Perhaps you’ve come across the term Infinite Banking Concept (IBC) or heard of people talking about ‘being their own bank’. Seems like a pretty cool idea right? But how does it actually work?
In short, the Infinite Banking Concept is a financial strategy that involves using a Whole Life Insurance policy as a personal bank.
The concept is based on the idea that instead of depositing money into a savings or checking account at a traditional bank, the individual becomes their own banker by using the cash value of a life insurance policy to make loans to themselves. This provides several benefits, including tax-free access to money, access to funds without penalties, and the ability to earn interest on the money that would otherwise have been lost to taxes or fees.
Is the Inifinite Banking Concept a Scam or Legit?
I know, I know, the name itself sounds over the top and too good to be true. If someone was introducing it to you by starting off with the term “Infinite Banking”, you may immediately assume that it sounds like something shady.
The Infinite Banking Concept is a legtimate way of structuring your assets to maximize the compounding effect of interest over a long period of time. Essentially it allows you to not miss out on earning compounding interest on your current capital, whilst at the same time being able to access it in the form of a loan for any large purchase or expenditure that you need.
It’s a long term financial play which has risks involved, so be sure to understand exactly how it works before attempting to pull it off.
How Does The Inifinite Banking Concept Work?
Say you’ve been working hard to grow your savings and have accumulated a significant amount of money in your bank right now. For this example we’ll use an amount of $500,000 for simplicity.
Well now that you’ve saved up $500,000. You could choose to continue saving the amount, invest it, or spend it on your lifestyle needs – perhaps buy a house or a car.
Creating Your Own Private Bank
Instead of immediately drawing on this bank balance, what you could do is to put it in an instrument that you control completely. Let’s call this the “Private Bank“.
The private bank is often created using a form of life insurance policy with a cash value and death benefit.
In Singapore, individuals can apply the Infinite Banking Concept by purchasing a Whole Life Insurance policy with a reputable insurance company. It is important to note that not all Whole Life Insurance policies are suitable for this purpose, and it is important to find one that has the right features, such as a high-yielding cash value, low fees, and the ability to make policy loans.
Once the policy is in place, the individual can make regular premium payments to build up the cash value of the policy. As the cash value grows, the individual can make loans against it, using the money for investments, paying off debts, or any other purpose. The interest on the policy loan is paid back to the policy, which increases the cash value even more.
Whilst your money is inside the Private Bank you earn dividends & guaranteed growth, whilst having full privacy and control over it. Now the $500,000 that you’ve saved earns tax-free growth and is able to participate in upsides of long-term compounding.
Being a life insurance policy, you also receive protection in the form of a death benefit. At the same time, your money is also protected from creditors in case somebody tries to sue you.
Great, now that we’ve set this up how do we access the money when we need it?
Taking a Loan Out Of Your Policy
Life insurance polices are backed by a mutually owned life insurance company. When you want to access your money, you can take a loan from your policy using the cash value as collateral, and you create your own repayment schedule.
In comparison to simply spending the money right away, this strategy essentially allows you to earn from the spread between the dividends that you earn on the policy value versus the interest that pay on the policy loan.
More importantly, the initial cash value remains untouched and you are still able to participate in the compounding effect of that sum of money.
For example, the amount of $500,000 compounded over a period of 15 years at a rate of 3% annually would result in $778,983.71, whereas if you had spent the full amount you would not have received any earnings.
Elements of a Well-Designed Life Insurance Contract For Your Private Bank
To use a life insurance policy as a tool for the Infinite Banking Concept, it is important to design the policy in such a way that it maximizes its benefits and provides the flexibility and security you need.
1. Whole Life Insurance Policy
A whole life insurance policy is an ideal type of policy to use for the Infinite Banking Concept. This type of policy provides lifetime coverage, which means that as long as you pay the premiums, the death benefit is guaranteed to be paid out when you pass away. This makes whole life insurance policies a stable and secure option for building wealth.
2. Guaranteed Cash Value
The guaranteed cash value is an important component of a well-designed life insurance policy for the Infinite Banking Concept. This is the amount of money that accumulates in the policy over time and can be used for a variety of purposes, including as collateral for loans. A guaranteed cash value is a key component as it provides you with access to funds when you need them.
3. Premiums that Build Cash Value
When designing a life insurance policy for the Infinite Banking Concept, it is important to choose a policy with premiums that build up cash value. This means that a portion of each premium payment goes towards building the policy’s cash value, which can then be used for a variety of purposes.
4. Policy Loan Provision
This provision allows you to borrow against the cash value of your policy, providing you with access to funds when you need them.
5. High Loan-to-Value Ratio
The LTV ratio is the amount of the policy’s cash value that can be borrowed against, expressed as a percentage of the policy’s face value. The higher the LTV ratio, the more funds you can access when you need them.
6. Death Benefit Protection
This provides you protection and allows your family to recover all the funds upon the scenario of death.
Benefits of the Inifnite Banking Concept
The Infinite Banking Concept is a powerful financial strategy that can help you take control of your finances and build wealth for the future. Here are 7 key benefits that you can enjoy by using this concept.
1. Earning Compounding Interest
With the Infinite Banking Concept, you can earn compounding interest on your savings, which can help your wealth grow faster. Compound interest is the interest earned on a deposit, which is then reinvested to earn even more interest. Over time, the power of compounding can help your wealth grow exponentially.
2. Guaranteed Loan Provision
This means that you can borrow money from your policy whenever you need it, without having to worry about being denied. This can be especially helpful in emergency situations, when you need access to funds quickly.
3. Tax-Free Growth
Another benefit of the Infinite Banking Concept is that your wealth can grow tax-free. This means that you won’t have to pay taxes on the growth of your savings, which can help you keep more of your money and build wealth faster.
4. Death Benefit Utility
In addition to the benefits of tax-free growth and guaranteed loan provision, the life insurance policy also offers a death benefit utility. This means that if you pass away, your beneficiaries will receive the death benefit from your policy, which can provide them with financial security and peace of mind.
5. Can Leverage on the Cash Value
You can leverage the cash value of your policy for a variety of purposes, including investments, debt repayment, and more. This can help you build wealth and achieve your financial goals faster.
6. Protection from Creditors
Another benefit of the Infinite Banking Concept is that it can provide protection from creditors. This means that if you face financial difficulties, your policy and the cash value within it may be protected from creditors, helping you maintain your financial security.
7. Enjoy Privacy and Will Not Affect Your Credit Report
Finally, the Infinite Banking Concept offers privacy and will not affect your credit report. This means that you can manage your finances without worrying about the impact on your credit score or the prying eyes of others.
Disadvantages/Risks of The Infinite Banking Concept
1. Limited liquidity in early years
When you first purchase the policy and make premium payments, you are essentially locking up your funds in the life insurance instrument. This will result in lower liquidity at the start, especially since the funds have not yet had the chance to compound and grow.
As such it is advisable to also have other savings on hand and not to commit your entire net worth into the policy. The Infinite Banking Concept is a long-term financial play on wealth accumulation and should not be used to cater for any immediate financial needs.
2. Annual Payments
Depending on how the policy is structured, ideally you want to front load the premium payments in early years so as to capitalize on larger compounding effect. This means that you must be prepared to commit to the annual payments in the first few years which require a significant portion of your income.
3. Sophisticated Policies May Have Higher Qualification Requirements
The process to acquire a life insurance policy that caters to the concept of Infinite Banking may be much more complicated, since the policy may be different from the standard polices in the market. It’s important to approach a financial advisor that fully understands what you are trying to achieve and is able to structure a life policy that suits your goals.
For individuals with pre-existing health issues and other complex issues, if may be harder to get a high rating for your policy.
How Do I Employ This Strategy?
Step 1: Choose a Reputable Insurance Company
The first step in creating an Infinite Banking Concept model is to choose a reputable insurance company. Look for a company that offers Whole Life Insurance policies with high-yielding cash value, low fees, and the ability to make policy loans. Some of the top insurance companies in Singapore include Manulife, Great Eastern, Prudential, and AIA.
Step 2: Purchase a Whole Life Insurance Policy
Once you’ve selected an insurance company, it’s time to purchase a Whole Life Insurance policy. This type of policy is ideal for the Infinite Banking Concept because it has a cash value component that grows over time. You can use the policy to make loans to yourself, using the money for investments, paying off debts, or any other purpose.
Step 3: Make Regular Premium Payments
To build up the cash value of your policy, you’ll need to make regular premium payments. These payments can be made monthly, quarterly, or annually, depending on your preferences. As you make payments, the cash value of your policy will grow, giving you more money to work with.
Step 4: Use Your Policy to Make Loans
Once you have built up a sufficient cash value in your policy, you can use it to make loans to yourself. To do this, simply fill out a loan request form and provide proof of your loan amount. The insurance company will then issue you a loan, which you can use for any purpose you choose.
Step 5: Repay Your Loans and Watch Your Cash Value Grow
When you take out a loan from your policy, you’ll need to repay it with interest. This interest will be paid back into your policy, increasing the cash value even more. Over time, this virtuous cycle of borrowing and repaying will help your cash value grow, giving you more financial freedom and security.
Conclusion – Do Your Research!
The Infinite Banking Concept offers Singaporeans a powerful tool for managing their finances and building wealth. By becoming your own banker, you can enjoy tax-free access to money, access to funds without penalties, and the ability to earn interest on your savings.
It is important to consider both the benefits and potential disadvantages before deciding if this concept is right for you. As it is a more complex structure and requires a more in-depth understanding of the financial instruments involved, not all financial advisors are well-equipped to help you execute this strategy. Make sure to find the right one that can help, and don’t jump into it too quickly! If in doubt, always do more research first!