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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 otherwise spent.  

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 making anything.  

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 moment ago.  

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 bank.  

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.

When it comes to leaving a legacy, what I have found is that the majority of families desire to leave an inheritance to help the next generation. They often want to leave their kids and grandkids better positioned financially, spiritually and with wisdom to make their lives better than their own.

However, the truth of the matter is that many people spend very little time thinking about their legacy and taking action to transfer assets and instill their values and their wisdom to the next generation. People often live as if money, their beliefs, their values and their wishes are secret and don’t do anything to organize and communicate them to their children or grandchildren.

Another unfortunate roadblock to the entire idea of generational planning is that many people will miss the opportunity to enhance the next generation by living with a scarcity mindset. What I mean by a scarcity mindset is that they have a belief that they will need every dollar they have which leads to behavior that overshadows any thought of generational planning.

In order for us to leave a legacy and enhance the next generation, we must begin to realize that living in scarcity and keeping our wishes for future generations a secret leaves the next generation starting over and the pattern of scarcity and secrecy is repeated generation after generation.

What if we were to make decisions today that we knew would satisfy our current and future financial needs while simultaneously maximizing the transfer of assets and ideas to the next generation? How much better would the future look? It is possible if we think beyond our current state and think generationally.

• What is your vision for the next generation?
• What do you want your children and grandchildren believing about family and finances?
• What family legacy do you want your children instilling into your grandkids?

The bottom line is that your family is looking to you for guidance and leadership. How you think and what you do will impact your family for generations. To learn more about how to develop a generational plan for your family, reach out to us and we can show you what others are doing to leave a legacy.

Warning: This is a long post about a use of whole life insurance commonly referred to as Privatized Banking, Cash Flow Banking, Bank On Yourself or Specially Designed Life Insurance. If you have zero interest in this concept, how it works, or if it makes sense at all then this post isn’t for you. But if you’ve been pitched a whole life insurance policy or Specially Designed Life Insurance Contract to be used as a privatized bank by an insurance agent or financial advisor and want a 100%, objective review – then you’re in the right place.

Why This Whole Life Insurance Review Will Help You

I often get a lot of questions from blog readers and clients about this “banking” use of whole life insurance. I think the main reasons this Privatized Banking concept has become such a hot topic as of late, are the following:

1. Over the last several years we have had a lot of volatility in the stock market, which has shaken a lot of investors confidence in investments like stocks and mutual funds. (There is a flight to safety.)
2. We have a large number of baby boomers retiring or nearing retirement that want to begin protecting their assets.
3. Banks continue to pay zero interest on bank deposits while charging interest to use their money for big-ticket purchases.
4. The public as a whole is a bit more savvy thanks in part to the internet and they are looking for smarter ways to fund their lifestyle.

Though life insurance as a whole has not evolved much over the years, certain product features and riders have improved. For a handful of companies, such as Lafayette Life, Ohio National, Mass Mutual and others, this “banking” concept has become a niche and they have worked to enhance features within their whole life products specifically designed for this purpose.

But sadly, there is a lot of misinformation out there about how these programs really work.

Savers doing research on this use of whole life insurance (privatized banking, cash flow banking, bank on yourself or specially designed life insurance) is becoming increasingly difficult. When using Google to do research for example, you often get search results that point directly to an insurance agent.

And some of these sites are not really truly independent or helpful research.

This whole life insurance review is just the opposite. It is 100% independent, breaks down the good and bad, and uses fully disclosed research. The purpose is to help those thinking of using a “banking” strategy using whole life insurance make a well-informed decision.

What’s Covered in This Review

In this review I’ll be covering the following information on the use of whole life insurance as a “banking” policy (privatized banking, cash flow banking, bank on yourself or specially designed life insurance):

• Important Terminology
• How it works
• How it is best used
• How it is poorly used
• Tax Considerations

What you’ll find is that like all life insurance, the idea of “private banking” using whole life insurance has its benefits. However, there are things some agents might say about its performance or practical use that is not entirely clear.

It’s important you understand the details of this concept, so you can determine if this strategy is right for your personal situation.

For readers who have found my website for the first time and don’t know much about me, I am a financial planner. In the financial services business there are heavy regulations about what I can and can’t say. So, to keep the regulators happy I am required to explain that while this review is independent, I am a financial advisor and some of the information I am providing as possible options for you to consider could result in obtaining my services. They just want you to know that by doing so, could result in me being compensated for my time and/or services.

However, this review is clearly being made available to you at no charge without obligation to engage my services. This independent review is to simply offer impartial and objective views to the most commonly asked questions I get about this concept.

The Privatized Banking, Bank On Yourself or Cash Flow Banking Concept Using Whole Life Insurance

In this review I am going to break down a whole life insurance contract specifically designed around this “banking” concept. This type of insurance is offered by several life insurance companies and is not a proprietary design.

A popular way people are being introduced to this concept is through clever marketing where it is deemed an alternative to the stock market as well as seminars or educational events. Agents or advisors invite people in their community to attend a free event where they are offered a free consultation or review of sorts where they may recommend this strategy as part of a financial plan.

I’ve done plenty of seminars over the years and feel they are a great way to educate/help people. I have observed though, that in recent years, more and more of the advisors doing seminars have become quite focused on product sales. There are plenty of great agents/advisors out there that only make suitable recommendations, but there are also some that aren’t always focused on their client’s best interest.

This strategy is not for everyone and by doing this review I hope to be able to help you discern whether this is something you should consider or something you should not be doing.

Before I get into this review I want to make a few things clear:

• I am not against this strategy but do believe it is over sold.
• This is NOT an investment – It is a savings strategy
• After reviewing a lot of different concepts and ideas floating around in the financial industry, I actually think this concept can be beneficial for certain situations.
• The terminology of “Private Bank” or “Privatized Banking” 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 activities with a bank. So, the terms “Private Bank” or “Privatized Banking” is referring to the banking activity
• It is common for someone to adopt opinions from someone or something they read. However, I believe that most people really have no idea how life insurance works.

I think that by me doing this review, I can help potential users of this strategy understand the real pros and cons of how this works. So let’s dig in.

The Idea Behind Privatized Banking, Bank On Yourself or Cash Flow Banking Concept Using Whole Life Insurance

Many of us 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 is 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 recurring obligations, you may have other things you are saving for such as a new car, home improvements, or a child’s education among other things. These would be considered big-ticket items that you would save for over time then spend the money in large chunks. You may even find yourself needing to borrow money from a bank to fund these types of transactions.

Regardless of how you approach these big-ticket items, one thing is for certain, you will save and accumulate money then spend it or you will borrow the money then pay the loan off over time.

Either way, it is 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 are needed.

Capturing and maintaining control over some of this money while it flows through your hands is the purpose behind this concept. It is an idea to have the ability to earn interest on money you would otherwise spend.

Now, to clarify a point here that many agents and financial advisors get wrong – 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 as a cash alternative or bank alternative not an investment alternative or a basic life insurance solution. We are talking about fulfilling the need for capital on an ongoing basis using the cash value of the insurance policy.

A “banking” policy has a specific feature designed to allow the policy owner access to money through a non-recognition loan from the insurance company. In other words, the insurance company will loan you money from their assets using your death benefit and 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 as if you did not take any money from the policy.

This is an important point to grasp because without fully understanding this loan provision it will be difficult to understand why anyone would use this concept in their financial planning.

How A “Banking” Strategy Is “Specially Designed”

Now, there are a few key things you should understand about the term “Specially Designed”. This concept will not work well unless the contract being used has certain characteristics and the financial advisor who is developing the design for you understands how to use them.

So, a word of caution, if you choose to establish this type of program, make sure you are working with a financial advisor who has a thorough understanding of how this concept works.

To help you out a bit here, it would be beneficial for you to know and understand some of the terminology that goes along with how a whole life policy is designed for this purpose.

• A mutual life insurance company simply means that the company is a private company and is not stockowner owned. If a company is a mutual company then its policy owners technically own it. This benefits you since the boards of directors are not accountable to shareholders but rather the policyholders.
• A non-recognition loan is a loan provision where the insurance company will loan you money from their assets using your death benefit (if you pass away) and cash surrender value (while you are alive) 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.
• LPUA or a Level Paid Up Addition rider allows policy owners to add more money to the policy than just the required premium of the contract. This provision provides an advantage to the policy owner since they can rapidly accumulate cash to build their “banking system” while also purchasing additional insurance that is paid up.

It would also be helpful for you to understand that a whole life policy is different from all other forms of life insurance. Whole life insurance is the only form of insurance that you can eventually own. All other forms of life insurance will have perpetual internal charges that will have to be paid either by you or from the polices cash values. A whole life policy once paid up no longer has required premiums.

An advantage to all forms of life insurance is that the cash values grow tax-free and you have tax-free access to cash either through withdrawals of principal or through a policy loan.

Now I am not making a recommendation to use this strategy nor am I attempting to convince you that this is a good idea. What I am attempting to do is provide you with the details of what this is and how it works so you don’t make a decision to do something that you end up regretting later.

For those who know me well, know that I’m a bit of a math junkie. So I wanted to really peel back the layers on this and get a better idea of just how it works and what you might consider before making any decisions.

Warning: Extreme Math Geekery Ahead!

In my opinion, some agents/advisors don’t take the time to fully explain how this concept works. There is good and bad to this strategy that I am going to walk you through.

Read this carefully if you really want to understand how this works.

Let me give an example, you have $10,000 in a bank account earning interest and you withdrawal $4,000 from the account, the amount of money remaining and earning interest is $6,000.

Now, let’s look at the general concept behind a “banking” policy and assume you have the same $10,000 in the policy earning dividends and you withdraw $4,000 in the form of a loan. In a “banking” policy, the amount of money remaining and earning dividends is $10,000.

The policy functions as if the money was never 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 policy as collateral.

Now, you may ask why the insurance company would do this. Well, from their position, it is a simple and safe investment for them to lend money to their policy owners at a competitive interest rate.

On the topic of interest charged on the loan, there is a cost to doing business and in order for the insurance company to offer this method of accessing money from your policy, there needs to be a benefit for them to make the loan.

The design of the policy is important to be able to recapture the interest paid on the loan through the dividends earned in the policy.

The advantage to a “banking” policy is that it provides an opportunity for you to have your money remain in the policy and continue to grow uninterrupted within the policy while simultaneously using a policy loan from the insurance company to access money and use it.

So, let’s say you have $100,000 in cash value within your policy earning 4% and you take a loan of $30,000 to purchase an automobile at 5% from the insurance company. By taking the money as a loan, your $100,000 remains in the policy and continues to grow.

Therefore, in our example, the $100,000 earns $4,000 and the loan interest on the $30,000 loan is $1,500. The earnings on your cash value recaptured the loan interest paid. ($4,000 Earned- $1,500 Paid = $2,500 Net)

Now, since the concept functions using a loan from the insurance company, we need to address the repayment of the loan. The loan on a policy does have flexibility since the insurance company does not have a required repayment schedule.

From the insurance company’s perspective, they can charge you interest every year on the loan and know that if you die the loan is repaid or if you surrender the contract they deduct the loan balance plus interest before they send you the proceeds from your contract.

The downside to not repaying the loan is that it limits access to money in the future but having the flexibility of how the loan is repaid is one of the advantages to this concept.

Clearly, it is to your advantage to repay the loan since you are likely to want to use money again in the future and by repaying the loan it will allow for more access to money later.

The idea behind this is how money is flowing in and out of your life. It should be viewed as a conduit to funnel money in an effort to earn interest on money you are planning to ultimately spend anyway.

Now there are disadvantages and problems with this strategy. The entire concept has its limitations and is why I felt compelled to write this review.

First of all, the biggest determining factor in whether or not you should consider the use of this strategy is to be honest with yourself and determine if you are a “good” saver. If you have poor money habits and do not have a solid track record of saving money then this strategy is not a good fit.

The reason is due to the temporary illiquidity of cash within the contract. Any person setting up a “banking” policy needs to understand that they will not have access to 100% of their money for up to 5 to 10 years, depending on the age and health of the insured and the capitalization or funding by the owner. The lack of liquidity covers the cost of the permanent life insurance and to disregard the lack of liquidity would be careless.

In the majority of tests that I have run on this concept, what I have found is that the amount of available cash after twelve months can range from 60-70% of your first years premium.

Now, a good saver seldom needs access to all of their money at any one time, which is what enables this strategy to work. The entire foundation of this strategy is built on having access to money but not necessarily all of your money.

But again, if you are someone who needs access to all of your money immediately (from day one), this strategy is not likely a good idea.

It is important for someone considering this strategy to work with a seasoned financial professional who looks at your entire financial situation before making any recommendation. This strategy is highly complex and if designed incorrectly can cause a loss of capital as well as potential tax issues.

Understanding the tax rules is critical when designing a “banking” policy to help avoid an accidental or purposeful MEC (Modified Endowment Contract). How a contract is funded (capitalized) and how withdrawals or policy loans are taken needs to be done carefully to prevent adverse tax ramifications.

Also, if a contract is surrendered or were to lapse while the insured is still alive, there could be negative income tax consequences. Be certain that the financial professional(s) you are working with understand the section of the IRS Tax Code that pertains to permanent life insurance (IRC Section 7702).

Tax liabilities will occur if the policy lapses or is surrendered and the policies cash value exceeds the amount of money you deposited. The difference may be subject to tax.

You may also have tax liability if while the policy is in force your withdrawals from the policy exceed the premiums paid.

Proper capitalization (funding) of the policy can minimize a lot of potential problems being mentioned. If you do not fund the contracts in a manner where the base of the contract and LPUA rider is maximized within the first 3-5 years, it is possible that the policy could underperform causing your cash value growth to be less than expected.

Underperformance would then be magnified as the contract experiences loan activity. If you are planning to utilize the policy early in its setup (within the first 24 months), it is imperative that you continue to capitalize the policy through year five or at least begin a payback of the policy loan in some capacity. The compounding impact of the interest accumulating in a policy that has early loan activity without proper capitalization or loan payback could very well result in a policy lapsing or requiring unfavorable modifications.

I know this is a lot of information but you have to understand when something is appropriate for your situation and when it simply is not a good fit.

There is no perfect product out there. They all have their pros and cons. You just have to weigh out the good and the bad and determine if it is a good fit.

Let’s look at the pros and cons to using this strategy.

The Cons:

• You do not have access to all of your money for 5-10 years and in some cases longer if you have substandard health or use tobacco.
• You are buying life insurance so you have to qualify for the policy.
• The amount of money available to you can fluctuate throughout the year based on the company’s proprietary calculations.
• If you access cash through a policy loan, you will have to consider the loan interest and the long-term effects on your cash value and death benefit.
• Though you will have some flexibility, the premiums are payable for 5-7 years. There is a funding commitment to the policy.
• If designed incorrectly there could be adverse tax consequences.

The Pros:

• You have the potential of earning interest on money you are otherwise going to spend.
• You have a permanent death benefit that once paid for is owned by you or your estate.
• You can earn 3-5% on money otherwise sitting in the bank earning zero interest.
• You have the ability to become independent of banks.
• Unlike a bank loan, you set the terms of the repayment of the loan.
• If you are a business owner, you have the advantage of having the money in the policy earn interest while using a loan to invest in your business and earn money on the same dollar.

For someone looking for guarantees with no market risk and looking for a way to earn interest on money they are storing in a bank, this is actually a fairly clever strategy to consider.

But I’m still not sure many agents really understand how this works and may over promise the bells and whistles of a policy.

So, be especially wary of anyone who suggests something different from what I have explained in this review. Their explanation should match very closely to what I am explaining.

There are exceptions to every rule, so be sure to analyze your unique situation to determine what is best for you. Better yet, just get in touch with me and I’ll walk you through these options using your exact situation.

I’ll use the exact information in this review to help you determine if this strategy is a good fit for you.

If the information you received from your agent or financial advisor does not match up with what I explain to you then you may want to reconsider who your agent/advisor is.

Have Questions on Privatized Banking, Bank On Yourself or Cash Flow Banking Concept Using Whole Life Insurance

If you have questions please let me know. I know this can be confusing and savers have made decisions to use this strategy not really knowing or understanding their options.

But, you need to know the real facts to make sure the route you take is not one you end up regretting later. After all, life insurance is a long-term commitment to contracts and surrender penalties. For some people, this won’t make any sense at all but for some, this might be a really good fit.

Today we are going to be discussing life insurance and the first question I will ask you is, “Do you have life insurance as an asset class in your portfolio?”

If you are questioning what I mean by this then you’re in luck because we are going to dive into what it means to have life insurance as an asset class.

It’s interesting to me how little people really know about life insurance.

OTHER USES FOR LIFE INSURANCE

Most people when they think of life insurance they think about its use to protect families, pensions, liabilities and business.

But there are other uses such as banking, retirement, tax reduction, long term care and portfolio diversification that is not often considered when thinking about life insurance.

I think one of the limitations people have about life insurance is its complexity but its also the negativity that surrounds these plans.

We are going to discuss all of this and more, but before we do I want to say a couple of things.

1. To get the most from this, I would encourage you to set aside any biases you may have based on things you have heard and tune in to why I do this in my personal planning.
2. I wouldn’t be putting thousands of dollars each month into these plans if I felt they didn’t work or make sense.

Now, I have shared my personal story before in other podcasts so I wont repeat myself but I will say that when I started out in the financial business in 1993, I started by selling life insurance and absolutely hated it.

I spent a couple of years learning the insurance business but I jumped to investments as soon as I could and got away from life insurance all together for a period of time.

I think I moved away from it because I didn’t like my experience with how it was being packaged and sold to people.  That problem still exists today.

But as I got more and more involved in financial planning, I realized that there was a need for it and I began incorporating life insurance back into my practice but not in the same manner as before.

RETHINKING THE TOPIC OF LIFE INSURANCE

Fast forward 20 years to today after thinking and rethinking the topic of life insurance, I have come to the conclusion that when it is used and designed properly, it is an effective tool and has a multitude of practical applications.

My goal is to share these proper designs and purposes with you so you can you understand why these programs can prove to be a welcome addition to many portfolios and financial plans.

The key here is removing everything you have heard about life insurance and setting those thoughts aside so to not cloud what we are discussing. This will allow you to take in what I will share with you over the next few minutes and hopefully formulate a different perspective about how these plans work.

Due to time limitations I will focus on the most common design of life insurance I use called a Specially Designed Life Insurance Contract.  Basically this is a high cash value, dividend paying whole life insurance policy.

WHOLE LIFE INSURANCE

Now, you may be asking why I use whole life when there is so much negativity about these plans and many newer forms of insurance available. And my response to that is this.

Most of what you hear or read about whole life insurance are repeated thoughts and opinions from one person to another. It is a comment or belief that is passed from one person to another with little if any basis for the opinion.  Generalizations and misleading comparisons are made without much testing or vetting.

Keep in mind that life insurance has been around since 100 BC. That’s a long time. The only financial instruments that are older than this are real estate, gold, silver and bonds. The first stock wasn’t used until the 1600’s, 1500 years after life insurance.

The first point I will make that I feel is important is that life insurance can be considered property and what that means is that it can be owned. If the contract is funded for a specified period, the policy owner has no future payment obligations and the death benefit, along with its cash values, are owned by the policy owner.

All other forms of life insurance such as universal life, indexed life and variable life are all perpetual payment designs. The payments never end whether the policy owner makes the payment or the premiums are deducted from the cash value of the contract.

The primary advantage to these plans regardless of their design is the tax-free death benefit, tax-free growth and if handled properly, tax free access to cash.

TERM INSURANCE

Now, you may be asking about term insurance since it is the most commonly compared product to whole life. I own millions of dollars in term insurance but this form of insurance fits more into the category of auto or homeowner insurance and specifically covers your family if a death occurs.  We are not discussing insurance coverage here.  What we are discussing is whole life insurance as an asset class and how the unique features of a whole life policy can make it a perfect addition to a financial plan.

SDLI AS A BANK ALTERNATIVE

Now, a common use of these policies (which we will refer to as SDLI) is to take advantage of its high yields and tax-free growth as a bank alternative. I have explained this extensively in other podcasts so I won’t drill down too deep here but the basis for this idea is due to low yielding bank rates.

A challenge savers face is the necessity for holding cash in low yielding saving accounts. As savers, the need to hold cash in a savings account is important to have access to funds when needed. The trade off for this access is little to no growth on the assets.

Though viewed mostly as a longer-term financial vehicle, a well-designed SDLIC can rival a bank savings account due to high, early cash values. Here are few things to think about:

With historically low interest rates, banks have little incentive to offer much of a return on a deposit account. While bank accounts offer a safe place to store cash, yields are low and are taxable.

In contrast, SDLIC offers access to the account surrender value through policy loans or withdrawals.  The earnings are in line with bond yields at 3-4% and have favorable tax treatment by the IRS. In addition, they offer an enhanced death benefit and long term care benefits.

There are no perfect situations. A SDLIC does have a couple drawbacks:

1. There are premium (deposit) requirements for 5-7 years depending on the design.
2. Policies have some cash restrictions in the early years that decrease over time allowing more access each year that passes. (In year one, they allow 65-80% access depending on the design)

Though a SDLIC does have some early restriction on access, if you do not need all of your money in the early years of contributing to a policy, this can offer more growth and benefits than using a bank account over time.

A proper design of these plans will offer access to cash when you need it in order to make big-ticket purchases that you would otherwise rely on a bank to lend you money.

BANK LOANS AND SDLIC

Often time’s people become accustom to relying on bank loans to make automobile purchases, education needs, home improvements, weddings, etc. It has become second nature for people to take on these loans when cash reserves or cash flow is inadequate to fund the need.

• When using a SDLIC, the policy design and loan provisions allow policy owners to take policy loans from the policy. These loans are provided by the insurance company issuing the policy and are not a withdrawal of policy cash values. (The policy value and death benefit are used as collateral for the loan.)
• Payments to repay the loan are optional (though we recommend you have a pay back method) and your money remains in the policy with uninterrupted compounding tax-free growth.
• Therefore, when a loan is taken, the insurance company lends you money with interest (typically around 5%) and your cash remains in the policy accumulating with interest and dividends (3-4%).
• When you borrow money from a bank, you are paying interest back to the bank with no method to recapture the cost of borrowing the money and you have a required fixed payment due each month.
• When you store money in a savings account and then withdrawal money to make your purchase, the money withdrawn is then gone and no longer working for you.
• When you store money in a bank account (as we have already discussed) you have >1% in taxable earnings.

In both instances, whether you use a SDLIC or a bank loan, you have interest charges, which is a cost for borrowing money. However, there are significant differences that you should take time to understand. When you borrow money from a bank, you are spending money you do not have. There is nothing supporting the loan other than your signed contract with no method to recover the interest paid.

If you are storing money in a bank account to make these purchases then you are dealing with all of the problem we have already mentioned. You have little in earnings and when money is withdrawn from the account, that money is gone and is not working for you.

An SDLIC has money stored and earning 3-4%. When money is needed you are borrowing money from the insurance company with your policy as collateral. The loan is charged around 5% for the amount borrowed.  Meanwhile your policy cash values remain in the policy earning interest.

Now, before you assume you are paying 1% on the loan, you have to understand that this is not about interest rates.  It is about how the policy is designed and the net benefit to the policy owner.

EXAMPLE:

A policy has $100,000 in cash value and the policy owner takes a loan to make a purchase of $30,000.  The $100,000 @4% earns $4,000 and the $30,000 @5% is $1,500.  The earnings recapture the cost of the loan and the net gain is $2,500.

This is why creating your own “banking system” using a SDLIC can help you build long term wealth on money you would otherwise spend or pay interest to a bank.

When it comes to portfolio design and asset allocation, using specially designed life insurance in your portfolio offers built in tax advantages while offering bond like returns.

The challenge investors have is the scarcity of available options. The choices are to either settle with a low yielding savings account or enter the high volatility of the stock market. Yes, there are fixed income options such as bonds and alike, but these are the most at risk asset class considering the reduction in interest rates over the last three decades that contributed to the bull run of bonds has settled in at all time lows.

What drove bonds higher was declining interest rates. Now, interest rates are near zero with nowhere to go but up, leaving bonds susceptible to loss. So, finding an alternative is important to help replace bonds as a way to balance the risk of stocks.

A couple of things to think about when it comes to savings and investments:

1. The goal of asset allocation is to spread risk amongst asset classes. Most people do not fully understand what this is. They see diversification as a quantity of holdings rather than quantity of assets. There is a difference. Having five US stock funds is equal to one asset. You may have quantity but you do not have diversification.
   1. For example: Bonds and fixed income securities are an asset class. Cash is an asset class. US stocks are an asset class and International stocks are another asset class. The list goes on…
2. Since interest rates are at historic lows and bonds are at risk of losing value if rates rise, finding an alternative for this asset class is important to help properly diversify a portfolio.

For these reasons, we believe using a SDLIC can be an effective replacement for the use of bonds and other fixed income options due to its ability to benefit from a rising interest rate environment.

The biggest misrepresentations of whole life insurance come from Wall Street and financial entertainers. They will often make the mistake of comparing a policy to a stock market driven asset.  They will claim, “You can earn more in the market”. While this could be true of the market, it is not a fair comparison of products. A whole life policy is a bank or bond alternative, not a stock market alternative.  Making that comparison is not truthful and is their attempt to undermine the benefits of using whole life insurance. SDLIC is not a perfect program but should not to be compared to a volatile long-term growth asset.  A SDLIC is a consistent return program and low volatility asset.

SDLIC IS NOT RIGHT FOR EVERYONE

Now, I always want to make sure there is no confusion with what I am saying.  These are complex concepts and expectations are critical when looking at this and all other types of programs available. While SDLIC can be ‘The Swiss Army Knife” of your financial planning due to its high cash values, accessibility to cash, death benefit, long term care benefits and tax favorable treatment, it is just a piece of a much bigger picture.

I don’t think SDLIC is an investment and don’t want you to walk away from this conversation thinking that it is. It is an alternative to a bond with comparable earnings potential.  There is a difference.  Any and all investments are speculation.  A life insurance policy is not.

Another point here is that, SDLIC is not right for everyone. If you need access to all of your money in the early years and have historically not been good with money then this is probably not the best option for you. This would be true with investing as well.  If you’re not a good saver and carry debt then you really need to be tuned into your cash flow problems before trying to save money.

With all that said, my team and I are here to help you feel more confident about your financial future. That’s why we’ve created a community of people just like you who want to think differently about money, create their retirement mindset, and reach their goals.

If your not already following me on Facebook, YouTube, Instagram and LinkedIn, and if you’re not already subscribed to our Forbes Top 10 Rated Podcast, The Common Sense Financial Podcast, take time to do that right now.

And if you have specific questions, or are looking for an advisor to help you through the maze of investing and financial planning strategies, reach out to us through our website.

We live in a world where there are more and more external things that keep much of our financial life out of our control. The stock market, government regulations, tax policy, interest rates, inflation, terrorism and rising health care expenses leaves us in a continuous state of fluctuation. This perpetual state of fluctuation often leaves us confused and searching for a way to establish more control over our money.

One area of our financial life where you do have control is how you spend and save the income you receive.

How you save and spend your money as it flows in and out of your life is called cash flow.

Cash flow is the lifeblood of your financial life.  It is what enables you to fulfill responsibilities and luxuries now and for the rest of your life.

Your cash flow may be funded by employment or a business or it can be income generated from your assets.  Regardless of its source, you have cash flowing through your hands and it is either flowing out of your control or into your control.

Your cash flows into 3 primary areas: Reoccurring obligations, Irregular obligations and Savings (Storage).

1. Reoccurring obligations are those financial transactions that occur on a regular basis often considered part of a budget.
2. Irregular obligations are those financial transactions that occur less frequently but would be part of your planned expenses throughout a calendar year.
3. Savings would be the amount of money over and above your obligations that you do not need now but will store for a future purpose.

Having a working knowledge of your cash flow helps you establish flexibility, access and control of your money, which can allow for more money to be retained and utilized during their lifetime and for future generations.

The sooner you identify what money is flowing out of your control, the sooner you can have more money flowing into your control.

Consider the things you do on a regular basis where you give up control of your money:

• When you spend money it is gone forever.
• When you finance a purchase, you forfeit control of a portion of your cash flow over to a bank.
• When you invest money in the stock market, you relinquish control over how much you earn or how much you will get back.
• When you store money in a bank, you allow the bank to have control over the money you deposited with little if any return.

Everything is about cash flow! And the sooner you identify what money is flowing out of your control, the sooner you can begin to make adjustments in how you manage your cash flow to have more money flowing into your control.

In other words, once you understand the reason why you are spending or storing money, you can then begin to take back control of your money and your financial life.

When it comes to storing money, you need to answer this question – How will you actually use the money you are storing (what is its purpose) and when exactly will you need it? Consider such things as new automobiles, home improvements, college tuition, and retirement, which are all part of your future cash flow.  You need to be able to answer these questions to establish control of your money.

• Why are you saving?
• How will you use the money?
• What is its purpose?
• When will you need it?

Think of this as planned chronological spending and saving.  While many people think in terms of weeks or months, to be effective in maintaining control of your cash flow it is recommended to think in terms of years.

Here are 2 primary reasons (purposes) for saving (storing) money:

1. For You To Spend! Store money to spend on “Big Ticket” items such as an automobile, college tuition, home improvements or other large expense that you would either save for or otherwise finance. The purpose of this stored money would be to spend it in large chunks.
2. For You To Use For Income! Store money to use as an “Income Source” to supplement your income. The purpose of this stored money would be to have a proverbial golden goose that generates income to fulfill your cash flow obligations as you transition into retirement.

In other words, once you understand how you will ultimately use the money, you can strategically store it to fulfill its intended purpose.

If the money is being stored to spend then we must protect its principal.  If the money is going to be used as an income source now or in the future, we must protect the income.

This approach places the control of your money in your hands. By knowing how you will ultimately use the money you can strategize to help grow and protect the purpose of your money.

The key to cash flow planning is to have money available when you need for the rest of your life!  Isn’t that what we all want?

After two decades of experience working in the area of estate and generational planning, I can say with confidence that there are many myths and consistent mistakes that are being made which prevent the creation and perpetuation of wealth from occurring.

MYTHS AND MISTAKES

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Myth: It ties money up that I need to live on.

Mistake: People will dismiss the idea of generational planning with this limiting belief without learning more about how a plan actually works.

Reality: Many of the plan designs we use allow for access to cash throughout the giver’s lifetime.

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Myth: Estate Planning is only for the wealthy.

Mistake: People often forego any legal preparations with this line of reasoning without understanding the problems they are creating for themselves and their family.

Reality: Estate planning is beneficial for anyone who has children or liquid assets over $250,000.

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Myth: I am too old or too young to be thinking about this.

Mistake: People will sometimes base their decision to do nothing on their personal limiting beliefs.

Reality: Generational planning is not about age. Anyone, young or old, who has the right mindset can be a catalyst for generational planning.

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Myth: All I need are Transfer on Death (TOD) or Payable on Death (POD) on property titles or beneficiary designations on retirement accounts or insurance policies.

Mistake: People often believe that these designations are sufficient to pass their estate from themselves to someone else at their death. In many cases, this is an effort to avoid the expense of an attorney.

Reality: A TOD or POD designation only transfers the asset from one person to another, which is the primary problem with the status quo of wealth transfer. This mindset often leads to consumption.

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Myth: My kids will know what to do.

Mistake: People will sometimes think because their children have a good education or job that it qualifies them to be a financial expert and know what to do.

Reality: A good education or successful career does not mean they know and understand financial or generational planning.

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Myth: This is more of an opinion than it is a myth, but some people have a belief that their assets and wishes are private and are not anyone’s business.

Mistake: While it is true they are your assets and are private, this mindset has proven, time after time, to cause problems within families.

Reality: I have had clients in my office on many occasions in tears over the fact their parents will not communicate anything with them. They are given no guidance and have to wait until their parent’s death to learn what is going on.

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Myth: Having a charity as a beneficiary disinherits my kids.

Mistake: Frequently, people neglect to leave money to their church or favorite charity believing any asset which goes to the charity is one less asset that goes to their kids.

Reality: The fact is that by utilizing life insurance and charitable trusts, often MORE money can be left to the children while giving money to the charity. Think about this: when working with charities, you have tax advantages which cut the IRS out as a beneficiary. This is more money to distribute to people and causes you care about.

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Myth: This is another mindset which is more of an opinion than it is a myth but is worth, mentioning. There are some who gift assets to their children each year with the goal of helping their kids out while they are alive.

Mistake: This approach can drastically reduce the potential size of an estate and the transfer of assets from one generation to the next. While the idea behind this gift is to avoid estate taxes, it is not efficient and should only be considered after speaking with qualified professionals.

Reality: By using a specially designed life insurance policy, you have the ability to offer gifts to your children while simultaneously creating a tax-free death benefit. When you give money directly to your kids, you are potentially missing out on passing hundreds if not millions of dollars to your kids.

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Myth: I already have a will and/or a trust.

Mistake: What we have found is that much of the legal work prepared simply distributes assets to their children and often does not resemble a generational plan.

Reality: Basic legal work simply passes money to the kids. This approach leaves the assets susceptible to consumption and leaves nothing for the next generation.

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Myth: The life insurance I have is sufficient.

Mistake: Assuming the life insurance you have is sufficient to satisfy your plans is risky. The type, funding strategy, and duration of the policy all play a role in the viability or efficiency of the policy.

Reality: After careful review, we often find policies that were either not what the client thought they were or are simply a poorly designed contract. We have had clients bring us policies they thought were paid for when in fact, after review, were on pace to lapse within a few short years.

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Anyone can come up with excuses for why this won’t work or why it is not right for their family. However, your family is looking to you for guidance and leadership. How you think and what you do will impact your family for generations. The question is, what are you going to do about it?

Our process enables our clients to make decisions today, which will work toward satisfying their current and future financial needs while simultaneously maximizing the transfer of assets and ideas to the next generation. We work with clients to get them thinking beyond their situation and to think in terms of their legacy.