Infinite Banking Calculator

What is infinite banking?

Infinite banking means funding a dividend-paying whole life insurance policy, building cash value, and borrowing against that cash value instead of from a bank. You repay the policy on your own schedule, and the cash value keeps growing while the loan is outstanding.

A policy loan isn't a withdrawal. The insurer lends you money with the cash value as collateral and charges interest. While the policy stays in force and isn't a modified endowment contract, the loan generally isn't taxable income.

Why the numbers matter

The pitch compares the policy loan rate with a bank rate. The fairer comparison is what the same premium dollars would earn if you used them to pay down debt directly. Paying off debt earns its interest rate with no risk, and in a policy's early years only part of each premium becomes cash value.

The risks are specific. If the loan and its interest grow larger than the cash value, the policy can lapse, and the loan above the premiums you paid is generally taxed as income even though you receive no cash. A loan still owed at death is subtracted from the death benefit.

How to use this infinite banking calculator

1. Choose whether you already have a policy or are considering a new one.
2. For an existing policy, enter the cash value, the premiums you've paid and the amount you'd borrow. For a new policy, enter the yearly premium, the years you'll pay it, and the cash value build-up from the insurer's illustration.
3. Enter the policy loan rate, the rate on the debt you'd pay off and the cash value growth rate.
4. Tick direct recognition if your insurer credits a different rate on borrowed cash value, and enter that rate.
5. For an existing policy, choose whether you'll pay the loan interest each year. Unpaid interest is added to the loan.
6. Read the headline, then check the chart for the year the loan could overtake the cash value.

Example: borrowing $50,000 from an existing policy

How to read your results

For an existing policy, a positive advantage means borrowing from the policy beats keeping the debt, after loan interest and any credit lost to direct recognition. Check the lapse warning: if unpaid interest lets the loan overtake the cash value, the policy can lapse and trigger tax.

For a new policy, the headline compares the policy route with sending the same premiums to the debt. If the policy route never catches up, the plan only makes sense when you need permanent life insurance for its own sake. The death benefit isn't counted in the comparison.

How to make policy loans work for you

1. 01

   Pay the loan interest

   Paying interest each year keeps the loan from compounding against the cash value, the most common path to a lapse.

2. 02

   Borrow only where the spread is wide

   A policy loan helps most when it replaces debt at a clearly higher rate, such as credit card balances, and least when it replaces a low fixed-rate mortgage.

3. 03

   Ask how loans affect dividends

   Find out whether the insurer uses direct or non-direct recognition and what rate borrowed cash value earns. The difference changes the math.

4. 04

   Stay under the seven-pay limit

   Paying premiums faster than the seven-pay test allows makes the policy a modified endowment contract. Loans from it are then taxed on gain first, with a 10% penalty before age 59½.

Common infinite banking mistakes

• Judging by the loan rate alone

  A low loan rate means little if the premiums would have earned more paying down debt. Compare the whole path, starting from the first premium.

• Ignoring early-year costs

  In the first years, much of each premium pays for insurance costs, expenses and commissions instead of building cash value.

• Letting interest pile up

  Unpaid interest compounds on the loan. Left long enough, the loan can outgrow the cash value.

• Forgetting the death benefit shrinks

  Any loan still owed at death, plus interest, is subtracted from what your beneficiaries receive.

The infinite banking formula

Key terms

Cash value

The savings part of a permanent life insurance policy, which grows over time and can be borrowed against.

Direct recognition

A dividend method that credits a different rate on cash value you have borrowed against.

Modified endowment contract

A policy funded faster than the seven-pay test allows. Loans from it are taxed on gain first.

Lapse

When a policy ends because its loans and charges use up the cash value. An outstanding loan can then become taxable.