Becoming your own banker may seem like a bunch of smoke and mirrors, but you can continually reap controlled growth as your own bank if implemented correctly.
Even the most popular be-your-own-bank bestsellers (below) make the bold claim that you can build wealth by starting your own personal bank, but don’t really elaborate on the steps necessary to become your own banker.
- Becoming Your Own Banker – The Infinite Banking Concept by Nelson Nash
- Bank on Yourself by Pamela Yellen (see footnotes for trademark details)
Upon first hearing that you can “be your own bank” you may have thought that you’d be starting some kind of bank branch in your neighborhood. By now you have probably come to realize that these books are instead discussing funding some sort of magical whole life insurance policy which you can borrow against to double dip on growth and become your own banker.
Now you’re just left wondering if Infinite Banking is legit, right?
The very bold claim that of all these be-your-own-bank books are making is that funneling money through life insurance and then taking policy loans is much better than even paying cash.
Here are the most common ways to become your banker with:
- Cars & Trucks
- College Tuition
- Real Estate (personal or investment)
- Business Inventory
- Business Equipment.
The truth is that there is actual merit to the underlying mechanics of this so-called “private family 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 will boil down the underlying strategy behind becoming your own banker much more succinctly in these 5-steps below.
If you’d rather watch a 6-minute video depicting the simple science behind this banking concept, we put together a video specifically for that purpose.
Otherwise, here we go…
The 5 Steps to Becoming Your Own Banker with Whole Life Insurance
Step 1 – Get Some Whole Life Insurance to Be Your Own Bank
Quite simply, the strategy requires that you take out a whole life insurance policy on yourself if you can qualify medically for it. If not, you can take out and control a policy on someone close to you to be your own bank with.
Warning: Insurance companies hate on STOLI (stranger-owned-life-insurance).
However, here are the types of relationships insurance companies will usually issue a whole life policy on for you to own and control 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 to become your own banker using other people as the insured.
Once you have identified who to buy insurance on, what’s the next step?
Step 2 – Whole Life Policy Design Necessities and Add-ons to Become Your Own Banker
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 Indexed Universal Life insurance (IUL) can also work if structured properly. In fact, IUL’s unique collection of features and benefits may make for the ideal banking policy for certain types of clients. However, we recommend that you fully understand all the pros and cons of Indexed Universal Life before using IUL to be your own bank.
Getting back to using the traditional Whole Life insurance to become your own banker, we fully agree that it’s of utmost importance to get your policy from a Mutual Life Insurance Company (as opposed to a stock insurance company). This is critical since mutual companies are owned by policyholders and share their profits with Whole Life policyholders in the form of dividends.
In order to maximize cash value growth and early access to the equity inside your own bank, you also will need these to make sure your Whole Life policy includes there two key riders:
- Paid-Up Additions (PUA) Rider: this is how to turbo-charge your “banking engine.” (more on this below)
- Term Insurance Rider: this would be like the titanium frame that holds the turbo-charged engine in place.
FAQ: “But wait, a term insurance rider? 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 turbocharger that will greatly accelerate growth inside the whole life policy to be your own bank.
Now that you know who to buy insurance on, where to buy it from, and which features you want add, what’s the next step to be your own bank?
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 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 to be your own bank… as much as the IRS will let you.
[Hint: When the IRS regulates anything, 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 to be your own bank:
- 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 these additional payments become immediately-accessible for your own bank)
- The other 5%-10% of this extra payment which doesn’t go toward building immediate equity goes to buying a little slice of extra permanent death benefit (called a Paid-Up Addition or PUA). What’s nice is that no further premiums are due on PUAs since they are contractually paid-up with this one-time payment. Additional PUA’s added to your policy’s guaranteed cash value entitle you to a bigger cut of the mutual company’s annual dividend pool. Although dividends aren’t guaranteed, most mutual insurance companies have paid dividends each and every year for well over 100 years).
- This immediate equity from Paid-Up Additions 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 Cash Value to Be Your Own Bank and Fund Expenditures and Fuel Outside Investments
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 become your own banker to buy things, to build wealth, to invest for your retirement and legacy. Now you can utilize the equity inside your own bank to do these things at any time for any reason using one of these 4 methods:
- Withdraw your cash surrender value or…
- Borrow against your cash surrender value using the guaranteed policy loan feature for maximum flexibility
- Pledge the policy as collateral to an outside lender if you can get a better rate
- Increase your total borrowing capacity by getting an outside loan without even having to pledge your policy that has become your own private bank
Now I know that most of you hear the word borrow and just cringe. However, even though you are technically borrowing funds when becoming your own banker, your entire cash value base continues growing 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.
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.
Question: “What if I don’t want to pay back the darn loan?”
Answer: “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 Once You Have Become Your Own Banker
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 the mutual company is holding your growing cash value as collateral, there’s no stringent payment structure in place for your own bank. 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 pace 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 to be your own bank with. Obviously, you should schedule some sort of regular loan maintenance, but it’s not necessary by any means.
In fact, I have contractor clients 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 fell swoop when they get paid for the entire job. They may pay whatever minimum interest maintenance is needed to keep simple interest on a flat balance while earning compound interest on an increasing balance. However, when a policy is performing well as your own bank, this minimum required interest payment may be nothing at all..
A lot of people hear how about paying interest on 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 bank account 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-replenish” routine but instead funnel the exact same cash flows through a properly designed Whole Life insurance policy to be your own bank, you will often see that the difference in net wealth is staggering with what they call infinite banking.
Here are the 3 reasons why becoming your own banker using life insurance works:
- Your cash value usually earns a much better growth rate than any bank, CD, or even safe bonds (without any market risk)
- The growth, as well as any lifetime distributions, aren’t taxed as long as some small amount of whole life insurance death benefit stays in force until the insured passes away.
- When you borrow rather than make a withdrawal, your full cash value continues growing inside the policy despite any loans you have against the policy with the insurance company.
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 your loans back as soon as you can so you can rinse and repeat.
Question: If you have a goose laying golden eggs, when would you want to kill the goose?
Answer: Never!!! In fact, feed that goose as early and as often as you can so it keep laying more and more golden eggs.
Let’s wrap this whole “Be Your Own Bank” 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 becoming your own bank may be overwhelming. Hopefully, the 5-steps described in this article on how to be your own bank have been helpful in deconstructing the actual mechanics and simplifying the strategy.
If you’re still not totally clear on how becoming your own bank with Whole Life Insurance works, read up on The Top 4 Myths behind Being Your Own Banker As well as the Top 4 Banking Truths (including access to a detailed case study).
Also, 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 tapping the image below or by calling this number (949)-288-2850.
John “Hutch” Hutchinson
ChFC®, CLU®, EA, AEP®, CExPs®
John “Hutch” Hutchinson has no affiliation or association with any of the following and does not feel compelled to do so since he is a published life insurance authority, policy design geek, and a multi-faceted accredited financial strategist:
- 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, nor 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.