The Simple, Step-Wise Explanation of Infinite Banking

(Nationwide & Pacific Life Specific)

“Planning is spending a small drop of time now to save an ocean of time later” - Alijah Wood

Intro To Set The Scene:

With loans, I'm going to break this down simply, so that you can understand how the infinite banking concept functions through a life insurance policy. 

So let's take a look at our friend Greg who has an IUL (indexed universal life insurance policy) with a cash value account (the money he has access to) of $1 million dollars.
Side Note For Newcomers: the cash value account is composed of the money that Greg funds his policy with plus the compound interest that has since multiplied his account.

So Greg now has a cash value account that amounts to $1 million, and he wants to take out a $500,000 loan to play with. Therefore, let's paint the picture of what happens to the three cash accounts within an IUL when a loan gets taken out:
- Cash value account
- Cash
- Grandfather account (loan balance account)

SEE BELOW!

Here are THE SIMPLE 5 steps you need in order to understand LOANS! 👊😁

1. Cash Value Account

Starting with the cash value account of $1 million, when Greg takes out a $500,000 loan, his cash value is not affected at all in an IUL. It stays at $1 million.

Therefore, his $1 million keeps growing at a predictable 10 percent rate of return. It is important to note that this growth is on the full amount of the principal and the future principal with compound interest. Thus, even though Greg took out a $500,000 loan, he still gains interest on $1,000,000. In conclusion, the cash value account is unaffected by loans.

2. Cash

Now what happens with the $500,000 that Greg took out? Well, Greg can use that money for whatever he wants. It is his money.

Greg can put it into a real estate investment, start a business, fund another investment, buy a car, buy jewelry... anything his heart desires. Yet, it is important to note that Greg has diligent financial literacy practices, so he knows not to take out too many lump sums to use on liabilities.

3. Grandfather Account

The grandfather account (loan balance account) is the really the cool piece.

So when Greg takes out a $500,000 loan, he automatically opens up a $500,000 grandfather account.  This grandfather account is going to grow at a fixed interest rate of 4 to 5 percent depending on the company Greg is using. However, the groundbreaking aspect of this account is that it allows Greg to fund his policy at a higher rate!

For example, normally Greg was only able to fund his policy at $62,000 per year. However, with a loan balance account amounting to $500,000, Greg is now able to grandfather in a lump sum of up to $500,000 into his policy. This money can be added as one huge lump sum (recommended) or as a gradual funding strategy.
Yet, why would Greg want to throw in all his money at once?

4. Why is this beneficial?

It is beneficial to fund your IUL as quickly as possible because:

- It's fully accessible within 3-5 days with no taxes or penalties attached
- It starts gaining 10 percent interest predictably in a tax-deferred environment
- It is safe from all market volatility, and it's completely tax free.

So why would Greg not want to throw his lump sums in his IUL rather than a bank where it does not earn interest? ... Self-explanatory question.

5. Warning ... Danger ... What is the catch?

With taking out loans, Greg should be mindful of the gap between his cash value account and his grandfather account.

Now, this isn't anything that's easy to mess up on... it is actually quite hard, but it is possible to get into loan trouble which would put your policy in danger of lapsing.
As a general rule of thumb, if your loan balance gets to be 90% of your cash value account, you will want to pay down the loan... unless you have sufficient alternative cash reserves to manage it without risk.