The benefits of the cash flow banking system are numerous, but what sets it apart from other money management strategies is its simplicity. Financial planning often feels too complex. Wealth generation need not be a scary subject though.
The cash flow banking system is one way to unlock financial freedom, and it isn’t as complicated as it seems. In fact, it utilizes a product you’re already familiar with, whole life insurance. It transforms it into an investment powerhouse that can grow your money, reduce your tax burden, and leave something to pass on to your heirs.
What is Cash Flow Banking?
Cash flow banking, is similar to infinite banking concept strategy. It is a financial approach that uses a dividend-paying whole life insurance policy as collateral for a line of credit. Over several years, you create a personal bank by overfunding the cash value portion of the policy. This then can then be borrowed against with policy loans carrying favorable interest rates and repayment terms.
More specifically, the cash flow banking system uses the concept of leveraging whole life insurance policies to purchase income-generating assets that will increase your cash flow and provide you with a steady stream of revenue.
The Benefits
1. Maximum Liquidity
If you think about the average person’s exposure to “investing”, it’s usually through an employer-sponsored retirement plan. They pick a fund, contribute to it every month, and when they reach retirement age they’ll hopefully have a nice nest egg to live on.
However, what they’re really doing is locking up their money. Those funds, with few exceptions, are only accessible once the employee reaches retirement age. They’re incapable of taking advantage of opportunities in the market.
A whole life insurance policy grows your money while you make smart investments. Since you’re borrowing against the policy rather than withdrawing from it, dividends are continually added to the cash value. Meanwhile, you can invest in assets that’ll increase your cash flow, like buying a business or real estate.
2. Better Returns than a Savings Account
Keeping your money in a savings account, will never be an effective strategy for growing your wealth. That being said, there won’t always be a good place to invest your money. It could be a bear stock market, a slow housing market, or a lack of business opportunities in your area.
Fortunately, most whole life insurance dividend rates are strong regardless of market conditions. Even when you’re not borrowing to make investments, your money is growing at a steady rate that’s far higher than any savings account can offer.
Another option is to use policy loans to purchase more life insurance coverage. This not only increases your death benefit, which can be passed on to your heirs but puts you in a more leveraged position once those policies reach maturity and can be borrowed against.
3. Opportunity to Minimize Your Taxes
Taxes are toxic to long-term wealth creation and you should take every opportunity available to reduce them. Cash flow banking is ideal for reducing your taxes as many of the assets you’ll invest in can be depreciated for tax purposes. Business equipment, real estate, and vehicles each have a “useful life” as defined by the government.
Properly structuring your investments to take advantage of this depreciation can offset the revenue provided by those assets to maximize your cash flow. This is one of the reasons traditional banks rely heavily on the use of bank owned life insurance as an asset strategy.
4. You Can Time the Market
Whether you’re investing in stocks and bonds, real estate, or business timing, timing is crucial. As the age-old maxim goes: buy low and sell high. However, more importantly, you might want to buy low and sell never.
If what you’re buying is a revenue-generating asset, the goal is to buy low and live off the income it’s bringing in. Policy loans backed by a whole life insurance policy allow you to make investments when they’re right for you.
5. Flexibility In Your Purchases
Usually, when you need money you approach a bank to ask for a loan. The bank will want to know how you’re spending that money and how you plan to pay it back. If the bank doesn’t feel you’re making a wise investment, they’ll charge a high-interest rate to compensate for their risk.
With the cash flow banking system, the lending institution doesn’t take any risk at all. Should you fail to pay back the loan, the cash value of the life insurance is there to make them whole. With cash flow banking, you can take out a loan for any expense. The bank isn’t concerned with how you’ll pay back the loan.
Why Isn’t Everyone Utilizing Cash Flow Banking?
1. Cash Flow Banking Takes Time
If you’ve come across a great business opportunity and need investment capital right now, cash flow banking won’t help you. This is a long-term wealth-creation strategy. In most cases, you’ll contribute premiums for several years before you start taking out policy loans. It just takes that long to build up enough of a cash reserve to borrow against.
Investment strategists will say you should contribute around 10% of your income towards your whole life insurance policy to ensure maximum leveraging power when it comes time to take out loans.
2. Cash Flow Banking Feels Complicated
While the principles behind it are relatively simple, funding a whole life insurance policy so you can become your own bank sounds daunting to the uninitiated. Taking 10% of your paycheck and contributing to a target date 401k is much less of a headache.
Cash flow banking lets you seize lucrative opportunities as they arise. This is one of the key benefits of strategies like private family banking and cash flow banking. Taking the time to learn its benefits and how to effectively use cash flow banking will pay off in the long run.
3. It’s an Active Investment Strategy
The dividends on a whole life insurance policy offer satisfactory returns especially when compared to savings accounts or “safe” investment vehicles like bonds. However, to realize substantial growth, you’ll need to do more than let that money sit.
To get a great return on your investment, you need to use your policy loans to buy real estate, equipment, or existing businesses – assets that will grow your wealth. While those assets generate passive income the choice to purchase them is a complex process that requires considerable research on your part.
4. You Need to be Diligent with Your Premiums
Cash flow banking is predicated on building up the cash value of your policy every month so there’s plenty to borrow against when investment opportunities arise. Should you fail to pay your premiums, your insurance won’t be canceled like with term life insurance. However, you would be leaving money on the table. When you don’t pay your premiums, your money can’t grow as quickly and you can’t borrow the maximum amount via policy loans.
5. You Need a Medical Exam
While cash flow banking is all about using cash and assets to improve your financial situation while you’re alive, it requires a life insurance policy to function. The policy’s underwriter wants to know how long you’ll be paying premiums. They require this information before paying out a death benefit.
Policyholders who are older or have health problems can expect to pay higher premiums. Namely, those premiums will largely go towards the death benefit, not the cash value where you need it. Fortunately, you don’t need to take out a policy on yourself to make use of cash flow banking. A spouse, child, parent, or business partner will work just as well, so long as they agree to the exam.
Getting Started with Cash Flow Banking
Does living a life of financial freedom sound like a journey you’re ready to embark on? Do you have the patience to plot out and stick to a long-term strategy like cash flow banking? Are you ready for the wealth of possibilities that come with being your bank?
If you are, Wise Money Tools is here to help. Sign up for our free toolkit to learn more effective investment strategies and how you can use your whole life insurance to grow your wealth. For a more personal experience, contact us directly to see how we can help you navigate the sometimes bewildering world of financial planning.
