“The Bank on Yourself dramatical change” is a book released in 2014. It was written by author Pam Yellen as a follow-up to her popular book released 5 years earlier simply called “Bank on Yourself.”
The new book has the same themes as the old one. She criticizes Wall Street and edges for their business practices while chastising them for stealing the wealth of the middle class. She slams “financial entertainers” for providing shoddy and generalized investment advice to the public and states this advice is over promising and under delivering. As solution, Yellen encourages her readers to seek the guidance of one of her specially trained “empowered advisor” in order to provide them with guidance on how to design a special kind of financial tool that has the ability to allow a person to “use their way to wealth.”
The concept the empowered advisor will show the reader who follows the advice revolves around a strategy that calls for an individual to store cash in a kind of whole life cash value insurance policy produced by a mutual life insurance company. The life insurance company who creates the policy will then give the policy owner the ability to take various loans against the equity they build up so that they can “use their money” while the actual asset “continues to grow” faster than the interest charged against the loan.
The asset continues to grow because the insurance company will continue to pay dividends on the equity that has been borrowed against.
When someone can borrow against an asset at one rate but earn a higher rate of return than what the loan requires, there is the possibility of earning an arbitrage profit.
When a lender gives a loan against an asset with equity, the loan is known as a “collateralized loan” because the asset is held as collateral to pay the loan off if the event the borrower doesn’t pay it off in other ways.. If the owner and the asset/borrower can earn a better rate of return with their asset than the interest rate on that loan they take against it, then it could be argued that a person could use their money but nevertheless be making money with it at the same time.
The uniqueness of a life insurance contract is that the money borrowed generally does not have to be paid back under a set schedule like most loans do from other lenders. consequently, not paying the loan back “on time” won’t affect an individuals credit score or cause them to go bankrupt.
I am not an empowered representative of “Bank on Yourself” but understand the idea behind it. Since whole life has contractual minimum guaranteed rate of return, it will never lose money due to market losses. The kind of whole life insurance policy she contributes is one that has what is known as a “non-direct participating dividend paying policy” that will allow the policy owner to receive a proportion of the life insurance company’s surplus earnings already against money that has been loaned against.
I think cash value life insurance in general is a financial product that more people should own to receive many of the high features they offer that no other financial product has. However, I don’t believe that relying 100% on this product is a viable solution to finance every buy a person will ever make again. After all, it is a loan and there is an interest expense charged against it. If money is obtainable from other supplies that is cheaper than borrowing from a life insurance policy, then these other supplies should be considered. This way, money placed in a life insurance policy can continue to grow at a higher rate than the cost of acquiring the money from another source. Who cares if anyone or any company makes a profit off of a financial service that brings more value to them? You shouldn’t care if you want to build up wealth.
Where are other supplies of capital that can provide an individual a lower their cost of financing than taking a loan against a life insurance policy? Here are three that I would consider:
1) A non collateralized loan from a bank or credit card company – When a person has good credit, there are a lot of edges and credit card companies that will be happy to give a person a loan so they can do anything they want to with. The interest rate on these loans can be extremely low. I have seen some that are less than 1%. It is OK to use these loans to make a buy. When a lender makes a loan to a person in this way, they take the risk. The individual who owns the cash value life insurance policy can nevertheless have their money obtainable for anything that may come up while it continues to grow at a higher rate than the interest being charged.
2) A collateralized loan against an investment portfolio – One of the best parts of a cash value life insurance policy is that it is contractually guaranteed not to go down in value. That isn’t the case for stocks, bonds and real estate investment trusts held in a brokerage account. These assets when held in non-retirement accounts can also be loaned against. This way, an individual can keep their investments invested and use the equity they keep up accomplishing the same “use and grow wealthy” objective of “Bank on Yourself.” Loans against investment assets can be done in a margin account. As long as the investments stay above the margin account minimum, these loans do not need to be paid back just like a loan on a life insurance policy.
3) A home equity loan – For the people who have home equity, there is the possibility of that they can take a home equity loan. Home equity loans are also a kind of collateralized loan. Unlike margin accounts or loans against a whole life insurance policy, home equity loans do require at the minimum the interest payments to be made. Home equity loans may work better than life insurance loans because it uses an asset that typically isn’t liquid. When a borrower has the opportunity to turn a non liquid asset into cash without selling it while maintaining complete control of a liquid asset like cash value life insurance, then the risk to the borrower is less than using the liquid asset as collateral. The reason being is that if anything were to happen in the future where edges would not lend money (like what happened in 2008-2009), the borrower would have more flexibility in their financial lives to manager change.
“Bank on Yourself” whole life insurance is a great asset to own but it isn’t always the best different to find the cheapest money to make purchases and “earn your way to wealth.” If an individual can borrow at a cheaper rate than the rate the insurance company will charge against the policy, it will allow the individual to build up wealth faster.
There are other considerations with “Bank on Yourself” whole life policies that need to be addressed in addition.
This article is not intended to provide any specific advice. Specific recommendations will vary from person to person. Working with a financial planner can help you to determine which course is right for you.