More and more talk is occurring around the idea of being your own banker, and while it may seem far-fetched or bring up ideas of setting up a brick-and-mortar bank that’s not true. What is true is that you can gain tremendous benefits from properly setting up and educating yourself on how to utilize a whole life policy.
While there is a lot of talk about it much of it is either negative or uninformed. That being said several books were written on the topic decades ago and as time goes more and more are being written trying to explain the topic to a wider audience. Some of the most common books are: Become Your Own Banker, Bank On Yourself, and LEAP. One of my newer favorites is “Live Your Life Insurance”.
Let me pose a question here: If whole life insurance is good enough for the wealthy and businesses for the purpose of growing their wealth, then doesn’t it stand to reason it’s good enough for us too?
Yes, it’s true that businesses and the wealthy have more money than the rest however even they started with a small policy, leveraged it, and then got another policy most likely larger. We too can start small and then grow into another policy.
If you are still wondering why someone would want to do that then let me summarize how whole life works in this concept quickly. A whole life policy builds cash value which you can take loans against and repay to essentially double the use of it by earning interest(and possibly dividends) on the cash value amount, and by paying yourself a little extra when repaying the loan. This method constantly increases the cash value amount and eventually makes the policy large enough you could no longer need to pay premiums on it.
So how does it work better than just paying cash?
The be your own bank method here is better than just using cash because it allows you to constantly increase your savings. Look at it like this: if you have a savings account and want to buy something and then rebuild those savings, every time you go from having savings down to zero or having no savings.
Using a whole life insurance policy as your savings account instead of the bank account (first of all you get a better-guaranteed rate of return so from that point of view it’s flat better) lets you keep your money in this account even when loans against it are taken. If you used it simply for vehicle loans, vacations, business equipment or products, or other expenses you could constantly increase the value never having to start over from zero.
What does it take to be your own banker?
Get a whole life insurance policy to be your own bank
The basis of this concept requires that you get a whole life insurance policy on yourself if you can qualify medically, or on someone else if you can’t. If you need to take one out on someone else then be aware that insurance companies are leery about this. That being said some relationships make it acceptable: key employee insurance, business partner, grandchild, child, and number one is a spouse.
That being said, other situations may be feasible so long as you explain to the insurance company and have the proper paperwork.
What does properly structured mean
You don’t want to get just any whole life insurance policy for this to work. In fact, a standard whole life policy is actually not at all what you want.
You specifically want to go with a participating life insurance company so that you have the option of getting dividends if they are paid. What dividends are is a share of profits the company has made for the year.
There are two critical riders you want to have included: paid-up additions and a term insurance rider.
Yes, I said a term rider, and the reason for this is simple. It brings the cost of the policy down greatly while at the same time allowing for more cash value to be put into the policy. One additional benefit this rider gives is allowing you to purchase more paid-up additions in the early years of the policy accelerating the growth even more.
Something to note here is that sometimes an indexed universal life or even a universal life policy can perform better for the purposes you have in mind which is why it’s crucial to speak with an agent so they can help clarify the purposes you have and get the most appropriate policy in place.
Properly fund your policy and be your own bank
To be your own bank this part may seem the opposite of your current viewpoint. Why would you pay more than you “need” to with insurance? Well quite frankly most of us have learned to view insurance in the wrong light but hold on here while I share.
In an effort to mitigate the costs of a whole life insurance policy the best route is to pay more than the premium required for the basic protection. What this means is that you want to pay significantly more to be your own bank, which is precisely what you will be doing when paying back loans.
If you have the ability to put the majority of the premiums required into the policy in the first 10 or 20 years then that will astronomically help with the ability to make loans and maximize the cash value growth.
With a properly chosen and structured policy you can get well over 70% of premiums paid to go to cash value growth.
Another thing that happens when you pay an extra premium into your policy is that you get contractually paid increases on the death benefit amount. As cash value is connected to the death benefit this helps you continue putting more money into the policy, otherwise, you would need to get many many policies. What this also does is help with the guaranteed cash value growth within the policy speeding up yet again your ability to be your own bank using whole life insurance.
So now that you have the policy building what do you do with it?
Use the cash value to fund expenditures
Being your own bank allows you to build the insurance policy as an asset and purchase something else as well.
There are a number of options you can go to leverage or use the cash value. Most of the books above-used examples of buying cars or a house and then repaying themselves for that. This is the standard way that most of us view money: you earn money, you spend money. Or put another way.. money goes into your account and then you take it out and give it to someone else.
Now that’s not what we are doing here. Think of it like a secured line of credit(it’s not but if that’s easier to visualize do it) where you have money in your policy and the insurance company sends you what you ask for and it’s taken from the value if you die or don’t pay it back.
Alright for the purposes of being your own bank and building wealth the most powerful method of using the money is through investments. Specifically speaking, cash-flowing assets. So you may buy real estate, business inventory, or other options that have an associated income option. This now gets you making money in multiple ways not just within the policy.
That being said if you are just learning and want to start asap then it may be done with your current situation. You could run your current debts through your life insurance policy and then direct that new discretionary income to the next debt while paying yourself that debt instead (repaying the loan). So if you have debts car, a house, or a credit card here is what you could do.
Pay the premiums until you get sufficient cash value to pay off one of the 3 debts, then repay the cash value used to yourself plus a modest interest rate (maybe the same rate the debt itself had), and repeat for all your debts.
Let’s set some minds at ease
First off I know that hearing the words loan, lend, or borrow in the normal context is not very appealing. The money you are borrowing is never pulled out of the policy. So really what you are doing is maintaining the balance of your life policy and getting money from the insurance company, so as you can see it is literally doing two things at once.
The insurance company already holds your money in an account as a policy. So it’s no big deal for them to put a loan against your own money using it as collateral. The money they send comes out of their general fund. You are basically using other people’s money here(you’ve heard the term OPM before and this is just the absolute barest step in that direction).
Lastly, regarding loans, there is no requirement that states you must pay them back. However, you may really really want to when you start understanding how this concept works. Aside from that, there are many repayment options too.
Repay the loans to grow your bank
There is no reporting of these loans, they do not affect credit in any way. In addition, there is no strict repayment schedule either. The money is yours. You own it. If you want to pay it back then do so. If you don’t then don’t, however why look at this any different than you would your own savings or checking account.
Do you WANT to increase what’s in them? After buying something do you want to replenish what you spent so you can do so again? The answer is obvious, it’s our general emotional response to the ideas of loans that is at odds with learning this concept- so ditch the bad financial ideas.
How can I repay myself?
When repaying a loan you can pay principal and interest on your own schedule, make interest-only payments, make a balloon payment, and nothing in the meantime, or nothing at all. No other bank exists that offers these kinds of options and flexibility.
For some people or businesses, it makes sense to forego payment until they can pay it in full and during that time they will just pay the interest on the loan to keep it at an even balance. This is especially common for companies that have to come out of pocket for costs on a job up front and then pay it in full when they get paid the majority at the back end of said job.
Now before you start saying something like “Theirs the catch” consider for a minute that even using the money in your own bank account you would do something similar. Every time you make a purchase you want to replace what you spent so you have money in savings for a rainy day or another big purchase.
The truth is that putting a whole life insurance policy in place is only an added step to your existing financial use. You are going to follow the same routine of saving, spending, and saving again. Only whole life insurance be your own bank method allows you to recapture some of the dollars you have earned and use them more than once.
4 reasons why it’s better to be your own bank
- You get guaranteed growth on the money you put into your whole life insurance policy. In addition, you can direct the growth by leveraging the cash value in the manner you desire. Often this produces much much better rates of return than bonds or other “safe” investments would.
- Distributions are not taxed so long as some amount of whole life protection is in force.
- Loans do not remove capital from your policy (as opposed to say using a 401k for a real estate investment or personal home purchase would) and so what if a loan reduces the death benefit when someone dies, you already got that money so it doesn’t matter.
- Leveraging a policy in this manner can create a death benefit that’s far larger than most people without a policy like this can even consider getting at an older age. Even when already nearing retirement one of these policies can be used to create tremendous growth for the rest of your life and the lives of your children and theirs to come if you pass on the knowledge.