Arbitrage in the context of Infinite Banking refers to the difference between the cost of borrowing against the cash value of a whole life insurance policy and the returns generated by investing the borrowed funds in a higher-yielding investment, such as cash-flowing real estate.
Here’s how this arbitrage process works within the Infinite Banking concept:
Uninterrupted cash value growth: When you take a policy loan against the cash value of your whole life insurance policy, the cash value continues to grow uninterrupted, earning interest and potential dividends based on the full amount, as if you hadn’t taken out the loan. This is because the policy loan is provided by the insurance company and not directly withdrawn from your cash value. Your cash value is used as collateral for the loan.
Policy loan interest rate: When you borrow against the cash value of your policy, the insurance company charges an interest rate on the loan, which can vary depending on the company and policy terms. In this example, let’s assume the interest rate on the policy loan is 5.7%.
Investing in a cash-flowing asset: With the policy loan funds, you can invest in a cash-flowing asset like real estate that generates a higher return than the loan’s interest rate. In this case, suppose the real estate investment generates a 20% return.
The arbitrage: The difference between the 20% return on the real estate investment and the 5.7% policy loan interest rate represents the arbitrage opportunity. In this example, the arbitrage is 14.3% (20% – 5.7%). This means you’re effectively earning a higher return on your investment while still benefiting from the uninterrupted growth of your policy’s cash value.
Loan repayment: As you receive cash flow from the real estate investment, you can use the proceeds to pay off the policy loan, including the interest. Once the loan is repaid, your policy’s full cash value and death benefit are restored.