The Infinite Banking Concept

The Infinite Banking Concept goes by many names: Be Your Own Banker, Bank On Yourself, and Privatized Banking. There are lots of marketing materials around it [1,2], but little formal evaluation on Wikipedia or Bogleheads. If you’re looking for a deep dive on the numbers and strong arguments against IBC, I recommend the blog posts by the White Coat Investor [3] and Jacob Irwin [4].

The Life Insurance Model

Nearly every site or video or podcast advocating for IBC is based on life insurance as the underlying “private reserve”. A typical pitch includes:

• receive 4-6% interest, tax free
• insulated from the vagaries of the stock market
• take out loans against your cash value, and pay yourself back
• leave money to your heirs that avoids the estate tax
• Hillary Clinton and Warren Buffett use this technique

but tries to avoid discussion of the risks (for example, dividend rates trending downwards, or possible insolvency of the insurance company). Each of those points has counter points (see [3, 4] for detailed critiques), but the bottom line is that you can do better investing your money in other ways. Where it might make sense is:

• you are very wealthy and the estate tax applies to you (more than $5M per person)
• you want to diversify away from other asset classes (stocks, bonds, real estate)

Other Models

After reading [3, 4], I was convinced that IBC was a terrible idea; the only advocates were all insurance agents. The agent I spoke with tried to encourage me to become an agent as well so I could play with the models directly, but I found that it was really a multi-level marketing (MLM) system that encouraged a proliferation of agents in favor of IBC. (Note that there is no well defined fiduciary duty for insurance agents [5] at this time.)

The next evolution in my thinking about this strategy came from the comments section of a YouTube video [6]:

While there are many tools that can work as a private reserve, some will work better than others. Here’s a list of some (not all) of the most important things to look for in an asset that will give you the most advantages as a private reserve:

1) it won’t go down in value 2) you can collateralize it 3) you have a guaranteed loan option 4) you can pay back your loan with unstructured payments 5) the account grows at a rate high enough to (at a minimum) combat inflation 6) your capital continues to grow, even while you have a loan out against it

They go on to explain that a second mortgage or loan based on stocks are riskier because if your house or stocks lose value you can be subject to a margin call. Yes, that’s true - but if you don’t over-leverage, this risk seems negligible.

That pointed me to some additional resources which are essentially the same strategy but using different names:

• HELOC strategy [7, 8] or Money Merge Account [9]
• Wealthfront’s Portfolio Line of Credit [10, 11]

Bottom Line

The bottom line for me is that the idea of a “private reserve”, where you take out a loan against an asset you already have, makes sense if you were going to use credit anyway. For example, if you would take out a loan to buy a car, it makes sense to compare the rate you get for a car loan versus a loan against your portfolio.

Where it gets more attractive is if the loan is to fund another investment, such as purchasing real estate. In such a case, you’re still getting appreciation on the underlying asset while you’re using the funds as a downpayment on another asset. As long as you have positive cashflow, this is where the strategy might get you a few extra points of return… but at the expense of more complicated finances.

References

1. Nelson Nash’s site
2. How Privatized Banking Really Workds
3. A Twist on Whole Life Insurance
4. Is the Infinite Banking Strategy Using Whole Life Insurance Right for You?
5. Do Brokers, Agents Owe Fiduciary Duty?
6. Infinite Banking - Self Financing with a Private Reserve
7. Can You Really Pay Off Your Mortgage Early with a HELOC?
8. How To Save Thousands On Interest With A HELOC
9. Money Merge Accounts: Are They A Good Deal For Home Borrowers?
10. Portfolio Line of Credit
11. The Advantages of a Wealthfront Portfolio Line of Credit Over a Traditional Home Equity Line of Credit