately.

Questions to ask before moving forward

  • Is my financial foundation in place first?
  • Can I comfortably fund this for 10 years or more?
  • What do the guaranteed values look like, not just the projected ones?
  • How is the policy designed, and how close is it to MEC limits?
  • What are the loan interest terms, and how does borrowing affect dividends with this carrier?
  • What would happen if I needed to stop paying premiums?
  • How does this compare with other ways to reach the same goal?

Who else should be involved

Your CPA (tax treatment), and anyone else helping with your overall financial plan.

Related concepts and services

Want to talk it through? Your first conversation is free, with no pressure and no obligation.

Book a Conversation

Advanced concepts are described in general, simplified terms for education only. They involve legal, tax and financial considerations that depend on your situation and on current law, which can change. IAM Money Management does not provide tax or legal advice; consult your attorney and tax professional before implementing any strategy. Life insurance and annuity products are issued by insurance carriers, and features, costs and guarantees vary by carrier, product and state. Guarantees are backed by the claims-paying ability of the issuing carrier. Dividends are not guaranteed. Policy loans and withdrawals reduce cash value and death benefit and may have tax consequences.