Infinite Banking: The Buy, Borrow, Die Strategy for Everyone

We recently stumbled across a post from SmartAsset titled Buy, Borrow, Die: How the Rich Avoid Taxes. In the article, they discuss a concept used by the wealthy, in which they avoid taxes by buying appreciating assets, borrowing against them, and efficiently transferring those assets to heirs when they die. Not only does this process allow the wealthy to avoid capital gains (because loans aren't taxable), but it keeps their capital compounding over time.

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We appreciate SmartAsset taking the time to explain a very important concept. However, we strongly disagree with their conclusion, which is for those without significant assets to look to other means to create wealth through 401ks and IRAs, for example. Contrarily, we believe that Infinite Banking is the Buy, Borrow, Die strategy for everyone, including those starting without significant assets. Let us explain.

Buying Assets

SmartAsset highlights that the "Buy" part of the strategy involves using wealth to purchase appreciating assets such as stocks, real estate, artwork, fine wine, and other collectibles. The author notes, "Ideally, you buy assets that will grow in value on a tax-deferred basis and yield passive income." Stocks (through dividends) and real estate (through rental income) can bring in passive income, but artwork, fine wine, and other collectibles aren't really assets for that.

Additionally, while stocks tend to trend higher over time, they aren't guaranteed to grow in value. For instance, there have been numerous occasions in which stocks traded down or sideways (no appreciation) over 10, 15, or even 20+ year periods. This paper from Northern Trust illustrates the magnitude of stock and bond market drawdowns as shown in their screenshot below:

Additionally, while real estate prices haven't seen the same drawdowns, housing is built on leverage. People aren't generally buying equities with a 20% "down payment" and financing the rest. As a result, it requires a much smaller drawdown to have an impact on real estate equity values. And while home price growth generally trends higher, rental income may be much more volatile as maintenance, taxes, utilities, and regulation are factors.

Our point here isn't that you shouldn't buy stocks or real estate. We agree that these can be very attractive investment opportunities, but just note that you may be locking up capital for long periods if your timing isn't strong. As a result, for those without significant assets allowing them to withstand longer term volatility, we believe these are risky assets to leverage for annual purchases or additional investments.

"If ignorance is bliss, why aren't more people happy?" - Thomas Jefferson

With that being said, we believe SmartAsset left out the best (and potentially only) asset for safe, guaranteed, tax-free (if structured properly) appreciation with passive income that can be leveraged - a properly structured, dividend-paying whole life insurance policy from a mutual company, which is the foundation of Infinite Banking.

Borrowing Against Assets

As opposed to nearly all other assets, the cash surrender value ("cash value" for short) of a Whole Life insurance policy, which is effectively the equity in your death benefit, is contractually guaranteed to increase each year. Once a cash value has reached a certain level, it cannot decline. This amount represents what the insurance company would pay you to surrender the policy, relieving them of all future obligations. Since they're already prepared to pay you this amount, it serves as a liquid reserve they're more than happy to lend against rather than having you surrender your policy.

Sure, you can borrow against other assets, but the key difference here is that with Whole Life insurance, the lender is the guarantor of the collateral. Let's compare it to a HELOC. Banks need to charge higher interest rates to borrow against your home equity because not only is the equity not guaranteed to increase, but it can decline, resulting in negative equity. Failure to repay means the bank could lose money. However, with Whole Life insurance, the insurance company (lender) already owes you a death benefit that exceeds your cash value, so a failure to repay just means they now owe your beneficiaries less when you die.

Furthermore, while borrowers may avoid realized gains from stocks and real estate by borrowing against their capital instead of pulling from it, dividends and rental income are still taxable. However, Whole Life insurance dividends are not taxable if structured properly. Therefore, even during the periods in which you aren't leveraging your cash values through Infinite Banking, you can still benefit from guaranteed annual growth while avoiding writing the much feared check to the IRS each year.

Some of you may be wondering why we can't do something similar with a 401k, which has the chance for higher appreciation if the market performs well. However, 401k loans are different - you're borrowing FROM the plan, not against it. This means your investments have to be liquidated and pulled from the policy, thereby stopping all compounded growth on that capital. Additionally, you're generally capped at 50% of your vested balance or $50,000, whichever is lower. The loans are highly inflexible, and any job changes/losses may require you to pay taxes and early withdrawal penalties if you can't afford to immediately pay off the loan. You cannot take loans against IRAs. This is why we caution against SmartAsset's advice to lock up capital that could be safely leveraged to buy or invest through your working years.

Transferring Assets

Whole Life insurance is a phenomenal asset for estate planning because the death benefit is paid out tax free. However, we take a unique approach in which we structure policies for Infinite Banking. The policyholder is able to grow and leverage his/her capital, maintain death benefit protection, and eventually transfer wealth tax-free. Since this is permanent insurance, the insurance company is already planning to pay out your death benefit one day. Therefore, you're likely to avoid many of the other complicated probate issues with this simple and efficient asset.

Conclusion

The buy, borrow, and die strategy is successful because it allows people to avoid taxes while leveraging their capital that continues to compound over time. Don't be discouraged if you lack the hundreds of millions of dollars required to leverage massive brokerage accounts with confidence. Instead, look to Infinite Banking to begin structuring your own strategy.

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