Is this whole banking concept for real or just a bunch of smoke and mirrors?
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There are actually entire books, even bestsellers, devoted to this topic including:
- Becoming Your Own Banker – Unlocking the Infinite Banking Concept by Nelson Nash
- Bank on Yourself by Pamela Yellen
- The Bank on Yourself Revolution also by Pamela Yellen
Ever read any of these? If so…
You may have thought at first that you’d be starting your own bank branch in your neighborhood. In fact, this mysterious banking concept has nothing to do with banking as an institution at all.
You have probably come to realize that what all these books are talking about is funding some sort of special whole life insurance policy which you can borrow against to fund major expenditures.
The very bold claim that of all these books are making is that funneling money through this life insurance policy and borrowing against is better than even paying cash.
Here are the most common examples of the recommended expenditures to funnel through “your own bank”:
- Cars & Trucks
- College Tuition
- Real Estate (personal or investment)
- Business Inventory
- Business Equipment
To name a few.
The truth is that there is actual merit to the underlying mechanics of this so-called “banking strategy” at the heart of these books promoting “The Infinite Banking Concept®” * and “Bank on Yourself®.” ** (see footnotes at the end of the article for trademark details)
However, I can boil down the underlying strategy behind this mysterious concept of becoming your own banker much more succinctly in these 5-steps below.
If you’d rather watch a quick 6-minute video on “Banking Basics” click here.
Otherwise, here we go…
Step 1 – Get Some Whole Life Insurance to Become Your Own Bank
Quite simply, the strategy requires that you take out a whole life insurance policy on yourself (if you can qualify for it). If not, you can take out and own a policy on someone close to you.
Warning: Insurance companies aren’t keen on STOLI (stranger-owned-life-insurance).
However, here are some of the types people you can usually get an insurance company to issue you a policy on to act as your own bank:
- Business partner
- Key employee
- People you have loaned significant amounts of money to
Note: With a well-explained story and proper documentation, other situations may be possible.
Once you have identified who to buy insurance on, what’s next?
Step 2 – Banking Whole Life Policy Design Necessities and Add-ons
Now you can’t just get any old type of life insurance policy to be your own bank.
Nelson Nash’s book The Infinite Banking Concept – Becoming Your Own Banker and Pamela Yellen’s Bank on Yourself books insist that it must be a Participating Whole Life Insurance Policy.
Although we are big fans of using Whole Life insurance as your own private bank, we recognize that Index Universal Life insurance (IUL) can also work if structured properly. In fact, IUL’s unique collection of benefits might even make for the ideal banking policy for certain types of clients.
In order to maximize cash value growth and early access to the equity inside your own bank, you also will need these to make that sure your Whole Life policy includes there two key riders:
- Paid-Up Additions (PUA) Rider: this is how to turbo-charge your “banking engine.” (Click here to learn about how PUAs work)
- Term Insurance Rider: this would be like the titanium frame that holds the turbo-charged engine in place.
FAQ: “But wait, term insurance? I thought you needed Whole Life to make this work?”
Answer: You do need Whole Life, but by blending it with this additional term rider, you can substantially bring down the cost of the total death benefit needed to support the amount of cash you want to pump into your bank. It also increases the amount of Paid-Up Additions you can buy in the early years, which is like the turbo charger that will greatly accelerate your whole life policy’s growth.
Now that you know who to buy insurance on, where from, and which features you want, what’s next?
Step 3 – Properly Funding Your Policy So You Can Become Your Own Banker
Now if this just seems completely counterintuitive to pay any more than you absolutely have to when it comes to buying insurance, prepare to have your paradigm shifted and your mind blown!
The way to outrun the costs of a Whole Life policy is to pay additional premium over and above the amount required for the basic coverage. In fact, you will want to pay substantially more…as much as the IRS will let you actually.
[Hint: When the IRS regulates how much you can do, doesn’t that usually mean that something good is going on there?]
Here are all the reasons why you want to pay the maximum amount of premium:
- The commission paid to the agent for the additional payments is peanuts
- 90-95% of the extra premium payments goes straight to your cash surrender value (in other words they become immediately-accessible as equity in the policy)
- The other 5%-10% of this extra payment which doesn’t go toward building immediate equity goes to buying a little slice of extra death benefit (called a Paid-Up Addition or PUA). What’s nice is that no further premiums are due on PUAs since they’re all contractually paid-up with this one-time payment. Additional PUA’s added to your policy entitle you to a bigger cut of the mutual insurance company’s annual dividend pool (which although aren’t guaranteed, most mutual companies have paid dividends each and every year for well over 100 years).
- This immediate equity gets stacked onto your guaranteed cash value which contractually starts growing at a favorable guaranteed rate of return (even if no dividends are ever paid again).
Now that you’ve got your banking engine in place, you’ve filled it with fuel, and the engine is humming, now what…?
Step 4 – Use your policy values to Fund Your Purchase.
Using our car analogy, it’s time to take her for a ride. Most people don’t want to accumulate wealth simply just to have an impressive annual statement. You want to use your money to buy things, to build things, to invest in things. Now you can utilize the equity inside your own bank to do these things at any time for any reason. When I say “utilize the equity in your bank” you can do so using one of three methods:
- Withdraw your cash surrender value or…
- Borrow against your cash surrender value using the guaranteed policy loan feature
- Pledge the policy as collateral to an outside lender if you can get a better rate
Now I know that most of you hear the word borrow and just cringe. However, even though you are technically borrowing funds, your entire equity base (full cash value) continues to earn interest and grow within your policy, including the amount you borrowed.
You see, some people think they are “borrowing out” the cash value from the policy and “paying themselves back with interest.” That’s not true at all, and often used as a deceptive sales pitch.
Your cash value never actually leaves your policy even when you take a loan and “borrow against” it. You see, the insurance company is happy to give you a loan out of their general fund because they’re always holding your cash value as collateral.
So that’s why it seems like you pay yourself back the interest.
Your entire cash value balance never leaves the policy continues to grow inside the policy including the amount you borrowed.
Q: “What if I don’t want to pay back the darn loan?”
A: “You don’t have to, but you may want to. And you have the ultimate flexibility of how to do that.”
Step 5 – Pay Back the Loan on Your Terms
Thankfully this loan is a private loan between you and the insurance company so it doesn’t show up on any credit report. Also, since they’re holding your growing cash value as collateral, there’s no stringent payment structure in place. Here are your options for repayment:
- Pay principal and interest on whatever schedule you want
- Make interest-only payments
- Pay nothing until you can make a balloon payment for the entire balance
- Pay nothing (hoping the policy growth keeps up with the interest that’s rolling up into the loan balance) and have the death benefit pay off the loan at death.
Needless to say there’s no other institution (or even a mafia loan shark) that offers this kind of flexibility. Obviously you should schedule some sort of regular maintenance, but it’s not necessary.
In fact, I have clients who are contractors who bid jobs, and have to come out of pocket for materials and labor costs. They float the loan for close to a year and then pay it off in one foul swoop. Or they pay whatever minimum interest maintenance is needed if they need more time. If the policy itself is performing well, this may be very little if anything.
A lot of people hear about paying back the loan and think, “Ah see, I knew there was a catch! I knew it was too good to be true.”
But think about it – even if you just kept your cash in a regular bank and made a withdrawal for every single purchase, don’t you start making deposits shortly thereafter to true up the account for the next purchase?
So if you apply the exact same “save-spend-save” cash flow structure (but instead funnel it through a properly designed Whole Life insurance policy rather than a traditional banking institution), you’ll often see that the difference in wealth building is staggering.
Here are the 3 reasons why building your own bank using life insurance works:
- Your equity usually earns a much better growth rate than any bank or safe bonds (without any market risk)
- The growth and any distributions aren’t taxed as long as some amount of the original policy death benefit stays in force until the insured passes away.
- When you borrow rather than make a withdrawal, your full cash surrender value continues growing inside the policy despite any loans you have out against the policy
That’s it! And that third factor is huge. Believe it or not, the combination of these 3 factors can contribute to vastly more wealth for the policyholder if this banking strategy is employed properly.
What I mean by that is that you should pay back the loan when you can.
Q: If you have a goose laying golden eggs, when would you want to kill the goose?
A: Never!!! In fact, feed that goose as early and as often as you can.
Let’s wrap this whole banking concept thing up:
Between all the books, videos, radio ads, and insurance agents out there discussing “The Infinite Banking Concept®” and/or “Bank on Yourself®”, the information surrounding this banking strategy may be overwhelming. Hopefully the 5-steps described in this article have been helpful in deconstructing the actual mechanics and simplifying the strategy.
If you’re still not totally clear on how building your own banking mechanism with Whole Life Insurance works, this next article may be especially helpful:
Click here for the The Top 4 Myths behind Being Your Own Banker As well as the Top 4 Banking Truths (including access to a detailed case study.)
If you have specific questions about the general strategy described above or you want to see how it can look with your own specific situation, we invite you to schedule a time to speak to one of our representatives at BankingTruths.com by clicking here or by calling this number (949)-288-6650.
(Click here for Hutch’s bio or click the different Acronyms above to see what each of them mean.)
John “Hutch” Hutchinson has no affiliation or association with any of the following:
- The Infinite Banking Concept®, The Infinite Banking Institute Nelson Nash, nor his book Becoming Your Own Banker – Unlocking the Infinite Banking Concept
- Bank on Yourself, Pamela Yellen, or her book The Bank on Yourself Revolution
* “The Infinite Banking Concept®” is a registered trademark of Infinite Banking Concepts Inc.
** “Bank On Yourself®” is a registered trademark of Hayward-Yellen 100 Limited Partnership.