If you’ve ever marveled at the potential for your savings to grow exponentially over time, then you’ve encountered the magic of compound interest, often hailed as the eighth wonder of the world. Harnessing the power of compound interest growth can significantly amplify your wealth, turning even modest savings into substantial sums over the long term. This guide dives deep into the essence of compound interest, contrasting it with simple interest to illuminate how your earnings can snowball, earning interest upon interest. We also highlight the best compound interest account for true uninterrupted compound growth.
Table of Contents
- Compound Interest Introduction
- Simple Interest vs Compound Interest
- Compound Interest vs Simple Interest Example
- How Taxes Destroy Compound Interest
- Penny Doubles Every Day for 30 Days
- Compound Interest Growth Over 20 & 30 Years
- Compound Interest Schedule
- The Best Compound Interest Accounts
- Cash Value Life Insurance as a Compound Interest Account
- The Best Compound Interest Account
- Traditional Bank vs Life Insurance
- Compound Interest + Velocity of Money = True Wealth Building
- Compound Habits
- Time is of the Essence
- Next Steps
Compound Interest
It has been called the 8th wonder of the world, with most giving the nod to Albert Einstein. The quote goes like this “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t {understand it] pays it.โ
This article answers the question of just what compound interest is and explores the various types of compound interest accounts available. By taking advantage of compound interest, you can position yourself to build up your savings over the long term as the magic of earning interest on interest helps expand your wealth and magnify your legacy.
Compound interest is best understood by comparison to simple interest. Definitions of these two concepts are as follows:
Simple Interest vs Compound Interest
- Simple interest: Interest earned on invested principal over multiple periods of time that does not take into account the interest earned in earlier periods. In other words, interest is only paid on principal, not on any interest earned on that principal.
- Compound interest: Interest earned on invested principal over multiple periods of time that does account for the interest earned on the principal in earlier periods. Interest is earned on interest plus principal when compound interest is used. It is this โcompoundingโ of principal and interest that creates huge long-term accumulation.
Compound Interest vs Simple Interest Example
The use of a compound interest example is a good way to illustrate the power of compound interest vs simple interest.
Consider a bank customer who invests $10,000 in a bank account paying compound interest and one who invests the same amount in a bank account paying simple interest.
If the account paying compound interest compounded annually, how much more would the account earning compound interest be worth than the one earning simple interest after 5 years?
| Simple Interest at 4% over 30 years | |||||
| Year 1 | Year 5 | Year 10 | Year 20 | Year 30 | |
| Starting Value | $10,000 | $11,600 | $13,600 | $17,600 | $21,600 |
| Annual Interest | ย ย ย ย ย ย $400 | ย ย ย ย ย $ 400 | ย ย ย ย ย ย ย $400 | ย ย ย ย ย ย $400 | ย ย ย ย ย ย ย $400 |
| Year-end Value | ย $10,400 | $12,000 | $14,000 | ย $18,000 | $22,000 |
| Compound Interest at 4% over 30 years | |||||
| Year 1 | Year 5 |
Year 10 |
Year 20 |
Year 30 | |
| Starting Value | $10,000 | $11,698.59 | $14,233.12 | $21,068.49 | $31,186.51 |
| Interest Growth | ย ย ย ย ย ย $400 | ย ย ย ย ย $467.94 | ย ย ย ย ย $569.32 | $842.74 | $1,247.47 |
| Year-end Value | ย $10,400 | ย $12,166.53 | ย $14,802.44 | $21,911.23 | $32,433.98 |
So what happened in the tables above over 30 years? The simple interest account grew at $400 a year, every year, no matter what the total value of the account grew to be.
In contrast, by year 30, the compound interest account was growing over 300% more interest than the simple interest account, and an overall $10,000 plus increase in value.
For more fun with compound interest, click here for a compound interest calculator, so you can run some numbers for yourself.
How Taxes Destroy Compound Interest
An important point we need to make here is how taxes effect compound interest. Here is a chart of one dollar doubling 20 times and that same dollar doubling 20 times but taxed annually at 25%. Notice how paying even a marginal tax rate (25%) can absolutely destroy wealth building.
We point out the above about taxes because it is important to consider using an account that is not taxed on gains if possible. We will get into the different compound interest accounts you can use below.
Penny Doubles Every Day for 30 Days
A popular way to demonstrate the power of compound interest is to ask the question, “what would you rather have, $1,000,000 or a penny doubled every day for 30 days?”
Most people initially choose one million dollars. However, as you can see from the chart below, taking a penny doubled every day for 30 days is far and away the winner.
Compound Interest Growth Over 20 & 30 Years
Letโs look back at the above example comparing simple interest to compound interest over 20 and 30 years. This allows us to really start to see the benefits of compound interest kicking in.
$10,000 at 4% simple interest for 20 years would grow to $18,000. Over 30 years at the same rate your $10,000 would grow to $22,000.
Using an online compound interest calculator we can calculate how much the same amount would grow to using compound interest:
Over 20 years at 4% compound interest your $10,000 would grow to $21,911.23 ($3,911.23 greater than using simple interest).
Over 30 years at the same rate it would grow to $32,433.98 ($10,433.98 greater than using simple interest, or 47% greater return with compound interest vs simple interest).
The added time for the compounding to work enables your original investment to grow significantly more than would have been the case if you had received simple interest on the money.
Given that even small amounts can provide substantial growth if they compound over a long enough period of time, it should be readily apparent from these examples that time is of the essence when it comes to maximizing the impact of compound interest on your savings.
The Earlier the Better
The flip-side of this is that if you fail to start saving early enough, it can be very difficult to make up for lost time due to the power of compounding. This is not to save that you shouldnโt set aside savings later in life, just that the earlier you start saving the better.
By giving your savings as much time as possible to compound in value, you can maximize the money you are able to amass for your financial goals, whether paying a childโs education, purchasing a home, providing retirement income, etc.
Compound Interest Schedule
While an account earning compound interest grows faster over time than one that is paid simple interest, not all compound interest accounts are compounded on the same schedule.
Some accounts are compounded yearly, some quarterly, some monthly, and some weekly or even daily.
The shorter the compounding time, the more rapidly an account will grow. Thus, an account that has interest compounded monthly will grow faster than one compounded yearly, and an account featuring daily compounding will grow faster than one compounding monthly.
The reason is the compound interest account is being credited interest each day, increasing the principle balance, which increases the effect of the interest credited. The balance โcompoundsโ at a greater rate since interest is credited more often.
To avoid consumer confusion regarding the actual interest rate they are receiving on an investment or being charged on a loan, the concept of an effective interest rate is used.
Also known as an annual percentage rate, or APR, the effective interest rate tells you the actual interest rate you are receiving or being charged on an annual basis. This rate takes into account the frequency of compounding to determine the equivalent yearly rate.
Using an APR enables you to compare different compound interest rate accounts on an apples-to-apples basis when it comes to evaluating the interest rate.
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The Best Compound Interest Accounts
A number of cash and cash equivalent accounts feature compound interest. Bank savings accounts, mutual fund and brokerage account money market accounts, and life insurance cash accounts typically accrue compound interest.
Corporate and government bonds, on the other hand, often pay simple interest, although sometimes these products will have dividend reinvestment programs which enable compounding.
Mutual funds, whether they invest in equities (stocks), or fixed-income (bonds), allow reinvestment of both dividends and capital gains if they are open-ended, enabling compounding.
A distinction should be made between mutual funds, whether of the equity or fixed-income variety, and cash accounts. While mutual funds feature compounding, unlike cash accounts, any principal invested in these funds is at risk, whereas money held in cash accounts generally doesnโt place your principal at risk (the exception being those rare cases where a financial institution fails, although in such cases there is often some form of insurance covering cash account holders).
Cash Value Life Insurance as a Compound Interest Account
The cash account in cash value life insurance, also known as permanent life insurance, such as whole life and universal life typically receives compound interest.
After youโve tended to your immediate liquidity needs by setting aside some cash for emergencies, placing money into dividend-paying whole life insurance can be a good way to build up cash savings.
Specific cash value whole life policies typically feature paid-up additions riders, which allow you to add cash to the account if you like.
The Best Compound Interest Account
The power of compounding interest within the framework of Whole Life Insurance, especially in the context of the Infinite Banking Concept, is a cornerstone of building long-term wealth. By leveraging a Whole Life policy that grows its cash value at a guaranteed rate, along with potential dividends, the cash value benefits from compounding, where interest earns interest over time. This growth is further enhanced when policyholders use the policy’s cash value for loans, as the borrowed amount still continues to earn interest due to the unique nature of policy loans, where the cash is not withdrawn but collateralized. As the policy matures, the effect of compounding becomes increasingly significant, illustrating the principle that the longer the funds are allowed to grow, the larger the future value will be, showcasing the remarkable power of compounding interest in enhancing one’s financial assets within a Whole Life Insurance policy. Please watch the webinar for more.
Traditional Bank vs Life Insurance
In light of our position that whole life insurance is the best compound interest account, please consider the following additional benefits that you receive in a high cash value whole life insurance policy versus a traditional bank savings account to store your “safe bucket” money.
| Traditional Bank Savings Account | High Cash Value Whole Life Insurance Policy | |
|---|---|---|
| Earnings Rate | The national average yield for savings accounts is 0.58 percent APY as of Dec. 18, 2023 (*Bankrate, December 13, 2023). But actual earnings are less after tax and not guaranteed. | Guaranteed (average) 3% interest. Plus an additional 2%-4% dividends. Tax-free, so net earnings of 5%-7%, which may increase as interest rates increase. |
| Withdrawals and Earnings | Amount available for withdrawals is lower because gains in the account are taxable. | Full amount of cash value is available for withdrawals. |
| Loans | Does not offer loans. Loan would have to be obtained through a bank or other lender. | Loans are available via the cash value, with no approval needed. Plus, the amount borrowed still continues to generate interest and dividends. |
| Loan Repayment | Amount and due date of repayments is determined by the bank or lender. If payments are late or missed, it negatively impacts your credit score. | No required loan payments. Policyholder determines when and how much is paid - or even IF payments are made. |
| Added Benefits Upon Death | Paid on Death (POD) to a beneficiary. | Death benefit is paid to beneficiary income tax free. |
| Living Benefits | None | ~Chronic Illness Rider - With a chronic illness diagnosis or need for long-term care, funds may be accessed from the death benefit. ~Accelerated Death Benefit - Death benefit funds may also be accessed in the event of a terminal illness diagnosis. ~Protection from 3rd party creditors - In most states, whole life insurance is protected from creditors, lawsuits, and bankruptcy. |
| Costs | Potential savings and checking fees. | Premium is required for death benefit. However, premium payments are leveraged for a larger death benefit payout - which is received income tax free by the beneficiary(ies). |
| Creditor Protection | Minimal. | Creditor protection based on individual state laws. |
Let’s look more closely at a few of these cash value life insurance benefits.
Highly competitive cash value returns:
Dividend paying life insurance companies cash value accounts have offered returns that have exceeded those offered by most other cash or cash equivalent accounts in recent years.
With these cash value accounts growing in the range of 4% guaranteed, they have rewarded policyholders with highly competitive performance for policyholders.
In addition, although not guaranteed, these mutual that offer participating policies have life insurance dividends, that are paid to policyholders income tax free. Dividends can increase your whole life policy return, with many top mutual offering dividends in excess of 6%.
Tax-favored growth:
Interest earned on a cash value account accumulates tax-deferred. This tax-favored growth enables your money to grow faster than would be the case if it were subject to yearly taxes.
You can withdraw earnings on your cash account free of taxation up to the amount of premiums you have paid into the policy, i.e. your basis. Withdrawals over your basis amount are subject to taxes.
Death benefit protection:
Life insurance is a highly effective method of transferring wealth. If your intention is to build up cash savings to protect your loved ones in case something happens to you, the death benefit protection offered by cash value life insurance will typically provide them with a greater amount than the cash value of your account.
Death benefit proceeds are income tax free to the recipient beneficiary. Additionally, you can gift life insurance cash value to your account beneficiaries without the gifts being subject to income or gift taxes providing the cash stays in the policy.
These gifts can take place during your lifetime. This contrasts with vehicles such as 401k plans or IRAs where taxes must generally be paid on funds passed down to your beneficiaries.
Control over your money:
Another advantage of cash value life insurance is that the funds can be withdrawn in the form of a partial withdrawal or you can borrow against your cash value through a policy loan.
Unlike 401ks or IRAs where a penalty typically applies to most 401k withdrawals before age 59 1/2, there is no such restriction on cash value accounts. And there is no required minimum distribution (RMDs) down the road.
Creditor and Bankruptcy Protections:
Many states offer life insurance creditor protection. If you are subject to a judgment or bankruptcy, the cash value in your life insurance is protected from creditors in many states. However, there is a lot of variance from state to state, so make sure you check your particular state’s creditor protection laws.
Compound Interest + Velocity of Money = True Wealth Building
This is the most important section of this article on compound interest growth because it describes how your money can grow in your savings account and how that same money can also be utilized for other investments — SIMULTANEOUSLY.
Mutual life insurance companies offer participating policies that pay you a guaranteed rate of return, plus potential dividends. You can borrow money from your account and use it for whatever you choose, such as to finance your own purchases, buying cash flow assets, whatever you choose.
Here is the magic. When you access the money in your cash account, you are actually taking out a life insurance loan by borrowing against the cash value in your policy. The cash value in your life insurance policy continues to grow, because it is still in there. It is still being credited with interest and potential dividends.
You now use your life insurance loan to purchase cash flow assets, such as real estate or other alternative investments like notes or bridge loans, your own business, what have you. Now you created cash flow and your life insurance policy cash value (and death benefit) continues to grow at the same time in your new asset.
Final thoughts
The last thing we wanted to leave you with was the idea that it is not just money that benefits from compounding. It can also be things like your habits.
Compound Habits
It is important to point out that compounding can be used in other areas of your life outside of your finances. One of the best examples of this is with habits. A small change (1%) in your habits over time can have exponential affects on your performance, success and overall quality of life. Here is a great explainer video (no affiliation to I&E) that shows just how powerful the compound effect of creating new habits can be.
Time is of the Essence
Time is the crucial element in making the most out of compound interest. The difference between an account earning compound interest (or a lifestyle of healthy habits) and one that earns simple interest is generally not all that substantial over short time periods. However, over extended periods of time the difference between simple interest vs compound interest can be great indeed. So don’t delay, start today!
Next Steps
If you would like to see how your own numbers look, schedule a call with one of our Pro Client Guides to see just how powerful this compound interest using life insurance strategy can be for you.
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A Modern Approach To The Infinite Banking Concept
36 comments
El Bee
Hello,
What are your thoughts on the MPI strategy snd do you sell them?
Steven Gibbs
Hello, thanks for commenting. We don’t currently sell under that particular branding; however, we do sell indexed universal life products. If you’re interested in exploring further and perhaps comparing to MPI, I recommend that you connect with our IUL expert Jason Herring by emailing him at jason@insuranceandestates.com and requesting a call. Jason has decades of experience in all aspects of permanent life insurance so I believe this will be beneficial for you.
Best, Steve Gibbs for I&E
Steven Gibbs is a licensed insurance agent, and the following agent
license numbers of Steven Gibbs are provided as required by state law:
Resident License; AZ agent #17508301,
Non-resident Licenses: TX agent #2273189, CA agent #0K10610,
LA agent #769583, MA agent #2049963, MN agent #40563357,
UT agent #655544.
Tom Devine
My phone number is xxx-xxx-xxxx. Please contact me ASAP, as I’d like to purchase an IUL before filing taxes.
Insurance&Estates
Hi Tom, go ahead and reach out to Jason Herring directly if you havenโt connected already by emailing him at jason@insuranceandestates.com. Iโll also pass you inquiry to him to reach out to you.
Best, Steve Gibbs for I&E
Steven Gibbs is a licensed insurance agent, and the following agent
license numbers of Steven Gibbs are provided as required by state law:
Resident License; AZ agent #17508301,
Non-resident Licenses: TX agent #2273189, CA agent #0K10610,
LA agent #769583, MA agent #2049963, MN agent #40563357,
UT agent #655544.
Jorge pineda
i need hold life insurance we compon entered
Jane
Hi, can you recommend a company which had this type of Cash Value Life Insurance as a Compound Interest Account available. I have spoken to several and they offer IUL however not a compound interest account. The numbers are also much lower as far as return and growth.
Insurance&Estates
Hello Jane, we work with top companies for this strategy and yours may vary depending on your goals.
If you haven’t already connected with our team, a great start is to request a call with Barry Brooksby by emailing him at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
Julianne
What is the cut off age for a profitable compound interest investment to begin please?
Insurance&Estates
Hello Julianne and thanks for connecting. There isn’t necessarily a cut off age as this could depend on how your policy is designed. For example if you’re older and lump sums are applied, this can expedite profitability. To take next steps, I recommend reaching out to Barry Brooksby at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
Malo
Can I withdraw my current retirement and roll them into a compounding interest life insurance policy without penalties?
Insurance&Estates
Hello Malo,
Thanks for commenting, generally speaking, you cannot roll qualified retirement account proceeds into an non-qualified account without taxation and penalities. That said, it sometimes makes sense to cash out an invest in non-qualified assets. To learn more, you could request a meeting with one of our experts by emailing Barry Brooksby at barry@insuranceandestates.com.
Best, Steve Gibbs, for I&E
Varad
Hello, how can I start putting money into a compounding interest account? What would be a good recommendation on an account type?
Insurance&Estates
Thanks for connecting. By compound interest account here, we are referring to a mutual whole life policy that has been utilzed to hold additional cash through paid up additions. To find out more about how this works, you could request a phone conversation by emailing our expert Barry Brooksby at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
Elvin
I am interested on a cash value life insurance policy. I live in Puerto Rico, do you have coverage here?
Insurance&Estates
Hello Elvin, thanks for connecting. I checked with our IBC expert Barry Brooksby and he thinks there is a company that can acccomodate you. To connect with him, request a call at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
Stephone Mcclouden
reaching out Regarding compounding interest account
Insurance&Estates
Hello Stephone, the best way to get started is to watch our webinar on this topic and if you’ve already done so, go ahead and email Barry to request a call at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
Stephanie Madden
My spouse and need guidance. We need to allocate for retirement. There is too much information to share here. I would be willing to arrange a more official form of communication.
Stephanie M.
Insurance&Estates
Hello Stephanie, if Barry hasn’t reached out to you, go ahead and reach out to him at barry@insuranceandestates.com to request a consulation in order to get started.
Best, Steve Gibbs, for I&E
John Covington
How can I start?
Insurance&Estates
Hello John, thanks for connecting. A great first step is to request a call with our IBC expert Barry Brooksby at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
Georganna Colquitte
I am very interested my email me
Joe Chiti
I wish to learn more and invest in a compound interest account
Insurance&Estates
Hi Joe and thanks for connecting. A great first step is to connect with our expert Barry Brooksby at barry@insuranceandestates.com so go ahead and send him your best contact information and request a call.
Best, Steve Gibbs for I&E
Cisco Leone
Interested in learning more and opening an account.
Is it possible to roll over a 401K into a Life Insurance Compound Account?
Thank you
Cevin Mckaskle
I need to get life insurance anyway and im also wanting to build wealth and do some investing in realistate soon .How do i get started in getting uninterrupted compounding interrest insurance ?Do i just apply for it when getting life insurance?
Insurance&Estates
Hello Cevin, the next step I recommend is for you to connect with our high cash value life expert Barry Brooksby. Send your contact information to him and request a call at barry@insuranceandestates.com.
Best, Steve Gibbs, for I&E
Jaime Govea
To whom it may concern,
I currently own a small business and would like to invest in what sounds like a cash compound uninterrupted interest account, where my goal is to start using that money for real estate investing. Can someone help me by explaining which direction is best and which company is in line for my goals.
Insurance&Estates
Hello Jaime, I recommend you watch our overview webinar on infinite banking with Barry Brooksby and when you’re ready, connect with him at barry@insuranceandestates.com to schedule a zoom call.
Best, Steve Gibbs for I&E
James P Bryant
hello i invest around 5000.00 every year in a traditional IRA and this gives me a substantial tax incentive on my tax refund . the IRA itself only pays about 2 percent . is there more benefit in a compound interest account and would it still bring me the same tax incentive on my refund ? just trying to figure this out before tax day comes . thanks
Insurance&Estates
Hello James, outstanding question and to get a thorough answer I recommend you connect with Barry Brooksby and get a side by side (truth concepts) comparison. You can connect with him directly at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
Robert Bousaleh
Interested in learning more and opening an account.
Thank you
Insurance&Estates
Hello Robert, to learn more, reach out to Barry Brooksby at barry@insuranceandestates.com.
Best, Steve Gibbs, Esq.
Paul Rawls
Dear Itzik
Please let me know the out come if you need some assistance please let me know for I was in the Navy also from 1970-1972. I can be reached @
Best Regard
Paul Rawls
itzik
I found out that while in the US Navy the Sfran base purser took out $192 from my $1726.14 earned while in the service of our country. The IRS was to begin taking out tax money from servicemen starting in 1956. I was never compensated for this error and looking at my service records I found the receipt for the tax money taken out from my pay. This was 64 years ago, and I have been trying to get an answer from the IRS but keep getting a run-around with their telephone services. I am trying to ascertain if the IRS owes me the compounded interest on this illegally taken out in 1955. I was separated from the Navy in feb 11th 1956. Is there anyway I can get an answer from them?? If they owe me that unreimbursed money then I would imagine they owe me over $7,000 . How can I get an answer from them???
Insurance&Estates
Thanks for reading. It sounds like you need to obtain a local attorney who focuses on working with Veterans issues. Best of luck in your efforts.
I&E