Universal life insurance is a type of permanent life insurance that is known for its cash value feature and flexible premiums. It's not just a death benefit policy; it also allows policyholders to adjust their premiums and death benefits over time, based on their needs. Unlike term life insurance, it has a savings component where a part of your premium gets invested, which can grow over time on a tax-deferred basis.

However, like any financial product, universal life insurance is not without its intricacies. The costs associated with these policies can be high, and their returns are often lower than those of other investments. Understanding the terms and conditions thoroughly is essential before opting for this type of life insurance.

Moving on to infinity banking schemes, also known as "infinite banking" or "bank on yourself," these are strategies where individuals attempt to become their own bankers. This is done by overfunding a dividend-paying whole life insurance policy, and then borrowing against the cash value that accrues. The idea is to save on interest payments that would otherwise go to financial institutions.

Even if you did grow your cash value substantially, you will still get hit with tax claw backs that make this scheme useless.

In an attempt to overfund a whole life insurance policy and benefit from the cash value, one might unintentionally trigger the policy to become a MEC.

A Modified Endowment Contract (MEC) is a tax qualification of a life insurance policy whose cumulative premiums exceed federal tax law limits. The primary downside of a policy becoming an MEC is the loss of tax benefits. If you take a loan or make a withdrawal from an MEC, the IRS treats these as taxable distributions.

This change can eliminate one of the main advantages of overfunding a whole life insurance policy, which is accessing the cash value on a tax-favored basis. Moreover, if you are under the age of 59.5, you may also face a 10% penalty on the taxable amount. Thus, understanding the implications of the Modified Endowment Contract rules is crucial when considering overfunding your whole life insurance.

While infinity banking sounds appealing, it comes with significant downsides. One of the primary problems is the time it takes to build up a sufficient cash value in the life insurance policy to make this strategy viable.

This process typically takes many years and requires consistently high premium payments. Moreover, loans against your policy must be paid back with interest, and failure to do so can result in a decreased death benefit. Additionally, the insurance policy's fees and administrative costs can also erode the returns of your invested cash.

The world of financial products is vast and varied. While universal life insurance and infinity banking schemes may be right for some, they also carry significant risks and costs. As with any financial decision, it's best to consult with a financial advisor and understand all the fine print before deciding.