The Infinite Banking Concept is not complicated.  It is actually quite simple – accumulate your wealth in an asset that you have complete control over and that is guaranteed to increase in value.  Then, through wise leverage, finance the things of your life – family, business, etc.  In this you retain complete control over the terms of every purchase and capture the opportunity cost of those purchases.

It is simple, but it does require a paradigm shift and requires rethinking your thinking.  Because changing how we think is difficult, many people feel the need to sensationalize IBC or they try and come up with analogies or explanations that reveal one truth but do also muddy the waters.

Some also misrepresent it in order to disparage the concept to in favor of the conventional financial paradigm.

This is the third of a series of articles addressing some of these misconceptions, misrepresentations, or over-sensationalist statements.

Another gimmick that surrounds the Infinite Banking Concept is that you don’t have to pay the loans back. This is another one that is technically true but makes things seem too good to be true, like it is free money. It also puts the individual in the wrong mindset for practicing IBC.

Yes, it is true that the policy owner does not have to pay the loan back.  There are no rigid loan repayment terms with monthly payments.  No one from the insurance company will be calling or knocking asking for your repayment.  The company doesn’t even ask what your repayment plan is.

Why?  Because the loan is perfectly collateralized.  If you never repay the loan, the loan plus all interest to be charged, will be paid off at policy lapse or death.  Default is impossible.

This is because your Contract is a liability for the company.  You have purchased $1M death benefit, that is a $1M liability that, as you age, becomes more and more likely they will have to pay.  And as a permanent life insurance policy, payment is ultimately inevitable.

At the same time your premium payments, past and future, are an asset for the company.  Premium paid goes into the general account and is invested in order to meet other death benefits. Future premium is an obligation to keep the policy in force.  If you do not pay the death benefit liability is wiped.

The cash value of the policy is the present value of the death benefit, discounted for time, minus unpaid premium

CV = PV(Death Benefit) – unpaid premium

When a loan is taken, it does not reduce the cash balance of the policy, instead creates a lien against it, collateralized by an equal portion of the death benefit.  What remains is the cash value, net of any loans. The death benefit is also net of any loans.

Net Cash Value = CV – Loans

Because of this, the company knows they will be repaid for all loans, with interest.

No, you don’t technically have to pay it back.  But if you don’t pay back the loan, you are stealing the capital stock of your business. That loan balance grows with interest that compounds annually. Large loans, left unpaid, can quickly out compound the growth of the policy and induce a lapse. 

With policy lapse can come a large tax bill as everything loaned above the cost basis is taxed as income at your top marginal rate.

This does not mean you have to make monthly payments or even annual payments. You are in control and set the terms.  While it is generally recommended to at least make annual interest payments to avoid compounding, it is a common practice to purchase an asset with the intent of selling it in a number of years and riding the loan until the sale.

Take real estate for example.  A policy owner might take a sizeable loan to make the downpayment on the property and necessary improvement with the intent of selling the property.  This could be months or years – and they might make no payments until the sale.  When the property is sold, the loan is paid off and what remains is pure profit.  All the while, their policy continued to grow in value.

The bottom line is to have a plan for repayment.  That might be monthly payments.  That might be repayment upon sale of an asset.  Your plan might be the excess income from an expected raise or bonus.  That might be the windfall from the death benefit from a parent or grandparent passing away.  It also might be excess income from children moving out of the house to start their own lives and families.

There is a place for not paying back loans – specifically when the policy is being used for passive income before graduation (Nelson’s preferred way of referring to death).  But even this is done strategically to avoid leaving a tax bill for the estate.

Yes, it is true – you do not have to pay back the loan.  But if you don’t you are stealing the peas…you are not being an honest banker.  You are also failing to think long range, and the only ones who will suffer are you and the beneficiaries of the policy. 

Veritas non verbum venditoris

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