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Infinite banking refers to a process by which an individual becomes his or her own banker. The infinite banking concept was created by Nelson Nash. In his book, “Becoming Your Own Banker,” Nash talks about the use of whole life insurance policies that distribute dividends and how owning such policies allows individuals to dictate the cash flow in their lives by borrowing against/from themselves instead of depending on banks or lenders for loans.
In Nash’s infinite banking concept (IBC), the cash surrender value(s) of whole life insurance policies act as collateral for a loan. The individual simply needs to call the insurance company and ask to take out a policy loan.
A whole life insurance policy is meant to cover the entirety of an individual’s life, not simply to assist family/friends in the event of the individual’s death. As such, the policy is eligible to pay out dividends, meaning it generates a form of income that increases the cash value of the policy over time.
As soon as the policy is active, it possesses value and can be borrowed against so that the individual can take money out of the policy as a loan (using the policy as collateral) to use for handling unexpected or significant expenses that occur during the individual’s life.
The most outstanding positive of the infinite banking concept or process is the sheer improvement in liquidity or cash flow. The value of a whole life insurance policy acting as collateral is far more liquid than, for example, equity in real estate, because the loan can be taken out more quickly and the individual can secure cash in hand faster and usually at lower interest rates than those available from traditional lenders.
The improvement to an individual’s cash flow can be significant, especially in times of financial hardship or unforeseen expenses, such as medical bills or the need to buy a new car. An insurance policy loan can also come in handy if an individual happens to be without work for a time, whether due to health issues, a death in the family, or simply the loss of a job. Because whole life insurance policies are non-correlated assets – meaning they’re not tied to the whims of the stock market – they are set to retain their worth.