I have been dancing around the “Be your own banker” concept for the last month or so after learning more about infinite banking. I finally figured out what I have never liked about whole life insurance. People use it for life insurance.
Let me tell you a story about myself and my wife and how the concept of the infinite banking system has been gaining my attention. We’re in our late 50’s and we have a house and several rental houses that are mortgaged for far longer than they should be. We have about $100k in an IRA that, to be blunt, hasn’t gained squat in several years. I make good money but most of it goes into paying off a lot of debt fairly slowly. I have a little covey of loans and credit card debt that is really money hungry and if I keep picking away at it the way I am it might never get paid off. I want a 20 year plan to get out of debt and created a retirement fund.
So the other day I was telling my wife about the infinite banking system and how it looked like it should work well for younger people but I had my doubts about what it could do for us. She asked if cashing out the IRA and putting it into something like this would work. So I’ve been playing with ideas. One of the big problems is that if we cash out the piece of junk IRA we take about a $40k penalty and tax hit. That’s the bad news. The good news is that if we do it happens to be about enough to pay off the covey of loans and credit cards I described above. I am currently paying about $2000 a month toward that covey and not effectively paying it off. If I free that up I can than pay that $2000 into a dividend paying whole life policy. By the third year I have repaid myself the $60k.
In the 5th year the policy has enough cash value to pay off one of the rental properties we have. At $2800 a month ($2000 plus the $800 I was paying for the rental house) we would have that paid back to ourselves in 5 years. In year 13 there is enough cash value to pay off our primary residence. The problem at this point is that I’m getting close to my 20 year window. But, by paying off my house I just freed up that much monthly payment, $2400 a month.
So, I am committed from the start to pay $2000 a month for 20 years. It is budgeted and isn’t cramping my lifestyle. So in the 13th year I now have $2400 a month that I can put into a short pay policy, 7 years, that in combination with the first policy will pay us back for the pay off on the house. So, at the end of 20 years I have paid off $550,000 in debt with the interest going to myself, not the bank, and have created guaranteed cash value of over $500,000. We own our best rental and our residence free and clear and have more cash than our IRA could have ever realized and, the kicker…..
The cash is in a whole life policy and is tax free. We can begin taking income from that and not pay taxes while living in our paid off house and collecting great rent. By the way, and this is extremely important. Even though this is done through a company that has paid dividends every year for 140 years, I assumed that none would be paid and went off of just premiums and guaranteed values. If they happen
Bottom line. What I need to figure out is how to use whole life and the concept of infinite banking to pay off our other rentals and have our cake and eat it too. I’m pretty sure I don’t have this right yet, but with the help of my friends I will shortly. If you have any questions or think I’ve got it all messed up, call or email me directly.