To truly understand the ins and outs of infinite banking, let’s first learn about whole life insurance and what makes it different from term life insurance.
Whole life insurance is a form of permanent insurance. As long as the premiums are paid, it does not expire. It also comes with a savings component – part of your premium goes into a cash savings account that accumulates value over time. You can receive the cash when you surrender the policy, use it to enhance the policy, or borrow against the cash.
Since whole life insurance is permanent, it presents greater risk for the insurer. Therefore, it has a higher premium than term. However, when one balances the fact of this against the fact that term insurance gets increasingly more expensive as one ages, and term doesn’t come with cash savings, the value of whole life insurance is clear.
Within the whole life insurance sphere, there are two variations: participating and non-participating insurance. Participating policies return dividends to the policy holder that can be used to pay your premiums or increase the amount of the benefit. This is why participating policies work so well for infinite banking. Note, however, that participating policies are typically more expensive than non-participating, and that dividends are not guaranteed.