Frequently Asked Questions: Using Life Insurance to Build Wealth
How do you use life insurance to build wealth?
You use a permanent policy — typically whole life — that builds cash value over time. That cash value grows tax-deferred at a guaranteed rate, and you can borrow against it through policy loans to fund investments, business opportunities, or large purchases. Because the borrowed cash value keeps earning interest and dividends, your money effectively works in two places at once. The death benefit also transfers tax-free to your heirs.
What is infinite banking?
Infinite banking (also called “be your own bank” or “bank on yourself”) is a strategy that uses a dividend-paying whole life policy as a personal banking system. Instead of borrowing from a bank, you borrow against your policy’s cash value and repay yourself, keeping the interest within your own financial system. It requires a properly designed high-cash-value policy and a long-term commitment — typically 7+ years before it hits its stride.
Is using life insurance to build wealth a good idea?
It can be, for the right person — typically someone who has already maxed out tax-advantaged retirement accounts, has stable income, and wants a stable, tax-advantaged asset that isn’t exposed to market risk. It’s less suitable if you need liquidity immediately, can’t commit to higher premiums long-term, or haven’t yet secured basic income protection for your family. For most people, affordable term life insurance is the right first step.
How much does a wealth-building life insurance policy cost?
Whole life insurance costs significantly more than term — often around 10 times more for the same death benefit, because part of every premium funds the cash value. For meaningful cash-value accumulation, many infinite-banking policies involve annual premiums of several thousand dollars or more. The exact cost depends on your age, health, the death benefit, and how the policy is structured. An agent can model different funding levels for you.
Do you pay taxes on life insurance cash value?
Cash value grows tax-deferred — you owe no income tax as it grows. Policy loans are not taxed as income. You would only owe tax on a withdrawal that exceeds the total premiums you’ve paid in. However, if a policy is overfunded beyond IRS limits and becomes a Modified Endowment Contract (MEC), the tax treatment of loans and withdrawals changes unfavorably — which is why proper policy design matters.
Can you borrow against life insurance to invest?
Yes — that’s central to the strategy. You can borrow up to about 90% of your cash value through a policy loan and use it however you like, including funding other investments. The cash value you borrowed against continues earning interest and dividends. The key risks: if your investment doesn’t pan out, you still owe the loan, and if outstanding loans exceed your cash value, the policy can lapse. Disciplined repayment preserves the strategy’s effectiveness.