In my book, “Next-Level Income,” I talk about the buckets that I put my money into. (Get your free copy here!) The 3rd bucket is what I like to call my “Opportunity Fund.” When I started investing, I had a goal to invest a certain amount per year. I would pay myself first and THEN I would pay my essential expenses. What was left I got to spend on fun things! Travel, bikes, etc. Personally I like to use a concept known as “Infinite Banking.” Infinite Banking is a specifically structured life insurance plan that allows me to build equity and then invest it when an opportunity presents itself. The great thing is that you can also use your cash value for things like buying a car, an emergency fund or paying for college. All without having to pay interest to a bank.

Exploring Infinite Banking 

Infinite Banking is a concept that was created by Nelson Nash in, “Becoming Your Own Banker” (which I highly recommend you read). Nash describes how the use of whole-life insurance policies that distribute dividends can allow individuals and families to control the cash flow in their lives by setting up their own bank instead of relying on banks or lenders for loans.  

You may have heard that whole-life insurance is a “bad investment” and that you should buy term and invest the rest. This is what I learned early on, even when I was working for State Farm as I finished my MBA. However, just like I discussed in our podcast with Richard Wilson, I wanted to learn how the rich invest, not the poor. What I discovered was that many of the wealthiest families and businesses in the world utilize life insurance for not only wealth preservation, but also wealth creation.

 Here’s a short list of some famous businesses that utilized whole-life insurance to start or grow their companies:

• Disney: Walt Disney 

• McDonalds: Ray Kroc 

• J.C. Penney: James Cash Penney 

Again, I knew that I wanted to invest like the rich, not like “poor” people who plan to have less money in retirement and “die broke.” My goal is to create multi-generational wealth. Let’s look at some of the advantages and disadvantages of the Infinite Banking concept:

 Advantages of Infinite Banking 

•  Guaranteed liquidity: you can take a loan out any time without a credit check, approval, or even giving a reason to the life insurance company!

• Safe growth: certain policies have guaranteed cash values every year that have historically grown ~5%.

• Tax efficient: Tax-sheltered growth, tax-exempt distributions and tax-free death benefit.

• Annual dividend payments: Just like a stock, or real estate, whole-life pays dividends every year.

Disadvantages of Infinite Banking 

With the advantages above, it seems like more people would have these policies in place? However with the advent of mutual funds over the past decades, advisors have advised clients to “buy term and invest the difference.” So let’s consider why you might not consider the Infinite Banking concept: 

• You don’t want or need a permanent death benefit 

• You can’t afford the premiums or your income is not stable 

• Expenses are front-loaded: just like starting a business, there is an up front cost to the insurance.  

How to structure your policy 

Personally I chose to start our family’s policies the year I found out my wife was pregnant. As I made more money, I put my bonuses and extra cash into these policies and then borrowed against them to buy real estate, land and ultimately fund partnerships when I started to syndicate deals. The key is that you must work with an advisor that specializes in the Infinite Banking Concept so that they can minimize fees and maximize cash value. An advisor that structures these policies makes less commission than a typical whole-life policy and the cost of the insurance over the life of policy should be <1%. If you compare this to fees that are paid to financial advisors or mutual funds it’s comparable or even less. The keys to a properly structured policy are: 

• Must be a mutual insurance company  

• Whole-life, dividend paying policy 

• 1st year cash value of the policy should be 50% or more. Ideally cash value should be 70-80% of first year premiums. 

To learn more about this strategy, you can access more information and our new webinar here.

You can also listen to our recent episode of the Next-Level Income Show, MONEY INSIGHTS INTERVIEW – How To Use Infinite Banking To Supercharge Your Investments.