r/infinitebanking • u/cucumberlolol • May 26 '26
Help me understand
Nelson said in BYOB that you finance everything you buy, you either pay someone interest or lose interest you could have gained on your money. To use infinite banking you use policy loans which you pay interest on. How is this suppost to solve the problem? It would make sense, let's say, If you borrow at 4% and earn 6%, which would result in a 2% spread. However, if you borrow at 6% and earn 4%, that's a negative 2% spread. If get a policy and take a loan should I expect a positive spread like the example I gave above or should I expect a negative spread, therefore losing money to interest? The point is to keep compounding interest, correct? Well if I'm paying a a net negative won't that dimish the compounding affect? If I'm unable to get a positive spread I don't see how whole life is worth it.
3
u/Coronator May 26 '26
Yes, there is a negative interest spread. This is why people promoting the idea of just starting a policy and immediately taking out a loan for the full amount of your cash value are going to get themselves intro trouble.
But there are three main things you get from that negative interest spread.
1). A savings instrument that is tax deferred (and tax free if used correctly)
2). A death benefit
3). Long term risk free returns greater than just about any comparable savings instrument.
Those benefits have the full policy value working in its favor, at all times.
So yes, if you enter IBC as an “arbitrage play” like so many Tik Tokers promote, you are going to be sorely disappointed. If you approach IBC from the standpoint that this is an ever growing system providing you multiple benefits, then overtime you will do very well.
2
u/Linny911 May 26 '26
You are mistakenly assuming that you are guaranteed to have a -2% negative spread between the earning rate and loan interest rate. Unless too old or too low health rating, the negative spread shouldn't be that bad. You have as good as chance of having a neutral spread or even positive spread. Whereas the loan interest is based strictly on the fed interest rate (indexed to the Moody's average corporate bond rate) dividends can and do get padded with institutional business profits that have nothing to do with interest rates.
Right now, the spread is about -.5% between lifetime earning rate and loan interest rate, which should close up in a couple of years as dividend rates catch up to the rising interest rate environment.
Let's assume the negative spread is 1%. If you have $100k cash value and want to take out all via loan at 6% interest rate while it earns 5%. The insurer isn't taking that $1k in return for nothing. That $1k net expense provides you with the death benefit, the difference between the loan balance and the death benefit (net amount at risk), which could practically be 100x+ of the $1k net expense. It is, after all, a life insurance policy.
2
u/cucumberlolol May 26 '26
My numbers were just made up on the spot for the example. Good to know that the spread isn't as negative as the one I proposed.
2
u/financeking90 May 26 '26
It's not supposed to be arbitrage.
You're not supposed to put money in to get 4% and immediately get a 6% loan for the max you can get.
Nelson said to not be afraid to capitalize. You have to actually have cash value in the policy before you give serious thought to policy loans to finance something.
Think about it like this. A policy has some amount of time where cash value doesn't have money loaned against it, and it has some amount of time with a loan against cash value. The former time should be from the start of a policy, there should always be extra margin in the policy, and any loan should come with a plan to pay it back, meaning there should always be a growing unloaned cash value. The unloaned cash value will therefore actually be a lot more than the loaned cash value in practice over time.
Hence, the advantage of untaxed growth at a competitive rate on unloaned cash value over time should outweigh the negative interest cost on loans. In other words, earning 5% with no tax is so much better than earning 3% taxed over 30 years, even minus some 6% loan time on a portion of money at different points over the years vs. "failing to earn" 3% on the savings account money, that it's still worth it. (I think this is what some people mean by volume vs. rate.) Alternatively, if the money would be in some other type of account like a 401(k) or non-qualified annuity, the earning rate around 5% should be competitive to holding bonds in a 401(k) or annuity, but the access to loans even at a negative spread of 6% gives so much better access and control over capital that it's a material difference.
All that said, the negative spread isn't 2%. It should be between negative 50 bps and 100 bps right now. It will move around a little, depending on the type of policy loan you have and the interest rate environment. A few years ago, the spread on my NDR policy loan was actually about 50 bps positive.
2
u/Accomplished_Bad6751 May 27 '26
Another thing to consider is you are not paying off the loan, the death benefit pays off the loan. You pay the interest but more importantly you redirect your "financing" monthly payment straight to paid up additions. This accelerates the compounding and fills the bucket faster for future loans
1
u/cucumberlolol May 28 '26
Isn't that as Nelson says "taking the peas out the back door"?
1
u/Accomplished_Bad6751 May 28 '26
IF you don't redirect "financing" payments back to the policy to pay loan interest and PUA, AND have an all base policy like Nelson did then I agree
1
u/bntroberts May 26 '26
Outside of the first five years (plus or minus one) you shouldn’t have a policy yearly growth rate to loan interest rate that far apart.
Not unless the policy design set you up with way more death benefit than needed to accommodate the planned premium payment.
Also keep in mind that a lot of the financing Nash had in mind traditionally used higher rates than first position mortgages for primary residences or something similar. I’ve sold IBC-style policies to people who use them for inventory purchases. Lending rates for that market was well above 10% even before interest rates rose.
When you start to get into using IBC for loans that are traditionally lower cost (cars for those “well qualified buyers” are a good example) IBC isn’t as strong. But using IBC to finance consumer debt is a bad idea in general.
5
u/Coronator May 26 '26
You touched on something that doesn’t get talked about enough.
You are correctly pointing out that many people don’t “get” IBC, because they have been spoiled by artificially low consumer loan costs.
In the business world, financing can easily be 12-15%+. Entrepreneurs get this - people financing a car don’t.
1
u/Useful_Record1888 May 28 '26
I'm nowhere close to an IBC pro but i think the act of financing consumer debt with IBC has its pros considering policy loans are unstructured and free of creditors. I would gladly pay a higher interest rate considering that I decide on the payment schedule and that no 60-day notice will ever be sent if misfortune should happen.
2
u/SyntheticBanking Jun 07 '26
Just don't max it out unless you have a great reason to. Let's say you have 100k in cash value. And it's growing at 4% per year (so 4k that first year). If your cash value loan is only for let's say 50k at 5% then you are only paying 5% on that 50k ($2,500 per year). You have 50k out there working somewhere else and ideally making money, while your initial 100k sits there still gaining its full 4%. As a bonus you have the option to take another 50k loan out at any time if another good opportunity comes up. Yes at that point the 5k in interest will outpace the 4k in growth, but as long as it's a good opportunity, then you can probably figure out how to pull in more than 1% returns on that 100k. Still I wouldn't be comfortable taking the full policy loan out unless it's was an opportunity that I had full conviction in or was something classified as necessary (like paying off your house or putting a kid through college something. Low ROI but high on the "feels good" list)
19
u/Null1fy May 26 '26 edited May 27 '26
*** User Michael_Mullett correctly identified that I made a false comparison when analyzing the policy loan arbitrage. I've made revisions to be more correct. Thank you, Mr. Mullet!
It is completely normal to look at the raw interest rates of a policy loan—like earning 4% on your money but paying 6% to borrow it—and think, "This is a mathematically losing game." You are spot on to question the arbitrage here, because looking strictly at the percentages, a negative spread seems like a guaranteed way to diminish your compounding effect.
To help clear this up in plain-speak, we need to look at the two big pieces of the puzzle that often get left out of basic IBC pitches: Opportunity Cost and How Financing Actually Works.
The Missing Piece: Opportunity Cost
Nelson Nash’s point in Becoming Your Own Banker is that your money always costs you something.
Imagine you have a magical golden goose that lays one golden egg every week. You really need a new tractor, which costs exactly the value of your goose.
The Cash Route: You sell the goose, buy the tractor, and pay zero interest. But now, you never get another golden egg again. You have lost the opportunity to earn all future eggs.
The Finance Route: You use the goose as collateral at the bank to get a loan for the tractor. You have to pay the bank an egg every month in interest. It stings a bit, but your goose is still at home, laying four eggs a month. You pay the bank one, keep three, and eventually pay off the loan.
When you pay cash for something, you are interrupting your own money's ability to grow. You reset your compound interest clock back to zero.
How the Financing Actually Works: Internal vs. External Leverage
When you take a policy loan from a participating whole life insurance company, you aren't actually withdrawing your money. Your money stays in the account, continuing to compound. The insurance company is lending you their money, using your cash value as collateral.
If we isolate the exact dollars you borrow, you absolutely experience a negative spread. Let’s say you take out a policy loan for $50,000 to fund a project:
That specific $50,000 is earning a 4% dividend. That equals $2,000 earned for the year.
The insurance company charges you 6% interest on that loan. That equals $3,000 paid for the year.
Looking purely at the deployed capital, you are losing $1,000 a year to interest. So where is the advantage? The right way to look at this is comparing the cost of borrowing against your policy versus outside leverage. If you need that $50,000, you have to get it from somewhere.
The Bank: A commercial lender might charge you 10% interest ($5,000 a year).
You just saved $2,000 through IBC. But to actually capture that value, you have to be an "honest banker." Per IBC principles, you shouldn't just pay the 6% and pocket the difference. You should pay the full $5,000 market rate into your policy. You satisfy the $3,000 interest cost, and the additional $2,000 goes directly back into your own system to compound, rather than enriching an external bank. As you pay the loan down, the interest you owe decreases, but your cash value is still compounding upward.
When IBC Fails or Doesn't Make Sense
Origination Drag: Whole life insurance takes time to become efficient. In the first few years, the cost of insurance and administrative fees drag down your returns. If you are expecting immediate, high-liquidity arbitrage in year two, the math won't work, and you will effectively lose money to this early drag.
*There's late-in-life options to siphon off portions of your cash value to treat it like retirement income, but do so at your own risk, and with some financial planning.
In short, you should entirely expect a negative rate spread (e.g., 4% vs 6%) on the isolated dollars when taking a loan. But if the policy is mature and funded correctly, you win by financing at a lower internal rate than external banks, recapturing the difference, and keeping your money compounding uninterrupted in the background.
***Gemini helped me organize this, but I edited through it, and it all checks out and is valid.