Arbitrage Explained: Profit from Interest Rate Spreads
Arbitrage is the art of exploiting price differences. Learn how the wealthy use interest rate arbitrage to build wealth faster.
Buying low, selling high — simultaneously
What is Arbitrage?
Arbitrage is the practice of taking advantage of a price difference between two or more markets. Buy in the cheap market, sell in the expensive market, pocket the spread.
Classic Example
Gold costs $1,800/oz in New York, $1,850 in London. Buy in NY, sell in London, profit $50/oz instantly (minus transaction costs).
Currency Arbitrage
$1 USD = 0.85 EUR in one exchange, but 0.88 EUR in another. Convert back and forth, capture the spread.
Interest Rate Arbitrage
Borrow at 5%, invest at 8%, pocket 3% spread. This is how banks make money — and how IUL strategies work.
Banking is fundamentally an arbitrage business
How Banks Use Arbitrage
The Bank's Arbitrage Model
- Accept deposits, pay 0.5% interest
- Lend those deposits at 7%
- Keep the 6.5% spread
That 6.5% spread is pure arbitrage profit. Banks don't create value. They exploit the spread between borrowing and lending rates.
The wealthy asked: "Can we do this for ourselves?"
Becoming your own arbitrage machine
Arbitrage in IUL / Infinite Banking
The IUL Arbitrage Structure
- Fund IUL policy: Cash value grows tax-deferred at 5-7% (indexed to S&P 500 with downside protection).
- Borrow against cash value: Policy loan at 5-6% interest.
- Cash value continues growing: Your collateral earns the index return AS IF you never borrowed.
- Use borrowed funds: Invest in real estate (8-12% return), business (15%+), or other opportunities.
- Capture the spread: Difference between loan cost and investment return is your arbitrage profit.
Positive Spread Example
Borrow $100K at 5%, invest at 10%, net 5% annually on borrowed capital. Your cash value ALSO grows at 6%. Total return: 11% from one dollar.
Protected Arbitrage
Unlike margin loans or HELOC arbitrage, IUL loans can't be called. Your cash value has downside protection (0% floor). Risk-adjusted arbitrage.
How the strategy plays out in real life
Real Arbitrage Scenarios
Scenario 1: Real Estate Investment
Setup:
- $200K cash value in IUL
- Borrow $150K at 5% for rental property down payment
- Cash value continues growing at 6%
- Rental property generates 8% cash-on-cash return
Arbitrage Math:
- Loan cost: 5% on $150K = $7,500/year
- Cash value growth (on full $200K): 6% = $12,000/year
- Rental income: 8% on $150K = $12,000/year
- Total net: $16,500/year
Your $200K is earning 8.25% effective rate (vs. 6% if you had just left it in the policy).
Scenario 2: Business Opportunity
Setup:
- $100K cash value
- Borrow $100K at 5% to fund marketing campaign
- Cash value grows at 6%
- Marketing returns 3:1 ROI (300%)
Arbitrage Math:
- Loan cost: 5% = $5,000
- Cash value growth: 6% = $6,000
- Business profit: $300,000 (one-time)
- Net gain: $301,000
Not all arbitrage is recurring. Sometimes it's a one-time opportunity. IUL gives you instant capital access without liquidation.
The psychological and structural barriers to arbitrage
Why This Works (And Why Most People Don't Do It)
Why It Works
- ✅ Non-correlated growth: Cash value and investment returns are independent
- ✅ No margin calls: Policy loans can't be called due to market volatility
- ✅ Tax-free loan: Borrowing isn't a taxable event
- ✅ Flexible repayment: No required payment schedule
- ✅ Downside protection: 0% floor on cash value = spread protection
Why People Don't Do It
- ❌ Don't know it exists: Wall Street doesn't teach this
- ❌ Fear of debt: "Borrowing is bad" conditioning
- ❌ Complexity: Requires understanding IUL policy design
- ❌ Delayed gratification: Takes 5-10 years to build meaningful cash value
- ❌ Commission bias: Advisors prefer AUM fees over insurance
Frequently Asked Questions
Ready to Become Your Own Bank?
Arbitrage is powerful, but it requires the right structure. Not all IUL policies are designed for maximum cash value and loan efficiency. We specialize in max-funded IUL designs optimized for banking strategies.