Have you ever thought about what it would be like being your own bank? What if instead of having a loan officer charge you for the privilege of borrowing from them, you could put down capital where it would make you the most money? Being your own bank is possible, and all you need is a properly structured whole life insurance policy.
Plenty of people will tell you whole life insurance is a bad investment. Yet, that’s because they’re either using it improperly or choosing the wrong policy. As an insurance product, something to make your family whole in the event of your unexpected death, it’s not great. Premiums are considerably higher than with term life insurance. This is because the underwriter knows they’ll eventually need to pay a death benefit, unlike 99% of term life insurance policies.
What whole life insurance is good for is building wealth, and eventually becoming your own bank. With whole life insurance, your money grows at a predictable rate. And, you can use it to acquire capital when you can make the most of an opportunity.
With that, let’s look at the six steps to being your own bank with whole life insurance..
Step #1 – Choose the Right Life Insurance Policy
Importantly, to be your own bank, you’ll need the right policy. The concept of infinite banking is built on a cash-value whole life insurance policy. This is a policy where only a portion of your monthly premiums go toward paying the insurance company to underwrite a death benefit, with the rest deposited in a dividend-earning account.
The cash value banking account grows over time and after several years, can be used as collateral for low-interest loans. This is where being your own bank comes in. In this case, you’re essentially borrowing from the cash value of your insurance policy. However, the money never leaves the account and continues to earn dividends.
To take out a whole life insurance policy, you’ll need a medical exam, and premiums. However, these premiums are reverse-engineered to fit your investment needs, not for life insurance.
There’s also the option of taking out a policy on a family member or business partner, so long as they consent to the medical examination and you pay the premiums. Selecting a policy with a cash value is only the first step to becoming your own bank though.
Step #2 – Make Initial Premium Payments
Once you have a suitable policy, you need to build up the cash value. You need enough to where you can start making loans to yourself. For most people, this process will take several years. With whole life insurance, the cash value grows at a predictable rate. This is regardless of market conditions but that growth is lower than what you’d get from a stock market portfolio (which is much riskier).
Should you run into trouble and need money immediately, it’s possible to withdraw funds from the cash value portion of the policy. This isn’t recommended and shouldn’t be used for investment or anything like that. You need enough money to grow in the cash value if you ever hope to be your own bank.
Step #3 – Borrow Against the Policy
If you’re going to be your own bank, you need to treat your whole life insurance like a bank. Not by making withdrawals, which would limit the hamper its ability to grow and could be considered taxable income, but by taking out loans from it.
The foundation of being your own bank is accessing low-interest loans using the cash value of your insurance policy as collateral. When you take out loans against the policy, the cash value continues to grow and offsets the already low-interest rates levied on the loans.
Step #4 – Make Investments to Grow Your Money Faster
The dividends on your policy cash value are predictable and certainly more substantial than what you’d get putting your money into a high-interest savings account. However, they’re only the first rung on the ladder to financial freedom. The purpose of being your own bank is to gain access to the liquid capital you need to make smart investments. Investments that will increase your cash flow and multiply the growth.
You can purchase a rental property, lease equipment, buy an existing business, or even start your own.
There’s even the option of taking out loans to buy more whole life insurance. This will help to build up an even larger cash value. This can be borrowed against to purchase income-generating assets. It’s all about leveraging your investments.
You may also need a sizable reserve of cash for the down payment on a house or to pay off a high interest rate loan. While a traditional bank loan necessitates reams of paperwork and approval from a loan officer, policy loans largely come with no strings attached. The bank isn’t concerned about how you’ll pay it back. This is the case since the cash value protects them in the event of a default.
Step #5 – Pay Back the Loans and Borrow Again
Once you’ve purchased some income-generating assets with borrowed money, the next step is to pay back those loans. Fortunately, policy loans don’t have a repayment schedule like traditional bank loans. You pay them back when it works for you when the assets you’ve purchased are generating cash flow. While there are always interest payments associated with outstanding loans, that interest is counterbalanced by the dividends that your cash value is bringing in.
Once you’ve paid back one loan and freed up enough of your cash value it’s time to make another investment. Over time you’ll build up a network of investments that bring in a healthy cash flow without ever needing to touch the money in the cash value of your policy.
Step #6 – Reap the Benefits of Being Your Own Bank
Whole life insurance offers numerous benefits beyond the ability to take out policy loans against the cash value of your policy.
The Death Benefit
The death benefit is a crucial aspect of whole life insurance. Regardless of when you die and how much you’ve paid into the policy, there’s a guaranteed death benefit to pass on to your heirs. This is in contrast to term life insurance, which rarely pays out a death benefit. Namey, the people insured by it are middle-aged and policies are priced to be unaffordable for the elderly.
There are Significant Tax Advantages
Taxes are antithetical to growing your wealth. The less money you have to invest or earn interest on, the slower your money grows. Fortunately, a properly utilized whole life insurance policy can notably reduce your tax burden.
Most importantly, your policy’s cash value portion grows on a tax-deferred basis. It’s not tax-free, but that’s not important because you won’t be withdrawing any money from it. You only borrow against it.
Secondly, when you take out a policy loan, that money is not considered income. However, you can use that money to purchase assets that will generate income and thus a larger tax burden. Therefore, you’ll want to focus on depreciable assets: business equipment, real estate, and whole businesses, which can offset those taxes.
Lastly, the policy’s death benefit is exempt from federal taxes, although some states limit the tax-free pass-on amount of the cash value in an infinite banking life insurance policy.
It’s a Highly Liquid Financial Product
One of the biggest hurdles to growing your wealth is not having the means to seize opportunities when they arise. For example, if you noticed a profitable business up for sale at a good price, how would you get the money to buy it? Most likely you’d approach a bank for a business loan, who would scrutinize your financials. By the time they finish the process, someone else has swooped in and bought the business.
Being your own bank means you get to choose when to invest, not a loan officer. When you request a policy loan against your insurance policy, it’s available in days, not weeks. So, the cash value of your policy backs this loan. Because of this, there’s no need to scrutinize anyone’s financials.
A Leveraged Investment
Whole life insurance lets you leverage your money – taking out loans to purchase income-generating assets. You can earn even more money than needed to pay back the loans. More leverage means more money available for borrowing. Consequently, this lets you grow your money faster than if you had to purchase those assets with only the cash you have on hand.
Taking it one step further, you can use whole life insurance to put yourself in an even more leveraged position by taking out policy loans to purchase additional life insurance. When you buy more policies, you increase the total size of the cash value across all the policies. This allows you to buy even more income-generating assets to increase your cash flow. Also, approaches like cash flow banking are also positive approaches to leverage and grow your investments.
Safe Place for Your Money
Using whole life insurance as an investment vehicle isn’t a new strategy. While Nelson Nash introduced the world to the concept of “infinite banking” in the 1980s, some of America’s wealthiest were using whole life insurance as an alternative to traditional bank loans at the beginning of the 20th century.
It just makes sense – with whole life insurance, you’re not beholden to the whims of a bank, your money works for you on your terms. It’s accessible when you need it and for what you need it for.
It’s also safe from third parties, both in the event of bankruptcy and upon your death. So long as you name another person as the beneficiary of your policy, it’s safe from the IRS and creditors, even if you’re paying the premiums and utilizing policy loans associated with it.
Being Your Own Bank With the Help of Wise Money Tools
Accumulating the resources needed to be your own bank is a long process. When you reach the stage where you can lend yourself money, to purchase income-generating assets, you’ve achieved true financial freedom.
Wise Money Tools is here to guide you through that process, checking off all the steps to being your own bank. Take a look at our free toolkit; it’s an invaluable resource with tips and strategies for utilizing whole life insurance to maximize your cash flow. If you need a more personal touch, send us an email and we’ll work with you directly to find solutions to your financial needs.
