Why Cash Value Whole Life Insurance is Often a Poor Investment Choice – Part 2

Infinite Banking

"Infinite banking" — also known as "becoming your own bank" — is the buzzword insurance agents use to promote cash value whole life insurance as a tool for financial independence. The idea is that by building cash value within a whole life policy, you can borrow against it, effectively creating a personal line of credit with tax advantages. In theory, it sounds like a self-sustaining system, allowing you to fund major purchases, investments, or emergencies without needing traditional banks. However, the reality is far less compelling.

Here’s how the pitch typically goes: With whole life insurance, you build cash value over time. As this cash value accumulates, you can borrow against it, essentially creating a personal bank. The supposed benefits include:

1. Tax-Free Loans: As it is technically a loan from your own policy, there are no taxes on the borrowed amount.

2. No Credit Checks or Approval: There’s no need to qualify or provide a reason for the loan, so, if you need liquidity to buy a house, car or business, you have the ability to borrow quickly.

3. Self-Sustaining Cycle: Agents claim that as you continue to pay premiums, your cash value replenishes, allowing you to borrow against it repeatedly and create a revolving source of funds.

On the surface, this setup sounds attractive — who wouldn’t want a tax-free, no-questions-asked source of funds? But let’s look closer at the hidden costs and risks in infinite banking.

1. Policy Loans Accrue Interest, Just Like Any Other Loan

While you’re “borrowing from yourself,” the insurance company still charges interest on the loan. The average interest rate on policy loans is often between 5-8% — not exactly low. So, not only are you paying a premium to fund the policy, but you’re also paying interest on loans against your own money. These costs can quickly add up, eroding the benefits of "borrowing from yourself."

2. Loans Can Reduce, or Even Eliminate, the Death Benefit

If you pass away with an outstanding loan balance, the insurance company will deduct the loan amount (plus any accrued interest) from the death benefit paid to your beneficiaries. This can significantly reduce the legacy you leave behind, especially if you have borrowed large amounts over the years.

3. Cash Value Grows Slowly Due to High Fees

The “infinite banking” concept assumes your cash value will grow at a rate high enough to offset both the premium costs and the interest you’re paying on loans. However, whole life policies are loaded with fees, and their growth rates are modest at best, often ranging between 2-8% (and on the lower end once fees are factored in). These high fees limit the growth of cash value, reducing the effectiveness of using it as a personal bank.

4. Repaying the Loan Adds Financial Strain

While insurance agents often downplay this, policy loans are not automatically repaid. You’re responsible for paying it back, which can add to your monthly expenses. If you cannot make the payments, the unpaid interest compounds, and eventually, the policy can lapse if the loan balance exceeds the cash value. When a policy lapses, you lose both the insurance coverage and any remaining cash value — essentially wasting all the premiums paid over the years.

5. Opportunity Cost: Better Alternatives Exist

The money spent on high whole life premiums could be invested elsewhere, potentially yielding higher returns and offering greater flexibility. Low-cost index funds, for example, have historically delivered higher returns over time without the need for costly loans to access your own money.

While infinite banking is marketed as a path to financial freedom, tying up funds in whole life insurance instead of investing them in more flexible options often leads to missed opportunities.

“Tax Free” Policy Dividends

There are two types of insurance companies – mutual and stock.  For stock companies, stockholders own the insurance company, while in mutual companies, policyholders own the insurance company.  In the case of a mutual company, when the company makes a profit, the policyholders get a dividend much like a stockholder.  Following the math here, as both an owner of a company and customer of a company, the dividend is just a return of premium that you paid on your policy.  In other words, you were just charged too much in the first place!  The IRS has determined that mutual dividends are not tax-free income as it is sold as, but instead a refund of an overcharge.  You are overcharged only later to get some money returned so you feel like you are making money.

The takeaway? Whole life insurance as a “bank” or “policy dividends” are sales tactics that leverage financial jargon to sound sophisticated. In reality, for most people, a mix of term life insurance and disciplined investing in lower-cost assets is a simpler, more effective path to building wealth and achieving financial independence. There’s a reason life insurance companies are so profitable — and this is it. Accepting lower returns and higher fees for the ability to borrow against your own money is a costly proposal that benefits the insurer more than the policyholder.

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