Life Insurance: Banks And Your Options

Life insurance is a financial asset that can be used during your lifetime, similar to an IRA or mutual fund. It can be used as a source of liquidity, with policyholders treating it as a personal bank. Whole life insurance and universal life insurance are the two main types of permanent life insurance that can be used as an asset. Whole life insurance is the most common type, offering a death benefit and the ability to accumulate cash value. Universal life insurance functions similarly, allowing policyholders to grow an asset by accruing interest over time that can be borrowed against. Banking with whole life insurance is a wealth-building strategy ideal for individuals looking to regain control of their finances, particularly when it comes to paying taxes and interest, and diversifying away from Wall Street.

Whole life insurance as a personal bank

Whole life insurance is a type of permanent life insurance that can be used as a personal bank, also known as the infinite banking concept. This strategy involves using the cash value of a whole life insurance policy as a line of credit, allowing policyholders to borrow against their own money and pay loan interest on the amount borrowed.

Pros

• Tax benefits: The cash value within a permanent life insurance policy generally grows tax-free, and loans against that cash value are not taxed. Life insurance payouts are also typically tax-free.
• Guaranteed returns: The cash value growth of whole life policies is not tied to the market but instead offers fixed returns set by the insurer. Policies from mutual life insurers may also pay annual dividends based on the company's financial performance.
• Easier loan access: Whole life policies with sufficient cash value allow policyholders to borrow against their own money without the need for applications, credit checks, or set repayment dates.
• Flexible repayments: There is no specific deadline for repaying a cash value loan, and policyholders can choose to pay back the loan at their own pace or not at all.

Cons

• High cost: Whole life insurance is more expensive than term life insurance due to the cash value component and the typically longer coverage period.
• Long accumulation period: It can take a decade or more for the cash value to build up enough to take out a loan, which means infinite banking is not a quick way to create wealth.
• Costly overfunding: To make infinite banking work, policyholders need to contribute a significant amount of money to the policy's cash value by overfunding their premiums, which may not be feasible for everyone.
• Complexity: Using life insurance as an investment and source of liquidity is a complex strategy that requires discipline and careful monitoring of the policy's cash value.

Steps to Creating Your Own Private Banking System:

• High Cash Value Whole Life: Choose a high cash value whole life policy from a mutual insurance company, which offers dividend-paying features and focuses on early high cash value rather than the death benefit.
• Life Insurance Riders: Include relevant riders such as the Paid-Up Additions Rider, Life Insurance Supplement Rider, Additional Life Insurance Rider, Term Life Rider, and Guaranteed Insurability Rider to maximize cash value and flexibility.
• Fund Your Bank: Overfund your policy to maximize cash value growth, but be careful not to trigger a Modified Endowment Contract (MEC) status, which can lead to tax implications.
• Finance Your Purchases: Borrow from your policy instead of withdrawing money to maintain the growth of your cash value. Use the borrowed funds for investments, large purchases, or business needs.
• Recapture Your Money: Repay the loan with interest to yourself to continue building your banking policy and maximize returns over time.
• Repeat and Plan Your Estate: Repeat steps 1-5 to continue growing your private banking system, and plan your estate to ensure a smooth transfer of your wealth to your heirs.

Pros and cons of infinite banking

Infinite banking is a concept created by Nelson Nash, where you "become your own banker" by using a whole life insurance policy as your own personal bank. Here are some pros and cons of infinite banking:

Pros of Infinite Banking:

• Guaranteed Rate of Return: Whole life insurance offers a guaranteed rate of return, while other permanent insurance policies offer fluctuating returns based on market factors. This means you know exactly how much your cash value will grow each year.
• Fixed Premium Payments: Whole life insurance policies have fixed premium payments, so you can budget and know exactly how much your policy costs. In contrast, other types of permanent life insurance offer flexible premiums, which can be subject to increasing premiums at the insurer's discretion.
• Guaranteed Death Benefit: Whole life insurance offers a guaranteed death benefit, which can be distributed tax-free to your beneficiaries or used for various other purposes, such as charitable donations or business succession planning.
• Tax Advantages: Infinite banking offers several tax advantages. The cash value growth in the policy is tax-deferred, and you can withdraw up to your basis (the amount you've paid in premiums) without being taxed. Policy loans are also tax-free, and dividends received from the insurance company are typically tax-free as well.
• Compound Interest: The cash value in your policy grows with true compound interest, uninterrupted by withdrawals or loans. Even when you borrow against the cash value, it continues to earn interest and dividends.
• Asset Protection: Life insurance offers excellent asset protection laws, depending on the state you live in. It may be protected from creditors, lawsuits, and bankruptcy.
• Living Benefits: Life insurance provides living benefits, such as an accelerated death benefit and a chronic illness rider, which can be beneficial if you are diagnosed with a terminal illness or suffer a qualifying chronic illness.
• Mindset Shift: Infinite banking encourages a shift in mindset and empowers individuals to take control of their financial future, reducing reliance on traditional banks and lenders.

Cons of Infinite Banking:

• Complex and Requires Discipline: Infinite banking requires discipline and a long-term commitment. It can be challenging to understand and implement, and you must fund your "bank" consistently over the years.
• Costly and Requires Qualification: Whole life insurance policies are significantly more expensive than term life insurance, and you must qualify for the policy by meeting certain medical and financial criteria. This may be a barrier for those who are older, have health issues, or are just starting their careers.
• Slow Growth: While whole life insurance for infinite banking grows faster than typical whole life policies, it still grows slower than most market-based investment options. It may not be suitable for those seeking higher returns or looking for a simple life insurance solution.
• Not Suitable for All Financial Goals: Infinite banking is a complex strategy that may be too robust for those who only need life insurance for income replacement. It is important to evaluate your financial goals and ensure infinite banking aligns with them.

Life insurance riders

Accelerated Death Benefit Rider

This rider allows you to access some or all of the policy's death benefit while you are still alive if you are diagnosed with a terminal illness. Insurers may subtract the amount taken out from the death benefit your beneficiaries receive upon your death. Payments are usually tax-free, but there are exceptions.

Accidental Death Rider

The accidental death rider increases the payout to your life insurance beneficiaries if you die from a covered accident. It is sometimes referred to as a "double indemnity" rider, as it can double the amount of money your beneficiaries receive.

Waiver of Premium Rider

Under this rider, future premiums are waived if the insured becomes permanently disabled or loses their income due to injury or illness before a specified age. The definition of "totally disabled" may vary from one insurer to another, so be sure to check the terms and conditions.

Family Income Benefit Rider

In the case that the insured dies, a family income benefit rider will provide a steady flow of income to family members for a predetermined number of years. This type of rider is generally purchased by individuals who are the sole breadwinners of their families.

Long-Term Care Rider

The long-term care rider offers monthly payments if the insured has to stay at a nursing home or receive home care. This rider takes care of long-term care costs, which can be expensive.

Return of Premium Rider

Under this rider, you pay a marginal premium, and at the end of the term, your premiums are returned to you in full. In the event of death, your beneficiaries will receive the paid premium amount.

Guaranteed Insurability Rider

This rider allows you to purchase additional insurance coverage within a stated period without the need for a further medical examination. This is most beneficial when there has been a significant change in your life circumstances, such as the birth of a child, marriage, or an increase in income.

Child and Spouse Riders

Child riders and spouse riders provide a small death benefit if the insured child or spouse passes away during the rider's term. The payout amount can typically cover medical bills and funeral expenses.

Cost of Living Rider

A cost of living rider gradually increases your policy's coverage over time so that the value of your policy is not eroded due to inflation. Your premium will also increase alongside your coverage amount.

Term Life Insurance Rider

A term life insurance rider lets you purchase additional term coverage on top of your permanent life insurance policy, giving you a larger death benefit for a set period of time.

Term Conversion Rider

With a term conversion rider, you can convert a term life insurance policy into a whole life policy near or at the end of the term. This can be a more affordable way to access permanent coverage later in life.

Funding your bank

Step three is to put money into your policy. The idea is to over-fund your policy, but not to the point where it becomes a modified endowment contract (MEC). The IRS has rules to prevent people from putting too much money into a life insurance policy because such a policy may be seen as a tax haven.

The goal is not to "MEC" the policy but to fill it with as much cash as possible to maximise early cash value accumulation and growth. This is why you need some or all of the riders listed in step two, which help to supercharge your cash value growth from the start.

You may also qualify for backdating your policy to save age, which allows you to fund the policy with more money in the first year than you normally would be able to.

Step three is your "capitalisation" period. Through the course of time, your policy's cash value will build. In Nelson Nash's book, *Becoming Your Own Banker*©, he recommends spending years in the capitalisation phase. Once you have built up enough cash in your policy, it is time to put it to use.

The good news is that a properly funded insurance policy will begin to accumulate cash value almost from day one. And depending on how your policy is structured, you should have access to 90%+ of your cash value from the start.

Finance your purchases

Please note: for a true banking policy to work properly, you want to borrow from the policy rather than withdraw money. When you withdraw, you are depleting your cash value. But when you borrow from the insurance company, using your cash value as collateral, your cash value continues to grow inside your policy.

Financing your purchases is the part of the entire banking on yourself strategy where it gets really fun and why life insurance is a good investment.

You see, as you build up a nice amount of cash in your policy, you are now able to utilise that cash value as collateral through a policy loan.

The company lends you money using your cash value as collateral and, in turn, you use the money to do anything you choose.

When you use your cash value as collateral and take out a policy loan, the money in your account continues to grow via compound interest.

The implications of this are that your money is working for you in your policy and your money is also working for you as you use it for various pursuits.

• Buy cash flow assets
• Loan money to your business
• Purchase large-ticket items

Using policy loans to finance purchases

Policy loans can be a useful tool to finance purchases. They can provide quick access to cash for those with permanent life insurance policies. Borrowers don't have to go through the usual approval process because they are borrowing against their own assets. The funds can be used for any purpose and they aren't taxable as long as the policy stays in force.

However, it's important to keep in mind that policy loans can also have downsides. If the loan isn't repaid before the borrower's death, the death benefit will be reduced by the amount of the loan plus any interest owed. Additionally, if the loan value exceeds the cash value of the policy, the policy could lapse and be terminated by the insurance company. This could result in significant tax liabilities.

• Make sure you understand the terms and conditions of the loan, including interest rates and repayment options.
• Be aware of the potential tax implications if the loan is not repaid or if the policy lapses.
• Consider the impact of the loan on the death benefit. Even if the loan is repaid, the interest accrued may reduce the death benefit.
• Review the loan agreement carefully to understand how interest and dividends will be determined and paid during the loan period.
• Seek advice from a financial advisor or tax professional to ensure the loan aligns with your long-term financial goals and doesn't compromise the primary purpose of life insurance, which is to provide financial security for your beneficiaries after your death.

Overall, while policy loans can be a convenient way to finance purchases, it's important to approach them with caution and fully understand the potential risks and complexities involved.

Frequently asked questions