The conversation around life insurance can be tricky because there are so many different types of contracts and strong opinions about whether or not they should be used.
In order to understand and really appreciate how the design we will discuss in this blog works, you really have to take everything you know and understand about life insurance and set it aside.
Here’s why… what I’m about to share with you likely has nothing to do with anything you already know about insurance.
It would also be helpful for us both to agree up front that there is no perfect savings program out there.
There’s no proverbial financial unicorn. There are pros and cons to everything we do.
The key to growing wealth and having access to cash when you need it is to understand the purpose you have for your money.
That’s first and foremost for finding the most suitable option available that can generate the desired outcome you have for your money.
The particular strategy we are discussing works best through the use of a specially designed whole life insurance contract.
Now I say specially designed because there are different types of contracts with different features that are all required to make this program work so this strategy we’ll be going through is known by a few different names; infinite banking, privatized banking, cash flow banking, bank on yourself, build banking.
Now the terminology of “banking” as I am referring does not suggest that a policy is an actual bank.
The name represents a process of saving or borrowing money that most people associate as banking activity so the terms private bank or privatized banking or build banking is referring to the banking activity.
If you Google search these terms you’ll likely find thousands of articles and videos talking about the good and the bad about how this works and the point of bringing that to your attention is that this is not something new.
This strategy has been used for years and it’s not something I think may work. It works when designed and used properly.
So, here is the problem…. When you think about how much money you will earn over a life time it can be staggering.
Just for an example, if you earn $50,000 a year over 20 years you have earned a million dollars.
That’s a lot of money! And when you consider the fact that it can be spent as quickly as it is earned, you can see why having a system for capturing and maintaining control over some of this money is so important for your long term wealth.
That’s where BUILD Banking is so valuable.
Many of use banks on a daily basis to transact business for personal or business purposes.
You have income flow into your accounts and you have bills you pay from those accounts.
It’s a continuous process of earning, spending, and replenishing your supply of money to meet the ongoing need you have for it.
It’s like filling up a gas tank and driving. You have to keep filling the tank in order to have the ability to keep driving.
Aside from these reoccurring types of obligations you may have other things that you’re saving for such as a new car, home improvements, maybe a child’s education among other things.
These would be considered big-ticket items that you would save for over time and then you spend in large chunks.
You may even find yourself needing to borrow money from a bank to fund these types of transactions, but regardless of how you approach these big ticket items, one thing is for certain, you will save money and you will accumulate money and then you’ll spend it or you’ll borrow the money then pay the loan off over time.
Either way, it’s a zero sum game considering all arrows lead to
zero and requires a continuous need to earn, spend and replenish your supply of
money to be able to make those less frequent, but large transactions when
they’re needed so let’s just illustrate this point a little bit.
Let’s assuming you’re saving $500 a month to have access to cash every five years to purchase a $30,000 automobile.
When the time comes to purchase the automobile, you write a $30,000 taking your account back to zero while you continue to save the $500 a month.
The money that you spend is now gone forever from your control, but you do have your car and you continue to begin saving for the next purchase in five years.
So the challenge is, how do you take money that you are already saving and spending and have that money work for you long after you would have otherwise used it.
BUILD Banking is the answer!
By using a specially designed life insurance contract that is designed
correctly can create long-term wealth resulting from money you would have
Now, as I mentioned earlier to begin to put this concept into prospective, you first need to take everything you’ve heard about whole life insurance and set it aside.
You can hang on to your beliefs about it, but understand we’re talking about an entirely different use for it.
We are talking about a specially designed life insurance contract engineered for utilizing cash.
This is very different from the basic approach to buying life insurance.
Here’s what I mean… This concept will not work well unless the contract being used has certain characteristics and the financial advisor who’s developing the design for you understands how to use them so a little word of caution here: If you choose to establish this type of program, just make sure you’re working with a financial professional who thoroughly understands how this concept works.
Now when the term whole life insurance comes up in the conversation many people will begin to dismiss this form of insurance stating that it’s too expensive and the rate of return is too low compared to other programs and honestly, in some ways they are correct.
If you simply want to purchase life insurance then this is probably not the best type of program to use.
Term insurance is a much more affordable way to carry life insurance coverage and if you want to invest long term, there are potentially better programs available that offer direct or indirect exposure to market so yes in some ways, what they are saying is correct.
However, we are not talking about investing long term with this concept nor are we talking about simply buying life insurance.
The idea is for this to be used a cash alternative or a bank alternative, not an investment alternative or basic life insurance solution.
We’re talking about fulfilling the need for capital on an ongoing
basis using the cash value of the insurance policy.
So, how does a BUILD Banking design using whole life insurance policy accomplish this?
As we already discussed, a specially designed life insurance contract has a special feature or set of feature designed to allow the policy owner access to money through non-recognition loans from the insurance company.
In other words, the insurance company will actually lend you money from their assets using your death benefit and your cash surrender value as collateral up to the amount of cash surrender value you have in the policy.
This allows for your entire cash value to remain inside the contract and continue earning dividends and interest since you did not remove money form your policy.
This feature allows for uninterrupted compounding growth of your money.
Now, this is an important point to grasp because without fully understanding this loan provision, you miss the point of why this is such a great tool for building long term wealth.
Let me give you an example.
You have $10,000 in a bank account earning interest and you withdraw $4,000 from the account.
The amount of money remaining earning interest is $6000, common sense right?
Now, let’s look at the general concept behind the specially designed life insurance contract and assume you have the same $10,000 in the policy earning dividends and you take $4000 in the form of a loan.
By utilizing the loan provision, your $10,000 remaining in the program earning dividends.
The contract actually function as if the money has never been removed from the policy because technically it never was removed.
The insurance company lends the $4,000 to you from their assets and only uses your money as collateral.
So, you may ask why the insurance company would do this?
Consider this, from the insurance companies perspective this a pretty simple and safe investment for them to lend money to their own policy owners at a competitive interest rate.
If you think about it, they have millions of dollars coming in each month from policy owners who are paying their premiums and they need to invest the money somewhere and by lending the money to their own policy owners and charging interest they have the collateral in their own policies to back the loan.
Now, on the topic of interest charged on the loan. We have to understand that there’s a cost of doing business and in order for the insurance company to offer this method of accessing money from your policy, there really needs to be a benefit for them to make the loan.
However, through a properly designed life insurance contract you may be able to recapture the interest paid on the loan through the dividends earned in the policy.
Unlike the example I previously used where you either saved to
accumulate money then spend it, or you borrow the money from the bank then pay
the loan off over time making it a zero sum game, the benefit of using a
specially designed life insurance contact is that it provides an opportunity for
you to have your money remain in the policy and continue to grow uninterrupted
while simultaneously using a policy loan from the insurance company to access
your money and use it.
Let’s look at another example.
You have $100,000 in cash value within this program earning 4% and you take a loan of 30,000 to purchase an automobile at 5%. So, the insurance company is charging 5% on the loan.
By taking the money as a loan your $100,000 remains in the policy and continues to grow uninterrupted.
Therefore, in our example the $100,000 earns $4,000 and the loan interest on the $30,000 is $1,500.
So, the earnings on your cash value could be viewed as a way to recapture the loan interest.
If you earned $4000 and paid $1,500, you net gain would be $2,500.
Compare this to a bank scenario where you’re zeroing out and not
One thing to keep in prospective is that when it comes to people who are good savers they tend to have money available when they need it.
They save regularly and seldom need every dollar that they have at any one time.
However, if you were someone who always needs every dollar that you have, then perhaps this is not the best approach for you at least at this time.
When it comes to business owners, this concept can be most advantageous here’s why.
If a business owner has uninterrupted compounding in growth within their policy and they’re recapturing the interest paid on their loan and are using the money borrowed from the policy to expand their business, they are not only receiving an internal rate of return in the policy, but they also have an external rate of return on their investment.
For example, you have $100,000 in your policy and borrow $30,000 to buy a rental property.
Remember from our previous example the difference between the loan interest and the policy growth would be a net gain of $2,500 (Internal rate of return).
Now, if you purchased a rental property with the $30,000 and collected rent from that property, you create profits from rent (external rate of return).
All by using the same dollars!
Now, this brings us to the next layer in this concept, which is repayment of the actual loan.
The loan on the specially designed contract has flexibility since the insurance company does not have a required repayment schedule.
From the insurance company prospective they can charge you interest every year on the loan and know that if you die, the loan is repaid or the if you surrender the contract, they deduct the loan balance plus interest before they send you the proceeds from the contract.
Either way, they know the loan is being repaid so they’re not concerned whether you ever make a payment towards the loan.
However, from a policy owner standpoint not repaying the loan
limits access to money in the future, but for some situations this still can be
advantageous over paying cash considering the recapturing example we used a
There are other personally tailored ways to work a loan, if the company allows you to pay your interest first then you can simply pay the principal on the loan and leave the interest to accumulate or perhaps you pay the interest and leave the principal.
There’s a lot of flexibility making the concept of the specially designed
life insurance contract a viable strategy for a variety of situations.
Now, clearly in a Build Banking arrangement it’s to your advantage to repay the loan since you will likely want to use the money again and again in the future.
By repaying the loan, it will allow for access to cash in the future.
When you think about it, this really is all about cash flow and how that money is flowing in and out of your life.
The utilization of this design should be viewed as a conduit to
create more money than by simply paying cash or financing purchases through a
One other unique benefit to using life insurance is to consider its tax favorable treatment.
A lot of people don’t understand this, but the earnings within a policy are tax-free. The money grows tax-free. The death benefit is tax-free and loans are tax-free.
Now, like I mentioned early on, there’s no perfect scenario.
The use of specially designed life insurance contracts does have
limitations and there are things you should consider before implementing any
type of strategy.
The biggest determining factor in whether or not you should consider the use of this type of strategy is to be honest with yourself and determine if you are an actual good saver.
If you have poor money habits and do not have a solid track record of saving money then this strategy probably is not a good idea.
t’s probably not a good fit and the reason is due to the temporary illiquidity of the cash within the contract.
Any person setting up a specially designed life insurance contract needs to understand that they will not have access to 100% of their money for up to five to seven years all depending on the age and the health of the insured and the capitalization or the funding of the owner.
This lack of liquidity covers the cost of the permanent life insurance and to disregard the lack of liquidity would be careless.
As I described earlier, a good saver seldom needs access to all their money at any one time.
The entire foundation of this strategy is built on having access to money, but not necessarily having access to all of your money at any one time.
Utilizing loans to access cash while you wait for all of your money to be accessible is a strategic way to minimize the impact of the temporary illiquidity, but again, if you’re someone who needs access to all of your money immediately from day one, this strategy may not be a good fit.
This is why it is so important for someone considering this strategy to work with a seasoned financial professional who looks at your entire financial situation before making any recommendation.
If you think this is something you may be interested in, lets talk to see if you’re a good candidate for this strategy.