WHAT IS INFINITE BANKING, AND HOW DOES IT WORK?

What is Infinite Banking and how does it work?

Imagine your money is like water in a reservoir. Normally, when you spend money—whether it’s on a big purchase, an investment, or an emergency—you dip into your water supply, and it shrinks. You might even have to borrow water from somewhere else (like a bank) and pay it back with interest.

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But what if you had a reservoir that not only refilled itself but kept getting bigger, year after year, no matter how much water you used? That’s what Infinite Banking is like.

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Here’s how it works: You set up a special kind of life insurance called an Indexing Whole Life policy. Over time, the money you put in—called your premiums—starts filling up your reservoir. The premiums are the regular payments you make to keep the policy going, like adding water to the reservoir each month or year.

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The best part?

Your reservoir never stops growing. Every year, it grows at a guaranteed rate of 5%—rain or shine—and the growth is completely tax-free as long as you don’t go over a certain limit called the MEC limit (Modified Endowment Contract). This is key because your money is compounding and growing, but you don’t have to pay taxes on that growth.

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In years when the economy is strong, your reservoir can grow even faster—up to 11% annually. But even when the market is down, your reservoir doesn’t shrink. You’re always earning money, whether you’re using it or not.

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So, What Is a MEC Limit?

Back in the 1980s, people started to figure out that whole life policies could be a great way to grow money tax-free. Some people started dumping large amounts of money into these policies, using them more as tax shelters than for insurance. The IRS noticed and introduced the MEC limit.

The MEC (Modified Endowment Contract) rule says that if you put too much money into your policy too quickly, the policy stops being treated as life insurance and gets taxed like an investment.

And even though we can't proclaim to treat the policy as an investment, the IRS can tax it as one.

The MEC limit ensures that the tax advantages of life insurance are still in place for most people but prevents the system from being exploited. So, staying under the MEC limit keeps your growth tax-free.

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Paid-Up Additions (PUAs): How to Supercharge Your Reservoir

Now, let’s add another exciting feature called Paid-Up Additions (PUAs). PUAs are like turbo boosters for your policy. They allow you to buy small chunks of extra life insurance that immediately increase the amount of money (cash value) in your reservoir. It’s like dumping a bucket of water straight into the reservoir, which increases its size and growth potential instantly.

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Here’s why that’s powerful: Every time you add PUAs, not only does your death benefit increase, but your cash value grows faster, and—just like the rest of your policy—this growth is tax-free as long as you stay under the MEC limit.

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For example, if you have extra money one year, you can purchase PUAs, and it’s like supercharging your reservoir, making it grow faster. Plus, the water you add never stops growing—it compounds over time, adding more and more water to your reservoir.

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Example 1: Investing in a Rental Property

Meet Sarah. Sarah has been saving up to invest in a rental property that costs $200,000. Normally, she’d have to drain her savings or take out a loan from the bank and pay interest. But Sarah has an Infinite Banking system in place.

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Sarah has been paying her premiums over the years, and her reservoir is now full enough that she can "borrow" $200,000 from her policy to buy the property.

Even after taking out the money, her policy continues to grow as if the full $200,000 is still there. So, while she’s using the money to buy her rental property, her reservoir keeps growing at 5% or more, and all of this growth is tax-free because she hasn’t crossed that MEC limit.

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Sarah uses the rental income from her property to "refill" her reservoir, paying back her loan. Plus, she’s using Paid-Up Additions to further supercharge her reservoir, boosting her growth even more. She’s growing her wealth from two places at once—her rental property and her life insurance policy. And since she’s borrowing from herself, she’s the one in control of the loan terms.

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Example 2: Buying a Car

Now, let’s take John. John wants to buy a new car for $40,000. Normally, he’d either pay cash (losing the interest he could have earned) or take out a car loan (paying interest to the bank). But with Infinite Banking, John’s got a better option.

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John borrows $40,000 from his policy, using the cash value he’s built up from paying premiums and adding some Paid-Up Additions along the way. He drives away in his new car, and meanwhile, his policy continues to grow at the guaranteed rate, as if the $40,000 is still there. He doesn’t owe the bank anything, and all the while, his money keeps growing tax-free within the policy.

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John decides to repay his policy on his own terms, so he starts making “loan payments” to himself, refilling his reservoir. This way, he keeps his money growing while using it whenever he needs.

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With this system, it’s like your money is working for you in two places at once. Just like how you can borrow water from your reservoir without lowering the water level, you can borrow from your policy without stopping its growth.

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But Wait there’s more! 

Sorry, I couldn't resist.

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Here’s where things get even MORE exciting.

Let’s say you’ve built up your reservoir and want to pour even more money into it. Normally, you’d be limited by that MEC rule—go over the limit, and the growth could get taxed. But what if you could get around that?

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By setting up our Irrevocable Spendthrift Trust, you can. When the Spendthrift Trust owns the Indexing Whole Life policy, everything changes. Not only does the trust protect your assets from creditors, lawsuits, and even spend-happy beneficiaries, but it also allows you to bypass the MEC limit.

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Let’s say you want to dump a large sum of money into your policy, past the normal limit. In a traditional policy, that extra contribution could trigger taxes. But inside our Spendthrift Trust, capital gains aren’t taxed. This means you can put in as much as you want—up to the carrier’s maximum limit—without worrying about taxes. Your money can keep growing, compounding, and working for you, all tax-free.

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In other words, the Spendthrift Trust makes the Infinite Banking strategy even more powerful. You’re no longer tied down by tax rules, and your money has even more room to grow.

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So, in summary:

1. Guaranteed, tax-free growth: Your money grows at least 5% a year, tax-free, up to the MEC limit.

2. Potential for higher growth: In good years, your money can grow up to 11%.

3. Use your money anytime: You can borrow against your policy without stopping its growth.

4. Control your repayment: You set the terms for paying yourself back.

5. More power with a Spendthrift Trust: You can go beyond the MEC limit, with all growth and capital gains tax-free.

If you’re interested in learning more about how this works and how it can benefit you, let’s set up a time to chat. I’d love to walk you through the details and show you how this strategy could be a game-changer for your financial future!