Fundamentals of Infinite Banking: How the Wealthy Do It!

For infinite banking, it's important to obtain a policy from a mutual insurance company because the policyholder (you), benefits when the company profits.

Frequently Asked Question:

Q: Does it matter which life insurance agent I work with if it's within the same company?

A: After you originate the policy, most companies will have apps or online access to see your cash value, amounts owed, and to take loans from. In most cases, you will call into a general customer service (who are very helpful) to execute payments, loans, or withdrawals.

Where the agent is important is designing the policy for you in terms of liquidity/returns/other policy riders. And most importantly what separates two agents selling the same policy from the same company is the commission assessed. For Simple Passive Cashflow clients we work with our vendors to drive commissions down because our clients originate huge policies ($50-$250k a year). We want to make you happy within the SPC Ecosystem of investments. Most of the early clients choose to get other quotes from other vendors and found that was a waste of time because we always beat them on pricing (assuming it's from a top rated high quality insurance company).

When taking a life insurance policy on a child, there are limitations to consider:

• The insurance company will set the max amount of death benefit to 50% of the parent's total death benefit, creating a significantly smaller MEC limit.

• Since minors don't have to go through underwriting/medical exams, they will get lumped into a juvenile health-rated class that is sort of like group health insurance. This can delay the cash value break-even point 1-2 years compared to an individually underwritten policy of a 30, 40, 50, or 60 year old.

Considering these limitations, it's more efficient to grow the cash value in an individually written policy than transfer the wealth to the minor.

The advantage for the 20 year old will be the ability to have the cash value grow longer.

Between a 20 year old and a 60 year old funding the same amount into a policy, there will be drastically different death benefits, but a similar cash value break-even point and cash available.

In order to know how much we can maximize the cash value and receive tax favorable treatment of whole life insurance, it's important to understand the IRS and Company limits.

Also known as the MEC limit, 7-Pay Premium, or TAMRA test, this limits the amount an individual can fund into the policy each year.

It is called the 7-pay premium because the IRS is really stringent on the first 7 years of the policy, after that the MEC limit will reset based on age, death benefit, and cash value in the policy.

The IRS limit is based on the age, gender, and total death benefit of the policy (which includes any term riders attached). We can set this limit to whatever we want when designing the death benefit of the policy.

It is a cumulative/rollover limit meaning if you had a $50,000 MEC Limit and you paid $10,000 in one year, you can put in $90,000 ($40,000 + $50,000) into the policy the next year.

In addition to the IRS limit, the insurance company limits how much you may put into paid-up additions which goes towards the cash value of the policy. The limit varies company to company. For example some companies have a PUA ratio limit of 10X the base premium.

Modified Endowment Contract (MEC)

If the IRS limit is surpassed, then the policy becomes a modified endowment contract (MEC), and the policy receives tax treatment similar to a retirement account.

The death benefit is still paid income tax-free (if you have a high net worth then you will need to pay estate tax) and the cash value still grows tax-deferred, but when you take out those gains you will need to pay ordinary income tax. And if you're under 59 1/2, then you have to pay a 10% penalty tax as well.

Also important to note when withdrawing from the cash value in a MEC, the gains are pulled out first. So if you had $110,000 in the policy ($100,000 basis and a $10,000 gain) and you withdrew $10,000, you would need to pay ordinary income tax on that $10,000 gain plus a 10% penalty if you are under 59 1/2.

Frequently Asked Question:

Q: What can I do if I trigger a MEC?

A: Most insurance companies give a 30 day window to reverse the MEC status. The policy owner must send an email to the insurance company stating something along the lines of “Please reverse the MEC status for Policy # _______” it was overfunded by accident. Then the insurance company can refund the difference that is above the limit.

If it's past the 30 day window, you can cash the policy out, cancel it, and fund a new policy.

Policy design is everything, you can have the same life insurance product from the same company, but if you have a poor design you could have drastically different results.