What is “paying yourself back” and how does it really work?
A common phrase used with regards to Infinite Banking is the concept of paying yourself back with interest.
This is a phrase that has caused some confusion. Let’s take a look at just exactly what this means and how it applies to a cash value life insurance policy.
Taking a Policy Loan
The reality is, when we use the Infinite Banking Concept we do not take our money out in cash. Instead, we leave our money in and let it grow.
Instead of using our own money, we take out a policy loan from the life insurance company. They charge us an interest rate relative to the interest rate our money is growing at.
Our money is used as the collateral, and we get a loan from the life insurance company.
In this way, we are, in essence, taking a loan and paying ourself back with interest, because much of that interest goes back into our policy.
However, many individuals choose to pay back their policy loans at a higher interest rate than the life insurance company requires.
This way, they pay themselves back with more interest, resulting in more money going into their life insurance policy.
This is a sort of forced savings tactic that works very well. A $50 or $100 monthly interest payment could result in hundreds of thousands of dollars in growth over your lifetime because of the power of compound interest.
In the end, it is really up to the individual to decide how to use their life insurance policy. But, it is important to understand that the life insurance company will require an interest rate on the loans, and so it is important to know that you are paying the bulk of the loan, in many cases, to the life insurance company and not directly to yourself.