What Most People Don’t Know About Infinite Banking and Taxes

Infinite banking is a powerful financial strategy that uses whole life insurance policies to build wealth, access cash, and take control of your finances. While many focus on the benefits of cash value growth and policy loans, the tax implications of infinite banking are often misunderstood or overlooked.

In this article, we’ll uncover what most people don’t know about infinite banking and taxes, helping you make the most of your strategy while staying compliant with tax laws.

Tax-Deferred Growth of Cash Value

One of the biggest tax advantages of infinite banking is the tax-deferred growth of the cash value inside your whole life policy. This means:

Your cash value grows without being taxed annually.
You don’t pay taxes on the interest, dividends, or gains while the money remains in the policy.

This allows your savings to compound faster than in a taxable account.

Policy Loans Are Generally Tax-Free

When you borrow against your policy’s cash value, the loan proceeds are typically tax-free, as long as the policy remains in force. This is because loans aren’t considered income but rather borrowing against your own assets.

However, there are important considerations:

If the policy lapses with an outstanding loan, the loan amount above your cost basis may be taxable.
Policy loans accrue interest, which you must repay to keep the policy in good standing.

Withdrawals May Have Tax Consequences

Withdrawals of cash value up to your cost basis (the amount you’ve paid in premiums) are generally tax-free. However, withdrawals exceeding your cost basis may be subject to income tax.

It’s important to understand the difference between loans and withdrawals to avoid unexpected tax bills.

Dividends Are Usually Tax-Free

Many whole life policies pay dividends, which can be used to purchase additional paid-up insurance or add to cash value. Dividends are generally considered a return of premium and are not taxable as income.

Tax Benefits Are Subject to IRS Rules

The IRS has rules to prevent life insurance policies from being used primarily as tax shelters, such as the Modified Endowment Contract (MEC) rules. If your policy becomes a MEC, loans and withdrawals may be taxed differently, potentially leading to penalties.

Working with a knowledgeable advisor ensures your policy stays compliant and maximizes tax advantages.

Estate Tax Considerations

The death benefit from your whole life policy is generally income tax-free to your beneficiaries. However, it may be included in your estate for estate tax purposes unless properly structured.

Using ownership structures like irrevocable life insurance trusts (ILITs) can help protect the death benefit from estate taxes.

How My Term Life Guy Helps You Navigate Taxes in Infinite Banking

We guide clients to:

Design policies that optimize tax-deferred growth
Manage loans and withdrawals to avoid tax pitfalls
Structure ownership to minimize estate taxes
Stay compliant with IRS regulations while maximizing benefits

Maximize Your Infinite Banking Strategy with Tax Smarts

Understanding the tax aspects of infinite banking is crucial to unlocking its full potential. With proper planning and expert guidance, you can enjoy tax-deferred growth, tax-free loans, and tax-efficient wealth transfer.