We met with Gary Pinkerton, a successful investor and a wealth strategist at Paradigm Life, to discuss the strategy of infinite banking. Through Pinkerton’s deep knowledge of how insurance companies work and his extensive expertise in other critical areas of personal finance, he has assisted his clients with the purchase of investment properties while also helping them to elevate their net worth.
The underlying concept of infinite banking is that everyone needs to store cash for various reasons. This is not money that is earmarked for investments. Instead, it is money that is being saved for a specific purpose. For example, it may be used as a rainy-day fund, a reserve for business activities, a reserve for real estate investing activities, and other similar purposes.
For many people, the money that they don’t want to place in at-risk investments sits relatively idle in a checking or low-interest savings account. Often, the savings rate doesn’t beat the inflation rate. Through the strategy presented by Pinkerton, you can potentially reposition your banking activities so that this money grows at a healthy rate of up to 5% annually.
Insurance companies accept monthly premium payments for each policy they underwrite. They grow these funds on behalf of their customers, and the growth rate may be as high as 5% in many cases. Generally, when you buy a whole life insurance policy, you are presented with a guaranteed rate of growth and an upper limit on growth. Often, the actual growth rate falls somewhere in between the margins.
The insurance companies pool together all of the premiums collected into a large fund, and the money is safely invested back into the economy. A portion of this growth is then returned to the policyholders. This is the mechanism behind whole life insurance policies.
One of the unique features of whole life insurance policies is that the growth accumulates tax-free. The policyholder can borrow against the money that he or she has already contributed to the policy without any tax penalty. Essentially, if you have contributed $10,000 in premiums, you can draw against this $10,000 at any time without facing a tax consequence. If you pull out any of the growth, which would be any amount over $10,000 in this case, the excess would be taxed. The taxation is at the same rate that your savings account’s interest would be taxed.
You can see that infinite banking provides you with a convenient way to grow your money at a higher interest rate than a savings account provides. At the same time, this is a no-risk investment opportunity with a guaranteed rate of return. More than that, the interest rate generally fluctuates within upper and lower limits based on market conditions, so it often is aligned well with the inflation rate at any given time.
You can enjoy all of these incredible benefits associated with building wealth, and you can do so while still enjoying unhindered access to your cash. In fact, you can always draw on your initial capital when you need it, and you can return it to your account through your regular premium payments in the same way that you would continue to contribute regularly to your savings account. Even if you draw your original capital out, the full amount of your original contribution will grow at the same rate. This is essentially similar to saving money in your savings account in many ways, but it allows your funds to grow at a much faster rate even when you tap into them.
Unlike term life insurance, whole life insurance has a guaranteed death benefit. Your beneficiary will receive that benefit at the end of your life, and this is similar to the way that an heir may receive other assets at the time of your death. Because of this, a whole life insurance policy is a true asset as well as a savings vehicle.
Keep in mind that the life insurance proceeds can also be applied to a church, a charity, or other beneficiaries. This flexibility gives you the ability to allocate funds as designated. Even if you have taken out a loan against the policy that has not yet been paid off at the time of your death, there is a built-in death benefit. Plus, the policy’s proceeds will also pay off any outstanding balance, so there is never a risk of passing debt onto heirs.
While the initial capital in the life insurance policy can grow slowly over time with regular premium payments, you also have the option of contributing a lump sum of cash to the policy. This essentially enables you to borrow a much larger amount of money without incurring tax penalties. At the same time, the full contribution amount is growing at a decent rate. While some people will draw the full contribution amount out for real estate investing and for other purposes, others will keep a reserve. This reserve can be used for a rainy-day fund or for other essential purposes. Generally, you can tap into the reserve within a few days, so the funds remain easily accessible.
Is infinite banking a smart strategy for you? After you learn more about it, you can consider buying a whole life insurance policy to experience the strategy’s powerful benefits for yourself.