The Real Math Behind Infinite Banking

Infinite Banking is a cash flow management strategy built on the chassis of a whole life insurance policy designed for early cash value accumulation. It’s the process of controlling and compounding the capital that would ordinarily flow right through your bank account. It’s the safer version of the “Buy, Borrow, Die” strategy for everyone — not just the super wealthy who can afford to lever their $100 billion of company stock.

Unfortunately, there are many misconceptions about Infinite Banking — not just those opposed to the strategy, but also amongst proponents. I’ll start off by saying I’m naturally biased. I think we all might be in some sense, but the point of this post is to set my biases aside and cut through the noise to explain the quantitative benefits of Infinite Banking.

I’m going to show you the proof of work I completed years ago when I was in your shoes, first learning as a potential client for someone else while working as a head trader in an investment world that despised Whole Life insurance. My passion was never cold calling people and telling them they’re underinsured. My passion has always been understanding investing, economics, money, the banking system, and finding ways to use that knowledge to help people overcome challenges in the real world.

That’s what I hope to do today.

NOTE: If you need a brief overview of what Infinite Banking is before we continue, check out this intro first.

My Journey to IBC

I remember March of 2023 vividly. I was driving to Charlotte for a weekend trip, and I remember pulling off the road into a gas station to quickly jump on a conference call. Just months removed from Jamie Dimon (JPMorgan’s CEO) and Moody’s (top rating agency) preaching about how strong our banking system was, I found myself listening to investors discuss what the fate might be for Silicon Valley Bank (SVB) — a top 20 bank in the United States that was dealing with an insolvency crisis.

Were they going to need a bailout? What percentage of their deposits were insured by FDIC? What assets did they hold? What other banks may be impacted?

The limited amount of info I was able to pick up through shoddy cell phone service in the North Carolina backwoods was enough to get my mind racing. I had been looking into Infinite Banking for several months at this point, which was stemmed by 2022’s market performance. Stocks and bonds were down big that year, which is very rare. There was nowhere to hide. This kept me wondering about the zero contractual downside and guaranteed growth that comes with Whole Life insurance.

It quickly became clear why SVB failed. This wasn’t a repeat of Lehman or AIG. They didn’t write subprime loans to people with no income or jobs. They didn’t sell billions of CDS (credit default swaps) on AAA rated CDOs (collateralized debt obligations) that would fail. They took customer deposits — money they needed to meet withdrawals — and took on leverage to buy long-term U.S. Treasury securities, which were allegedly the “safest” and most “liquid” securities on the planet. Banks found themselves with hundreds of billions of dollars in unrealized losses, heading towards insolvency. Something was massively wrong, and I wanted to know why.

Now thinking more about “banking” instead of life insurance, I went on to do a deep dive into how life insurance companies worked and how that differed from traditional banks. Suddenly, I began to question the preconceived notions I had: “Whole Life is a scam,” “Whole Life is a bad investment,” or “Whole Life is just expensive term.” This was all I had heard, and let’s be honest. Insurance is boring, so I never cared to look into it before. But, in hindsight, maybe “boring” is why this works so well.

I realized those preconceived notions were flat out wrong, so I started reading more and watching videos about Infinite Banking. Yet, something still didn’t sit right with me as I heard pundits say, “With Infinite Banking, you can make money buying cars!” or “Instead of paying interest to the banks, you pay it to yourself!” These people also overemphasized “control,” without explaining what that actually means. They flat out said the growth of the cash value does not matter. Some told me that you borrow from your Whole Life policy (not against it). And they refused to acknowledge the opportunity cost of getting started.

“Show me the incentive, and I’ll show you the outcome.” — Charlie Munger

It was that moment that changed my thinking. I needed to know what this was all about. I thought, if this doesn’t work, I’m not going to get a policy for myself. If it DOES work, I thought I might be able to do a better job of explaining this to people given my knowledge of investing, economics, and the banking system. After months of research, the latter became clear, and I chose to leave my job for this new opportunity.

Misconceptions Against Infinite Banking

I wont be able to address everything in this post, so reach out if you have more. First, you have the people who don’t think this strategy works. They might say…

1. It’s a “scam” because it’s more expensive than term

2. Whole Life is a bad investment

3. It only works if you’re super wealthy

4. It doesn’t work because “you have to pay to borrow from yourself”

Let’s get #1 out of the way quickly. This is the equivalent of saying that buying a house is a “scam” because it’s more expensive than renting one for a year. Duh. One is permanent ownership. One is not. Only 1% of term policies pay out. If you meet the terms of your Whole Life policy, your beneficiaries WILL receive the death benefit (much larger than the premiums you’ve paid, by the way). Even so, we aren’t using this for the death benefit. It’s for cash management.

As far as #2 goes, Whole Life insurance cannot be a “bad” investment because it’s not even an investment. It serves as the required rate of return on your capital. It’s not an alternative to the S&P 500. It’s an alternative to your savings account and bank loans.

I also don’t believe that #3 holds much weight. If you’re scraping by and only able to save $10/month, you should stay far away from Infinite Banking until you get your income up or your expenses down. However, if you can afford to save, and you have idle cash in your bank account throughout the year, this can work incredibly well.

I believe #4 may be the most common critique of Infinite Banking. This one is a bit more complicated and involves math, so we’ll come back to it.

Misconceptions In Favor of Infinite Banking

On the other side, we have those who either overstate or misunderstand the benefits. They might say…

1. “Control” is what really matters

2. Growth within the contract is irrelevant

3. Don’t invest in the stock market

4. The opportunity cost of starting your system isn’t important

For #1, what matters far more than “control” is the guaranteed compounded growth on the contract and the ability to borrow against that capital to keep it compounding. “Control” is important, but it’s never explained. And while this is a private contract and you have certain contractual rights (contrary to banks), your money isn’t literally in a vault. It’s still money at the insurance company.

In regards to #2, this is flat out incorrect. Growth absolutely matters. The point of Infinite Banking is to avoid interrupting the compounded growth of your capital. If it’s not compounding, it pretty much defeats the purpose. This is not an investment, but growth is important.

I think #3 is silly. While I consider myself more of a “value” investor, in which I try to identify unique, low-risk, high-reward opportunities in the market, you cannot dismiss the long-term growth of the S&P 500 (even though valuations are stretched right now, which may not bode well for the next 10 years — see: chart below). Many also complain about the “fees,” which are negligible nowadays in low-cost ETFs. And taxes matter, but after-tax growth can still be attractive.

I believe #4 may be the most overlooked point that advocates of Infinite Banking miss. This also involves math, so we’ll come back to it.

Paying to Borrow

Now time for some math. Let’s start with the misconception from the opponents of Infinite Banking — paying to borrow your own money.

Does it make sense to borrow at 5.5% against an asset that’s growing at 5%? Most people would say “no.” If this asset was worth $100,000 at the beginning of the year, your interest cost would be $5,500, and the year-end value of your asset would be $105,000. You lost $500… right?

This is true, but it’s only true in the short-term. Let’s assume you take a $100,000 policy loan against your cash value and only pay back the interest each year — $5,500. After one year, you’ve paid $5,500 in interest, and your asset only grew by $5,000. However, because your liability (the policy loan) isn’t compounding, and since your asset continues to compound, this narrative quickly changes.

After year five, your asset growth (additional liquidity that can be accessed via tax-free policy loans) exceeds your cumulative interest cost by $628. After ten years, your cumulative interest paid is $55,000, yet your asset has increased by $62,889. After twenty years, you’ve paid $110,000 in interest, but your asset has now increased by $165,330. After thirty years, you’ve paid $165,000 in interest, but your asset has grown by $332,194. So, even if you don’t pay your principal balance on the simple interest, non-amortized loan, you’re still achieving compounded annual growth.

This is the Buy, Borrow, Die strategy the wealthy use. For instance, instead of Elon Musk paying capital gains/income taxes, he can borrow against his $250B of TSLA stock to buy things or invest. Meanwhile, his TSLA stock compounds over time.

Now, let’s assume you used that $100,000 to invest back in your business. This generates an additional $20,000 in annual free cash flow, which you use to repay your policy loan over five years. After just two years, your asset growth exceeds your cumulative interest paid, and you still achieve the long-term compounding in your policy.

Instead of Infinite Banking, had you instead paid $100,000 in cash and just saved the $20,000 each year for five years in lieu of loan repayments, your savings balance would be worth $261k less after 30 years (I’m still showing the IBC Asset Growth for comparison). Also, this interest of 2% is WAY above the market average over the past 30 years on a savings/checking account, it doesn’t factor in taxes paid each year, and it also doesn’t factor in future withdrawals that would stop the compounding.

Buy Term, Invest the Rest?

So many people opposed to Infinite Banking suggest people should just buy term and invest the rest. After all, the market long-term return is typically 9-10%. However, this strategy is NOT an alternative to Infinite Banking. This buy term, invest the rest is an alternative to simply saving within a Whole Life policy. But that’s not what Infinite Banking is. Infinite Banking is the process of borrowing against your cash value to purchase things or invest.

Nothing is stopping you from borrowing against your cash value to invest in your business, real estate, or the stock market. However, investing comes with risk. Let’s think back to SVB’s biggest problem. They took money they needed (cash for customer withdrawals that can happen at any time) and invested it in long-term U.S. Treasury securities, which historically do really well over time. Had they held these securities for 20-30 years until they matured, they may have been decent investments.

But that’s not what happened. As investors started withdrawing or spending money, banks were forced to sell these securities. Due to inflation, the Fed aggressively had been raising rates, which crushes bond prices. When selling these U.S. Treasury securities at deep losses to meet liquidity, they lacked the capital to meet withdrawal demands.

The whole point is this. If you need to buy things in the future, or you need to invest, why would you “save” that money in the volatile market? It’s an INVESTMENT. It can decline 30, 50, or even 70%. It has happened before, and it will happen again at some point. Is a 50%+ decline really worth the risk to achieve a 10% taxable return instead of 5.5% tax-free growth that comes with zero downside?

The advice isn’t to avoid investing. I’ve made tremendous returns investing at times. The advice is to not take money you need and lock it up in securities that need a long-term horizon to confidently perform well.

Opportunity Cost

The biggest factor that advocates of Infinite Banking overlook is the immediate loss of liquidity. Standard (not structured for Infinite Banking) Whole Life premiums are called base premiums. They buy death benefit over time (i.e., for 30 years or until age 100). The problem with base premiums is that they don’t generate cash value in the first year. The insurance company keeps this money to cover expenses.

We mitigate this factor with Infinite Banking by using PUAs (paid-up additions). These are mini, one-time, paid-up death benefits that boost cash value dollar for dollar. For instance, someone wanting to save $2,000/month for future investments and expenses might pay $800 in base premium and $1,200 in PUAs. This would leave them with about $1,200 in cash value (from PUAs) to borrow against in the first year.

The first year is always the hardest. Each year after that, base premiums generate more and more cash value. However, that “cost of starting your own banking system,” as many advocates like to say, is still an opportunity cost. It’s money you can’t spend today. It’s money that’s compounding in the policy over the long-term, so this is where an investment is actually a good comparison. Here’s an example (click to expand).

Key Assumptions

• Green (left) shows an Infinite Banking policy. Blue (middle) shows a saving and investment alternative. Red (right) shows the difference between value and liquidity.

• For simplicity, the IBC policy is going to be a “reduced, paid-up” policy after 7 years, which means we pay premiums for 7 years. After 7 years, premiums stop, the death benefit drops some temporarily, but our cash value continues to grow.

• We’re assuming saving $200,000/year across both scenarios. For Infinite Banking, we used a 40% base premium ($80,000/year) and 60% PUA ($120,000/year) split.

• For the savings and investment portion, we’re assuming that our savings amount is equal to the cash value. The investment amount is equal to our early opportunity cost — premiums paid minus cash value liquidity/savings, which is money that we can’t access today.

• We assume our investment, in which we only contribute to for three years, is compounded at 10%. No taxes are calculated on this, because we don’t know when you’d potentially sell. The savings amount is compounded at 2%, taxed at 25% ordinary income (1.5% after-tax growth), which is still way higher than historical averages.

With the Infinite Banking policy, you’ll see that we pay $1,400,000 in premiums over seven years. After 30 years, we’re left with a cash value of ~$4.4M. As you’ll see, in the fourth year, we no longer worry about the liquidity drag (opportunity cost). Net cash value growth (annual cash value increase minus premiums paid) is positive. Therefore, our total opportunity cost is $94,660 from the first three years.

If we assume that $94,660 is invested and compounded until the 30th year at 10%, we end up with $1.6M. Our total savings of ~$1.3M compounded at the after-tax 1.5% equals ~$2M after 30 years, giving us a total value of ~$3.6M.

Even when we consider the opportunity cost of getting started, after thirty years, we have an extra $844,101 using Infinite Banking as opposed to saving and investing. Plus, this still doesn’t factor in any taxes on the investment amount. If we assume you bought an ETF and held it for 30 years, and you paid a 15% long-term capital gains tax, IBC outperforms by almost $1.1M after 30 years. If you are trading in and out of securities more frequently, the tax burden is going to be even higher. If you sell on a down year, you could receive far less.

One thing we didn’t discuss yet is the liquidity. For Infinite Banking, you can generally borrow against about 95% of your cash value. Why? The insurance company assumes you won’t pay back your loan or your interest, so they bake this into the loan amount.

For the savings amount, we assume 100% liquidity. For the investment amount, we only assume 50% liquidity because that’s generally the max margin loan you can take in brokerages. Yes, you can choose to just pay tax and sell your stocks, but remember. The whole point of Infinite Banking is to KEEP YOUR CAPITAL COMPOUNDING UNINTERRUPTED. Also, borrowing against your value may result in margin calls, forcing you to sell low if the market dips.

In this scenario, liquidity is higher for IBC in just the second year. You have more capital that you can borrow against without interrupting your long-term compounding. After 30 years, liquidity is about $1.6M higher for IBC.

And that ~$6M+ death benefit is just the cherry on top that lets you sell your business and spend the money you earned, all while knowing the next generation will be taken care of.

Conclusion

Many business owners just look at the pre-tax growth of 10% and assume it’s a better strategy. But, we know damn well that you aren’t investing all your liquid capital in long-term investments. You can’t tell me the 60-95% of revenue you spend each year to maintain and grow your business sits in the stock market…

Infinite Banking is NOT an investment. It’s not an answer to, “what should I invest in?” It’s an answer to, “what am I doing with my cash?” We’re not talking about the 5% you have left over that you want to invest in a retirement account. We’re talking about the other 95% that goes in one door and right out the other.

I strongly encourage investing. I’d argue that you have far better opportunities in your business than buying a low-cost index fund when the market is trading at all-time highs, but that’s all up to you and how you want to take risk. Again, nothing is stopping you from borrowing against your cash values to invest in whatever you want. Either way, Infinite Banking is a far superior cash management strategy that provides you with early liquidity, attractive tax-free compounded growth, and zero contractual downside.

Book a call here if you’re ready to get started, and please reach out if you have objections.