Insurable Interests When Trying to Develop an Infinite Banking Concept Strategy

Who can you insure? Why does it matter? And the common mistakes that trip people up. Glad you asked!

The Question Nobody Asks Until It's Too Late, maybe…

You hear about the Infinite Banking Concept. You get excited. You start imagining a system where your money grows, stays accessible, and builds a legacy—all at the same time.

Then someone asks you a question that stops you cold:

"Who are you going to insure?"

Not what company. Not what policy. Who.

Most people freeze right there. They thought the hard part was understanding IBC. Turns out, the hard part is figuring out who you can actually put on the application.

This matters more than you think. Get it wrong, and you don't have a banking system. You have a rejected application and a lot of wasted time.

Let me walk you through it.

What Is an Insurable Interest, Anyway?

Here's the plain truth: you can't just take out a life insurance policy on anyone you want.

The law says you need something called an insurable interest. That means you would suffer a financial loss if that person died. It's not about feelings. It's not about love. It's about money.

The concept exists to prevent people from gambling on other people's lives. Imagine if you could take out a million-dollar policy on a stranger and then collect when they died. That's not insurance. That's a bet on someone's death. And it's illegal.

So the law requires an insurable interest. You have to prove that the insured person's death would cause you a financial hardship.

Who Has an Insurable Interest?

The good news: most of the people you'd want to insure for IBC purposes qualify.

Yourself

This is the most common and straightforward. You have an unlimited insurable interest in your own life. You can buy as much life insurance on yourself as you can afford and qualify for.

Most people start their IBC journey by insuring themselves. You're the policy owner, the insured, and (if you structure it that way) the beneficiary.

Your Spouse

Marriage creates an automatic insurable interest. If your spouse dies, you lose their income, their contributions to the household, their retirement benefits, their Social Security. The financial loss is clear and legally recognized.

Many couples build IBC systems by each insuring themselves, creating two banking systems within the same household.

Your Children

Parents have an insurable interest in their minor children. The logic: if a child dies, the parents bear funeral costs, medical bills, and the loss of future financial support the child might have provided.

For adult children, it's a bit more nuanced. If the adult child contributes to the household financially, or if the parent would be responsible for their debts, an insurable interest may exist. But it's not automatic. The insurance company will ask questions.

Your Business Partner

If you own a business with someone, their death could destroy the company. You'd lose their expertise, their relationships, their share of the revenue. Key person insurance and buy-sell agreements are built on this insurable interest.

This is especially relevant for IBC because business owners often use policies on partners as part of their banking and succession strategy.

Your Employer or Key Employee

Businesses have an insurable interest in key employees whose death would cause financial harm. Think of the CEO, the top salesperson, the person who holds all the client relationships.

The business owns the policy, pays the premiums, and receives the death benefit if the employee dies. The employee's family doesn't collect — the business does, to offset the financial loss.

Someone You Have a Financial Relationship With

If someone owes you money, you might have an insurable interest in their life. Creditors sometimes require debtors to carry life insurance naming the creditor as beneficiary. This ensures the debt gets paid even if the borrower dies.

Who Does NOT Have an Insurable Interest?

This is where people get creative — and where they get rejected.

Your Neighbor

No. You have no financial relationship with your neighbor. Their death doesn't cost you money. You can't insure them.

Your Friend

Same answer. Friendship is not a financial relationship. Unless you have a documented business partnership or loan arrangement, you can't take out a policy on a friend.

Your Ex-Spouse (Usually)

Once the divorce is final, the insurable interest generally disappears. However, if there are alimony or child support obligations, or if the divorce decree requires life insurance, an insurable interest may continue.

A Celebrity or Stranger

Absolutely not. This is the classic "stranger-originated life insurance" (STOLI) scheme, and it's illegal. You cannot take out a policy on someone you don't know and have no financial relationship with.

Your Adult Child (Sometimes)

This is a gray area. If your adult child is financially independent and you don't rely on them for support, the insurance company may question whether you have a legitimate insurable interest. They might still approve the policy, but they'll ask more questions and may limit the death benefit.

Why This Matters for IBC

Infinite banking is about building a banking system. And the foundation of that system is a life insurance policy on someone you have an insurable interest in.

Most people start with themselves. They're the insured, they own the policy, and they control the cash value. Simple.

But as you expand your IBC strategy — building a family banking system, insuring your spouse, adding children — you need to understand the rules.

The Family Banking System

One of the most powerful applications of IBC is creating a family-wide banking system. Mom has a policy. Dad has a policy. The kids have policies. Each policy is its own bank, but together they form a system.

To do this, you need insurable interest in each person you want to insure. For minor children, this is easy. For adult children, it may require demonstrating financial dependency or a legitimate financial relationship.

Business Applications

If you're using IBC in a business context — key person insurance, buy-sell agreements, executive bonus plans — the insurable interest is usually clear. But you need proper documentation. The insurance company will want to see business agreements, financial statements, and evidence that the person's death would cause measurable financial harm.

Common Mistakes

Assuming You Can Insure Anyone

I've seen people get excited about IBC and try to insure their brother, their cousin, their neighbor's kid. It doesn't work that way. The insurable interest requirement is real, and insurance companies enforce it.

Not Documenting the Financial Relationship

If you're insuring a business partner or key employee, you need paperwork. A buy-sell agreement. A employment contract. A loan document. Something that shows the financial relationship exists.

Without documentation, the insurance company may deny the application or delay it while they investigate.

Trying to Circumvent the Rules

Some people think they can get around the insurable interest requirement by having the insured person apply for the policy and then "gift" it to them. This is called a "transfer for value," and it can destroy the tax advantages of the policy.

Under the transfer-for-value rule, if you buy an existing policy from someone else, the death benefit may become partially or fully taxable. You lose the income-tax-free treatment that makes life insurance so powerful.

Don't try to get cute. Follow the rules. Insure people you have a legitimate financial relationship with.

The Bottom Line

Insurable interest is the gatekeeper of the infinite banking strategy. You can't build a banking system on someone you can't legally insure.

The good news: most of the people you'd want to insure qualify. Yourself. Your spouse. Your children. Your business partners. Your key employees.

The bad news: if you try to get creative and insure people you don't have a financial relationship with, you'll waste time and money — and you might run afoul of the law.

Understand the rules. Work with a knowledgeable agent. And build your banking system on solid legal ground.

S. Paul Horsley is an Authorized Infinite Banking Concept Practitioner and licensed life insurance professional. He teaches the Infinite Banking Concept as originally developed by R. Nelson Nash. This article is for educational purposes only and does not constitute financial, tax, or legal advice.