Does becoming your own banker sound too good to be true?
If you want to figure out what’s behind claims like “you can build wealth by starting your own personal bank with whole life insurance,” then you have come to the right place!
The way this banking strategy is often explained by life insurance agents explain can be sensationalized and over-hyped. In fact, even the most popular publications about the subject can be downright misleading at time:
- “Become Your Own Banker”
- “The Infinite Banking Concept ®” *
- “Bank on Yourself ®” ** (see footnotes at the end of the article for trademark details)
This article is intended to demystify and dissect 4 of the core truths as well as the 4 biggest myths that surround this cash flow banking strategy at the heart of what’s often referred to as “The Infinite Banking Concept ®” * or “Bank on Yourself ®.” **
Banking Truth #1 – Can you become your own banker using life insurance as your own private bank?
Does this whole banking strategy really work?
The short answer is yes it can.
The mechanics of this so called “infinite banking concept” are sound and can actually work quite well, if (and this is a very big IF) the underlying whole life insurance policy is designed properly for maximum cash value accumulation.
There is a unique combination of features, riders, and life insurance policy design techniques that allow for an over-funded whole life policy to optimize these 7 key benefits below:
- Principal protection (and guaranteed growth every year)
- A competitive growth rate (that doesn’t start with a decimal point)
- Tax-sheltered growth and tax-exempt distributions
- Access to your equity at any age for any reason
- Creditor protection (in many states)
- A tax-free death benefit over and above your equity position
- A tax-free advance of some of your death benefit if you become chronically ill
This unique concoction of benefits can’t be found in any other asset class and make Whole Life for retirement the ideal compliment to other riskier investments.
What I find so interesting is that if your local bank offered an account with these benefits, then people would be lining up around the corner to deposit money into. But since the whole life insurance industry has done such a terrible job of positively promoting its own wares, this concept remains one of the best-kept financial secrets in America.
It’s worth noting that several media pundits like Dave Ramsey and Suze Orman 2w21wq1emphatically argue that ANY Whole Life Insurance Policy is a rip-off. Upon closer examination, you’ll find that they don’t really understand advanced life insurance design at all, much less how it works within the context of the banking concept.
Usually, they are making bold blanket statements on shock and awe “financial entertainment” programs designed to captivate the masses and sell ads for the networks they represent. Some of these financial gurus even have a hidden agenda to sell rivaling products if you pull back the sheets. Regardless, these blowhards will rarely ground their overstated opinion with detailed facts like you will find throughout our site.
This leads us to our first myth and most often asked FAQ…
Banking Myth #1 – Whole Life Insurance is a bad investment so using it to be your own bank is a bad idea.
Don’t get me wrong, depending on how the policy is designed, Whole Life Insurance can certainly be a bad investment vehicle, but that is optional.
There is an infinite number of ways to design a policy for different financial goals. Here are the two opposite ends of the spectrum:
- If someone wants the maximum amount of death benefit carried all the way to life expectancy, then cash performance will suffer (since the bulk of the internal charges are based not so much on how much premium goes into policy, but rather how much permanent death benefit those premiums buys.)
- Conversely, if someone wants to use their whole life policy for cash value accumulation and private loans, then it’s optimal to have your premium payments pay for as little death benefit as possible (thereby reducing the most expensive component of life insurance pricing.)
So what’s the truth?
Banking Truth #2- Policy design matters A LOT when using Whole Life to become your own banker
Although Whole Life Insurance is a product that has been around for over 150 years, I’m not talking about your grandmother’s life insurance.
Did you know that the two biggest banks in America park billions (with a “B”) of dollars of their Tier 1 capital inside permanent life insurance policies designed for maximum cash value accumulation?
So at this point, your brain should be mulling over these 3 considerations:
- Maybe there is something to this banking strategy with life insurance.
- It’s unlikely that major banks got scammed for billions of dollars, so there must be some way to design a life insurance policy to be investment-worthy.
- Maybe I should be doing for myself what banks are doing with my cash deposits. Do what banks do, not what they say!
So how can this kind of whole life insurance policy help me become my own banker?
The agent helping you set up the policy should use a combination of policy design features and optional riders to allow for robust cash growth to occur early and often. Designing a whole life insurance policy in this manner will substantially reduce agent commissions and allow for more rapid cash value growth inside the policy to be used for your own private family bank.
All of the companies that offer this type of policy have been in business for well over a century and consequently have very similar mortality data. So think about it…If your agent is getting more commission from one company than another, then wouldn’t it stand to reason that the owner of the policy (or the “banker”) will be the one paying the price through poor policy performance?
Here are the two main ways agents can increase their commissions:
- By having the premium support more death benefit than necessary
- Or by choosing an insurance company that pays a higher commission rate
So it’s important that the agent you choose be:
- Ethical: to help you choose the right company and policy design to fit your goals (probably the most robust cash value performance with sufficient early access)
- Knowledgeable: to know which insurance companies and products can achieve this for the different age and health variations. Also, they must know which combination of riders can optimize your policy for this strategy.
- Independent: to be able to pivot from one company to the next as the companies change their dividend rates and available products.
Click here for a copy of our free PDF report explaining “The Key Stages of a Whole Life Insurance Policy Designed for Banking” and get a glimpse of the optimal policy design specs for a banking policy.
You also need to consider the carrier’s lending options when it comes to choosing the right product. And that tees us up to discuss Myth #2…
Banking Myth #2 – You pay yourself back the interest when Whole Life insurance is your own bank.
When discussing Nelson Nash’s “Infinite Banking Concept” or Pamela Yellen’s “Bank on Yourself,” agents may tell you that when you pay interest on a policy loan, you’re actually paying yourself back that interest.
Um… that’s FALSE!
Although that may sound sexier, and the policy continues growing in a way that seems to create this effect, you are NOT paying yourself back the interest when paying back policy loans.
Banking Truths #2 – You Pay the insurance company loan interest, while they continue crediting your Whole Life policy with interest and dividends (even on loaned money).
Here’s the actual 7-step money flow that can create the illusion that you’re paying interest to yourself when paying back a policy loan:
- You call your life insurance agent or company directly and request a loan.
- The insurance company determines if you have enough equity (cash surrender value) to support the loan.
- If so the insurance carrier sends you a check from their general account
- They then put an internal lien against your cash value (that they’re essentially holding as collateral) for the amount you borrowed plus the first year’s interest.
- You cash or deposit the insurance company’s check and use it for your desired purchase or investment.
- Your entire cash value balance continues to earn interest and possibly dividends inside the policy (including the amount you borrowed because it never actually left the policy. Remember that the company just earmarks a comparable amount of cash value in the policy as collateral for the loan you took?)
- If you choose to pay back principal and interest throughout the year (neither is mandatory), the lien against your cash value will be reduced accordingly (including a refunded credit to your cash value for the upfront simple interest you paid at the onset of the loan).
I know that the true mechanics of a life insurance policy loan doesn’t sound as sexy as “you pay your policy back the interest,” but facts are facts.
Let’s be clear though that utilizing the contractual policy loan feature to become your own banker has some clear advantages:
- The loan is totally private (no credit checks or reporting to credit bureaus)
- The loan is completely flexible (no mandatory loan maintenance as long as the cash value exceeds the loan amount)
- There are opportunities for positive arbitrage (when the total return of the policy exceeds the loan interest).
- Regardless, your full balance continues climbing up that compound curve in spite of being used for outside purchases or investment opportunities.
So now that we got that out of the way, some of you may be thinking exactly what I’ve written for Myth #3…
Banking Myth #3 – I’m better off just paying cash than borrowing against my own bank.
You’re probably saying something like, “That sounds like a lot of hassle. So if I’ve already saved up the cash, whether it’s in the bank or this magic life insurance policy, why not just withdraw my funds and pay cash for the purchase?” And that’s a perfectly valid question, especially since most of us are trained to “see RED” when we hear the word “borrow.”
How in the world can borrowing be better than paying cash?
You’ll soon find out.
Let’s just say that first, you have the desire to pay cash for all major purchases like:
- Real estate
- Tuition Payments
- Business Inventory,
- Business Equipment
And furthermore we have to assume then that you are disciplined enough save up cash afterwards for your next purchase. If so, you will in most circumstances be much better off funneling those funds through a properly designed life insurance policy and utilizing the flexible loan feature as described above.
WHY? HOW? Well, that’s exactly what our next Truth covers.
Banking Truth #4 – Continuous Compounding beats Thwarted Compounding or Stalled Compounding
Keep reading below… or click here to watch a six minute video on the crux of this Banking concept.
You already know that this banking concept has nothing to do with paying yourself back the interest in an insurance policy, so how exactly does this strategy help you get ahead?
It has to do with the MIRACLE of compound interest.
What a wondrous phenomenon!
It’s unclear as to whether Albert Einstein called compound interest “the eighth wonder of the world” or “the greatest invention by man,” but he was definitely enamored with the concept.
Of course he was. Just look what happens when you let compounding interest snowball in your favor for decades.
It’s like a snowball becoming massive as it rolls uphill.
Unfortunately though, when you pay cash to make a major purchase you basically melt the snowball and reset the compounding to its weakest point – the beginning.
If I cut a compound interest curve right down the middle, which side would you rather have?
Do you like the flatter left-hand side of the curve or the steeper right-hand side of the curve? You want the right-hand side, of course, and how you get there is by not interrupting the curve anywhere along its journey.
Well guess what, the moment you withdraw funds from any compounding asset to pay cash for a purchase, you just killed the compounding. Once you refill your account with the amount you spent, you reset that curve to the flatter side on the left
You lose your place on the compound curve and start over.
This makes sense, right?
It should. It’s SCIENCE, the science of money.
If however, you borrow against this continuously compounding asset class, you can often create more wealth for yourself because you entire balance keeps working for you in this tax-sheltered environment.
You probably get by now that allowing assets to continue safely compounding even after making a major purchase could potentially give you a huge leg up financially, correct? That’s how you get to that coveted right-hand side of the curve.
So how do you do you keep your assets chugging up that compounding curve no matter what?
Here’s how: you need an asset class that has these 5 benefits embedded into the structure of the account:
- A contractually guaranteed growth rate (and opportunities for additional growth.)
- Growth that’s immune from market risk
- Growth that’s immune from taxation
- The ability to borrow against your equity tax-free
- The contractual right to borrow against your equity at any time for any reason and still have your assets compounding toward that right hand side of the curve.
But wait! Hold on a second…
Banking Myth #4 – All Debt is Bad!
First of all, keep in mind that with this type of loan you actually saved up a corresponding asset that you’re collaterally borrowing against. So are you technically “in debt” at all?
If we looked at this transaction like a CFO, you do have a liability in the form of a loan on one side, but on the other side, you have a corresponding asset that can wipe out that “debt” at any moment, right?
Let’s look at the mechanics of using the story of two best friends, Samuel Saver and Benjamin Banker.
Samuel Saver saves up cash and withdraws it to pay for major expenditures and strategic investments. Once he does, he starts aggressively saving to bolster his reserves.
His best friend Benjamin Banker pays premiums to build up cash value in life insurance and then borrows against his safely growing equity when he has a major expenditure or strategic investment opportunity. Rather than rebuild his savings account, Benji flexibly pays down the lien against his continuously growing cash value and ends up at a higher place in line.
Follow the bullet points to see how similar the cash flows are for these two pals.
Samuel Saver Purchasing his Car by Paying Cash:
- Sammy started with nothing and made periodic payments for 5 years to a high-yield savings account so he can pay cash for his next car.
- After 5 years Sammy withdraws his cash to pay for the car.
- Sammy’s account is virtually empty and he can either:
- make systematic deposits to fill the account again for his next car.
- leave his savings account empty and just enjoy his car
Benjamin Banker Purchasing his Car Using His Own Bank:
- Benji starts with nothing and makse periodic payments to a properly-designed overfunded permanent life insurance policy to build equity
- After 5 years Ben borrows against his available equity (cash surrender value) to pay cash for the car at the dealership.
- His policy equity (net cash surrender value) is virtually zero and Ben can either:
- Make principal + interest payments to reduce the lien that the insurance company has placed against his growing cash value
- Surrender his policy for any remaining unencumbered cash value. He lets the insurance company extinguish the loan with the cash value they were holding as collateral for the loan, and just be happy with the car he bought
Even though these two scenarios are nearly identical from an out-of-pocket cash flow perspective, it’s likely that Benjamin Banker will come out way ahead of Sammy Saver several years down the road. Not to mention, Benji Banker had death benefit protection the whole time and quite possibly protection against chronic illness as well.
It’s best if you look at the two depicted side by side, but notice how every time Benjamin Banker pays down the lien against his cash value he ends up at a higher place in line on that continuously compounding curve:
So even though Benjamin Banker could just wipe out the debt with assets at any time, remember there’s six key reasons he may want to pay down that loan against this unique asset class he owns. It’s because of those 6 key benefits we discussed at the very beginning of this piece?
Just in case you forgot what those additional benefits were, here they are again:
- Principal protection
- A growth rate of return that doesn’t start with a decimal point
- Tax-deferred growth and tax-exempt distributions
- Access to your equity at any age for any reason
- Creditor protection (in many states)
- A Tax-Free Death Benefit over and above your equity position
Regardless of which benefits you like best, when you buy permanent life insurance it’s a package deal.
No other asset class does all these things. In fact it’s difficult to cobble together any combination of investment products to create even close to the same pool of benefits.
Hopefully things are becoming clearer and you’re realizing that the underlying mechanics behind the heavily promoted concepts out there like Nelson Nash’s Infinite Banking Concept or Pamela Yellen’s Bank on Yourself actually have some merit to them.
I hope this article has helped to clarify what can be an otherwise overwhelming subject.
As you progress through your research, at some point you will want to see how your own custom numbers can look from the most competitive insurance companies that offer these products. I’d like to personally invite you to have a confidential one on one webinar with one our team members by clicking here or by calling us at (949) 288-6650.
Until then…happy banking,
(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 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