Everything You Need to Know About Cash Flow Banking

You may have heard about cash flow banking and its ability to help you finance expenses, give you control over your finances, and create a financial legacy for your family. Similar to the heart of the infinite banking concept, there are many benefits to cash flow banking. Here are a few advantages of using a cash flow banking system, and information on how to set up a life insurance policy to use it.


What Is Cash Flow Banking?

Cash flow banking is a long-term approach to accumulating wealth wherein the policyholder leverages cash value in a whole life insurance policy to self-finance, make purchases, make investments, or create free cash flow. Cash flow banking can provide you access to capital without having to go through the traditional loan process at a bank. Normally when you take out a loan from a bank or another financial institution, you are required to make payments, which include interest and principal, until the loan is paid back in full. Cash flow banking promotes leveraging money against life insurance cash value which is similar to a line of credit because it is interest only. All you are required to pay on a policy loan is the interest.  With cash flow banking,  you are never required to pay back the principal.

Cash flow banking gives you options about how you manage your finances. When you have been funding a cash value life insurance policy, you will have access to money that you can borrow at a moment’s notice. The “loan” comes from the insurance company’s general fund and it is fully collateralized by your policy. Because a policy loan is fully collateralized it gives you the flexibility to use the money you’ve borrowed however you wish and for as long as you wish. All you’re required to pay on the loan is the annual loan interest. You have full control as to when and if you make principal repayments. Having a loan out against your policy does not negatively affect the guaranteed growth of the policy. This is one of the significant attractions of cash flow banking.

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What Type of Life Insurance Policy Do You Need for Cash Flow Banking?

To start cash flow banking you’ll need a whole life insurance policy. Some people are hesitant to opt for whole life insurance policies because the premiums are typically higher than term insurance. However, term insurance doesn’t allow you to build cash value. These higher premiums are essential to building cash value and utilizing cash flow banking. Without significant cash value, you can still have a useful life insurance policy, but you won’t have the added benefits of available cash value to use in creating a cash flow banking system. A whole life insurance policy provides you with a death benefit to cover traditional life insurance needs and has the ability to provide cash value for the benefits we just covered.

To start cash flow banking, you’ll need a properly designed whole life insurance policy. Getting a policy that is eligible for dividends and has a paid-up additions rider are two of the most important features to have in a policy if you will be using cash flow banking. As you pay premiums, you accumulate cash value in your policy that can then be borrowed to fund anything from a house to a college education. Additionally, money from a life insurance policy has tax advantages. Whole life insurance is the best policy to use for cash flow banking.

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How Does Cash Flow Banking Work

The first thing to do is buy a whole life insurance policy. Then, you’ll need to wait for a long time, sometimes many years, for your policy to become more valuable. When you eventually need a loan, you can borrow money from your policy instead of getting a loan from a regular bank. Even though you’re technically borrowing from your own policy, the money you get comes from a pool of money that the insurance company manages. Your whole life insurance policy acts as security when you take out a loan from it.

Remember, it can take a lot of years to save up enough money in your policy to borrow a substantial amount. If you’re planning to borrow a big sum of money, it might even take decades. So, using cash flow banking to save up for a house down payment won’t work for everyone. You’ll get the most benefit from it many years later, but only if you can afford the high monthly payments.=

The Advantages of Cash Flow Banking

Using a cash flow banking system allows you to increase, use and enjoy your wealth now and create a financial legacy for your family after your death. Cash flow banking, also known as ‘infinite banking,’ is possible because you can use your policy as collateral similar to the way you can use other assets such as your home for collateral. Cash flow banking allows you to create a strategy for your finances that has guaranteed growth with little risk.

Tax Benefits of Cash Flow Banking

Cash flow banking receives most of its tax benefits from the tax favorability of Whole Life Insurance itself. Section 7702 of the Internal Revenue Code is the section that deals with life insurance. Whole life insurance grows tax-deferred and life insurance dividends are not taxable until they exceed the total premiums paid.  The death benefit is tax free to any beneficiary who has an insurable interest in the insured person up to the gift limit. There are other tax benefits that may be derived from cash flow banking with proper planning.

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Disadvantages of Cash Flow Banking

The disadvantages are mostly human factors such as:

  • Failure to obtain a correctly designed life insurance policy
  • Inappropriate management of the money in a cash flow banking system
  • Poor understanding of how a life insurance policy and cash flow banking system works

Most of the undesirable consequences that could become disadvantages can easily be avoided by addressing these human factors.

As a company, we put heavy emphasis on creating and providing educational materials for people who are looking into using whole life insurance and for our Clients after they have purchased whole life insurance.  We know that a better informed buyer will be more likely to get a good policy and we know that a policy owner with a better understanding will be able to build wealth more effectively.

How to Make the Most of Cash Flow Banking

At McFie Insurance, we design and sell whole life insurance that works for people who want to use a cash flow banking system to keep more of the money they make, grow their wealth, and have financial peace of mind.

If you’re deciding whether or not to adopt the cash flow banking strategy, our ebook, “Understanding the Infinite Banking Concept,” answers the common questions you may have regarding cash flow banking. Although Infinite Banking Concept and cash flow banking are not identical, they share the same core principles.  If you want more personalized information about how cash flow banking could work for you,  Schedule a strategy session with us to be able to speak with us directly about your situation.

Ben McFieBen T. McFie

There's a lot of confusion around finance; there's so much to know and it's frustrating when you don't know enough to make the best financial decisions. I like to bring clarity to financial matters so people can make good financial decisions that will help them live wealthier more fulfilling lives.

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