Never pay taxes on your investments again

Infinite banking or “Bank on Yourself” has been gaining traction over the last few years. In short, the concept is based on over funding whole life insurance and using the cash value to fund future expenses instead of borrowing or selling investments.

To place this concept into context we need to address a few hard truths. We have no control over three variables:

1. Inflation,
2. Future income tax rates, and
3. Market returns.

 In other words, the three most significant factors that will determine our standard of living in retirement are out of our hands. Congress decides how much you can spend in retirement. There are trillions of dollars in 401k and IRA accounts that have yet to be taxed. The government loves this. Fully 1/3 of your retirement money is not yours. It has never been yours and will never be yours. In effect, you have a silent partner (the IRS) who has the ability to change his ownership of your retirement fund without your consent. Most workers plow money into these accounts to lower their current income tax burden without thinking about the fact they may wind up paying even higher tax rates when the money comes out. I realize that company match programs make it very tempting to participate in company sponsored plans. These plans are not all bad. The issue is you need a hedge, a hedge against poor market returns and a hedge against higher tax rates.

One major component of infinite banking is your ability to pull money out tax-free without regard to whatever Congress decides later. Let’s break down the concept.

Two Clients

The best way to illustrate this financial transaction is to compare two 65 year old investors both in similar financial condition. One has a paid up $1mil whole life policy, the other does not. Both have large retirement accounts. The investor with the paid-up policy has much more flexibility than the other investor. The flexibility involves having the ability spend assets that will be replenished at his death or using tax-free withdrawals to minimize the need to use heavily taxed IRA/401k assets. The client without the $1mil policy must be much more concerned about leaving enough money to support family members.

As mentioned before, infinite banking is nothing more than over funding whole life insurance to it develops cash value sooner and is paid up earlier. The IRS regulates how much money can be invested in life contracts. If their rules are violated withdrawals may be taxable where the policy is considered a modified endowment contract. If set up correctly this will not happen. Below is an example of how this works. In our exempt a healthy 51-year-old male, non-smoker is buying $100,000 whole life policy with $425,000 of ten-year term. The normal premium is just over $5,000 per year. Instead we are going to put $25,000 into it per year for ten years, either out of cash flow or by repositioning other assets. For the next five years, we are going to use dividends and cash values to pay the premiums for there is no out of pocket for five years. Under current dividend scales, the client may withdraw $25,000/yr for 16 years tax-free. Now at age 81, the client received $150,000 more than he put in and has had life coverage for 31 years paid for out of pre tax dividends. You will notice in the chart below that the client is never out of pocket more than $3665. The reason this is true is due to the fact that whole life premiums are NOT an expense – they are an investment, moving money from one pocket into another. The out of pocket amount reflects the total premiums paid and subtracting the cash surrender value. For more information go here.

About the Author:

David Disraeli has been in financial services for over 31 years. He is an author, speaker and financial advisor and the president of The Personal CFO, Inc. During his tenure, David has been an insurance agent, portfolio manager, stockbroker, Certified Financial Planner and financial analyst.