Quick Summary

Here’s a summary of a planning strategy often called “infinite banking.” This approach uses a permanent life insurance policy to build cash value that you can borrow against, almost like using your own private bank.

It can sound appealing. Loans are often tax-free while the policy is active. But there’s an important catch. If the policy later lapses, those loans can turn into a large, unexpected tax bill—even if you never received cash at that time.

Why This Matters

Let’s walk through what can go wrong.

In a recent Tax Court case, Sawyer v. Commissioner, a man had a life insurance policy for many years. Over time, he borrowed against it—sometimes to pay premiums, sometimes to support his business. That’s a common part of how this strategy works.

Eventually, the policy ran out of value and lapsed. When that happened, the insurance company used the remaining value to pay off the loans.

Here’s the problem:
Even though he didn’t receive any money when the policy ended, the IRS treated it as if he did.

That created a large taxable gain—over $160,000. The tax bill was around $50,000, plus penalties.

This surprises a lot of people.

The idea of “tax-free loans” is only true while the policy stays in force. Once the policy collapses, the rules change quickly.

There are a few key takeaways families should understand:

• Access to cash is not unlimited
• It can take years before meaningful cash value builds
• Loans reduce the safety margin of the policy
• If the policy lapses, taxes can hit at the worst possible time

This is where real-world planning matters.

On paper, the strategy can look clean and efficient. But in practice, it requires careful monitoring, consistent funding, and ongoing advice.

Without that, small missteps can lead to big consequences.

Simple Lesson

Small details in planning can have big consequences.

Action Step

If you have a life insurance policy with loans—or are thinking about using one this way—take time to review it with your CPA and financial advisor so you understand the tax impact early on.

Planning ahead can make all the difference. If you’d like guidance, call (517) 548-7400 or reach out here: www.MichiganEstatePlans.com