This article was first published on June 30, 2025, by Nebraska Farmer as part of the "Tough Decisions" column series, contributed by the Center for Agricultural Profitability.
In our conversations about various farm financial management strategies, one question keeps coming up: What are your thoughts on infinite banking?
Given how often the concept is misunderstood and how aggressively it’s marketed, we decided to take a closer look.
Infinite banking involves purchasing a permanent life insurance policy such as a whole life, variable universal life or indexed universal life insurance policy. These policies have two components: a life insurance policy that provides a death benefit and an investment component called the cash value. Infinite banking is simply borrowing against the cash value of the policy.
This strategy is often marketed as a way to “become your own bank.” While this sounds appealing, the tactic rarely works. Although we could elaborate on several challenges and misconceptions about infinite banking, here are four key considerations of this strategy for farmers and ranchers:
1. Cash flow. Permanent life insurance policies are, first and foremost, insurance that requires premiums to be paid to keep the policy in force. While some policies allow the cash value to cover missed payments temporarily, not paying the premiums can cause the policy to lapse, resulting in the loss of both the death benefit and premiums paid up to that point.
Additionally, any gains in the policy up to that point will become taxable. Permanent life insurance is a long-term strategy — you need to know you can make the premium payments in both good and bad years.
2. Timeline. Each time you make a premium payment, a portion of your policy premium goes toward insurance, while the rest goes toward the cash value. At the beginning, that amount being contributed to the cash value is small mainly because of high first-year acquisition costs, but it increases over time. Building a large cash value within the policy for a decent-sized loan often takes years.
Advocates of infinite banking recommend maximizing the cash value as quickly as possible. One way to accelerate the cash value is through “paid-up additions,” if the policy allows them. Paid-up additions are extra payments or dividends.
However, the IRS sets strict limits on contributions during the first seven years of the policy. Exceeding those limits can cause the policy to be classified as a modified endowment contract (MEC), which removes many of its tax advantages, including the ability to borrow tax-free.
3. Rate of return vs. loan interest. When taking a loan on a permanent life insurance policy, you’re not actually withdrawing funds. Instead, you’re borrowing money using the cash value as collateral; this is a non-direct recognition loan. While policy loans are technically tax-free if managed correctly, they are not interest-free.
For infinite banking to be financially beneficial, the interest charged on the loan must be lower than the rate of return on the cash value. Ideally, you would find a “stated” or “guaranteed” rate of return on the policy that exceeds the interest rate on the loan, but these are difficult to come by.
Adding to the risk of this strategy, policy loans don’t require mandatory repayment. Without strong financial discipline, unpaid loans can grow over time, reducing the death benefit and possibly causing the policy to lapse. If that happens and the loan exceeds what you’ve contributed, the IRS may tax the excess.
4. Monitoring the insurance company. Finally, after assessing the risks and planning to purchase an insurance policy, you will need to review the financial stability of the insurer continuously. Remember, the guarantees provided by the insurance company are only as good as the insurance company.
As recently as May 20, 2024, PHL Variable Insurance Co. was placed in rehabilitation. This resulted in many restrictions for non-variable insurance policyholders, including limited withdrawals. While this is rare, it can and does happen.
The infinite banking concept can work, but it is often very difficult to execute properly. And while the concept is very simple, the overall plan can sometimes become difficult. Finding the right policy, getting good underwriting and planning far enough ahead to build up the appropriate cash balance are all obstacles that need to be addressed.
Disclosures
This material is for informational and educational purposes only. It is not intended as investment, tax or insurance advice. It does not constitute a recommendation to adopt or reject any specific strategy, including the infinite banking concept.
The goal of this article is to help individuals and financial professionals identify areas of risk that commonly undermine the effectiveness of such insurance-related strategies and to encourage prudent analysis on any type of long-term insurance design.
Individuals should consult with a licensed insurance professional, registered investment advisor or tax advisor before implementing any financial strategy involving life insurance or policy loans.
Groskopf is an Extension educator and agricultural economist with the Center for Agricultural Profitability at the University of Nebraska-Lincoln. Bailey works for Coordinated Planning. Bailey offers securities through Valmark Securities Inc., member FINRA, SIPC, and offers investment advisory services through Valmark Advisers Inc., a registered investment adviser. Groskopf is not affiliated with Coordinated Planning, Valmark Securities Inc. or Valmark Advisers Inc. Coordinated Planning is a separate entity from Valmark Securities Inc. and Valmark Advisers Inc.
