The term, infinite banking has been tossed around quite a bit. However, many people hearing this term have no idea as to what it is. They also have no idea how beneficial this type of methodology can be from a financial standpoint.
The most common question is What is Infinite Banking. Infinite banking is a method by which an individual becomes their own bank in respect to lending money and earning money through interest. The main premise behind this particular type of financial method rests on overfunded whole life insurance policies.
The Importance of Whole Life Insurance Policies
People may be aware of whole life insurance, but overfunded policies are an aspect of whole life insurance that most people are unaware of. Overfunded policies is where individuals overpay on premiums. What this does is creates funds that can be used at a later date as tax-free income or discretionary spending, pursuant to what the policy owner decides.
Borrowing Against Death Benefits
In addition to the excess in funds, infinite banking also relies on borrowing against a death benefit. These borrowed funds, under the infinite banking plan, will be repaid. This is where the excess savings are created to allow for more usable capital as well as to bolster an individual’s savings.
How Infinite Banking Works
The idea of infinite banking goes something like this. People are typically recommended to try to save at least 10% of their money for retirement. However, the average interest rates that people are paying on credit card and mortgage debt combines average anywhere from 20% to 25% if not higher.
When a person becomes their own bank, borrowing against a whole life insurance policy or an overfunded life insurance policy to pay these debts means when they pay back the money borrowed against this policy, they are paying interest to themselves. This allows people to save more money from a percentage standpoint than the meager 10% industry experts routinely recommend.
The idea of infinite banking is an interesting one, but it is also not a proposition that happens overnight. There are many different facets of infinite banking that simply can’t be discussed in this article, and different individuals may require different processes in order to make this financial methodology work for them. However, it is an intriguing and financially beneficial method that can bring significant financial independence to virtually anyone willing to take the time to follow the process.