Promoter structures library

IUL Infinite Banking and Premium Finance

CLegitimate but aggressive

Sold as: "infinite banking", "be your own bank", "tax-free retirement income", "premium finance", "LIRP"

The tax treatment is real. The illustration is the problem, and a lapse with a loan outstanding creates ordinary income in a year you have no cash.

Classification C. Defensible, but fact-intensive and audit-attracting.

The pitch

Be your own bank. Overfund an indexed universal life policy, borrow against the cash value, and take tax-free retirement income. A lender finances the premiums, so it costs little out of pocket.

Be precise about this

This is NOT an IRS shelter problem. It is a SUITABILITY AND ILLUSTRATION problem. The tax law relied on is entirely real: Sec. 7702 definition of life insurance, Sec. 72(e) inside buildup deferral, Sec. 101(a) income-tax-free death benefit, Sec. 72(e)(5) and (10) policy loan treatment.

Where clients actually get hurt

risk: Sec. 7702A MEC status
detail: Overfunding converts the policy to a modified endowment contract, making loans and withdrawals taxable LIFO with a 10 percent penalty before age 59.5

risk: Lapse with an outstanding loan produces phantom income
detail: The entire loan balance in excess of basis becomes ordinary income in a year with no cash to pay it. THIS IS THE SINGLE MOST COMMON CATASTROPHIC OUTCOME IN PREMIUM-FINANCE CASES.

risk: Sec. 101(j) employer-owned life insurance
detail: If the business owns the policy, failure to satisfy the notice-and-consent requirements BEFORE ISSUANCE and to file Form 8925 makes the DEATH BENEFIT TAXABLE. See Notice 2009-48.

risk: Illustration risk
detail: IUL illustrations remain a live regulatory controversy. AG 49-A disclosure changes took effect in 2026, and 2025 saw a wave of IUL lawsuits over illustration practices.

risk: Premium finance
detail: Adds interest rate risk, collateral calls, and lender-imposed surrender. The tax result is fine right up until the structure unwinds.

What it costs you if it is wrong

This one does not usually cost you a penalty. It costs you the policy. Overfunding past the Sec. 7702A limit makes loans and withdrawals taxable LIFO with a 10 percent additional tax before age 59 and a half, and a lapse with a loan outstanding turns the balance above basis into ordinary income in a year with no cash to pay it. If the business owns the policy and the Sec. 101(j) notice and consent was not signed before issuance, the death benefit itself becomes taxable.

Red flags specific to this structure

The phrase 'be your own bank' is used
The illustration runs at 7 percent rather than 4 to 5 percent
You have not been shown a lapse scenario with a loan outstanding
The presentation leads with tax-free income rather than a death benefit need
The business will own the policy and Sec. 101(j) was never mentioned
The policy is deliberately overfunded and nobody ran the MEC test

Questions to ask the person selling this

Take these into the next meeting. Someone selling the legitimate version answers them without difficulty.

1At what crediting rate is this illustrated, and what does it look like at 4 to 5 percent?
2Show me the scenario where the policy lapses with the loan outstanding. What do I owe?
3Is the policy being funded past the MEC limit under Sec. 7702A?
4If the business owns it, has Sec. 101(j) notice and consent been signed, and who files Form 8925?
5What happens if the lender calls for more collateral?
6What is the insurance need this is meeting?

Which of the Seven Markers this trips

None of them. The Seven Markers diagnose structures the government attacks as abusive, and this is not one. That is not the same as saying it is safe: what goes wrong here is set out above.

Score your own situation against all seven

The legitimate version

Permanent life insurance purchased for a genuine death-benefit need: buy-sell funding, estate liquidity, key person, family protection.

What distinguishes it

Sized to stay non-MEC if cash value access matters
Illustrated at conservative rather than maximum crediting rates, 4 to 5 percent not 7 percent
The client is shown a lapse-scenario stress test
A Sec. 101(j) checklist if business-owned
The presentation leads with the insurance need, not with tax-free retirement income
Nobody says 'be your own bank'

Holding one of these, or being pitched one?

The diagnostic work is worth doing before the return gets filed rather than after. That is a conversation, not an engagement.

Schedule a complimentary consultation

Take this into the meeting: the one-page brief

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