Becoming Your Own Banker
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What if you could be your own source of financing when the need arises instead of leaning on banks, finance and credit card companies? What if you could borrow against a life insurance policy and pay it back, instead of the bank? What if you could pay yourself back for a loan instead of paying an institution?
When you become your own banker, you can do just that. You borrow against your life insurance policy and rather than enriching the bank, your payments go to enrich your heirs when the policy pays out.
Being your own banker is an option that can be used to improve your financial peace of mind. There are several benefits to banking on yourself, and these include:
• Being able to reduce your debt as you increase your savings
• Building a college fund without sacrificing to do so
• Easily creating an emergency fund
• Recapturing the cost of business and professional expenses
• Recapturing the cost of the interest you currently pay to financial institutions
• Enjoying financial freedom as well as a secure retirement without worrying about market fluctuations
• Having a guaranteed tax-free death benefit
• Having access to tax-free withdrawals, loans and growth
Certainly, with any financial projects, we must develop a roadmap to confidently take us from Point A to Point Z without any missteps along the way. Using this process does not really create a “bank” and you do not really become a “banker.”
It is, however, a rather simple concept that will put you in control of your finances rather than a third-party who will charge fees every step of the way. Here are our milestones for you to complete and the best method to complete them:
Your first milestone is to capitalize your bank with permanent cash value life insurance. You should purchase a policy through a mutual insurance company so that you can capitalize on the annual dividends that are paid to policyholders and are not required to be reported as taxable income.
Where you purchase your policy matters and will highly recommend that you only go through an independent insurance broker since they will have access to many highly rated companies who will have the insurance products to meet your needs.
When you speak with your insurance broker, if they push back or appear to be a naysayer, go to the next broker. Your mission should be to have an advocate on your side from whom you can get critical advice and who is committed to helping you navigate the shopping, purchasing, and underwriting processes.
A good screening question to start with is to ask the broker if they are familiar with the concept of “infinite banking” or “becoming your own banker.” Then you can follow-up with asking if they are familiar with IRC section 7702 since this is the section that discusses the tax liability for your financial project that you are embarking on.
Next, you need to have a conversation with your broker to determine if participating whole life insurance will be the best product for funding your bank (it typically will be) or if a universal life product will work better for your individual circumstances. We can help you with this decision based on your needs.
Since your goal here is to fund your personal bank as soon as practical, we will recommend that you minimize your death benefit so that you will maximize your cash value in the policy.
Your next step in setting up your bank (insurance policy) is deciding whether or not you need any or all of the insurance riders that are available to you. Here again, your independent agent should be prepared to discuss each rider with you – what it does, how much it costs, and their recommendation. Here are the most common riders that typically all insurance carriers will offer:
Life Insurance Supplement Rider (LISR)
The LISR combines term insurance (low-cost) with permanent life insurance for an increased death benefit. The term insurance portion of the policy will decrease as you make your payments over time until only the permanent coverage remains. This method is a good way to have a higher death benefit on a temporary basis.
Additional Life Insurance Rider (ALIR)
The ALIR permits the policyholder to make increased payments on the policy to buy additional paid-up life insurance, thus increasing the death benefit and the cash value accumulation.
Paid Up Additions Rider
Using this rider, you can purchase additional insurance with a lump sum payment. The rider allows you to purchase more death benefit and at the same time increase the cash value in your policy. Many policyholders choose this method when they receive their annual dividend payments from the insurer.
Guaranteed Insurability Rider (GIR)
The GIR provides for the insurer to allow you to purchase additional insurance without proof of insurability. This rider would be redundant if you selected the ALIR.
Milestone #3 is very important and you should take the advice of your insurance professional when doing this. This milestone is when you actually fund the policy (your bank). You want to fund it with as much money as possible but be careful not to over-fund it causing it to become a modified endowment contract.
The internal revenue service has very specific rules about over-funding a life insurance policy and allowing it to become a tax shelter. You don’t want a MEC (modified endowment contract) but you want to get close to it.
After you have paid enough into your policy and the cash value become sufficient for your banking needs, it’s time for you to become a banker.
Now it’s time for you to begin financing your purchases rather than using a lender or a credit card. Remember, however, for this to work properly, you’ll fund your purchases using policy loans, not withdrawals. If you choose “withdrawal,” your policy’s cash account will be reduced by the amount of the withdrawal but when you take a loan against the policy, your cash value is undisturbed and continues to accumulate.
This is the best part because although you are borrowing money against your policy (for any reason and no credit check), you are using YOUR BANK for the purchase and the funds in YOUR BANK continue to accumulate!
Let’s take a minute and discuss some of the things you can do with the money in your bank:
Start focusing on recapturing your money with interest whenever possible. Using this type of banking strategy means you have to think like a banker. Certainly, you don’t want to make loans to yourself for the sake of being able to, just make sure you think of your personal bank first, even if you have the cash.
With access to cash and the ability to pay yourself interest, we’re sure you can expand on milestone #4 and use your banking system strategically to create additional cash flow by purchasing assets that will deliver interest back and cash back to YOUR BANK.
We have not heard this as often lately but when the concept was first introduced and most people didn’t understand it, they assumed their insurance professional was selling a scam. Being your own banker is not a scam, in fact, there are kits available that offer complete directions on setting up your bank. It is certainly not for everyone because there are several factors that must be in place for this concept to work well for you. It is a proven strategy.
The “becoming your own banker” strategy isn’t for everybody. Although you’ll be getting dividends (dividends are not guaranteed) from the mutual insurance carrier you choose to use, the rate of return on these policies are rather modest, and particularly in a low-interest environment.
There are a lot of individuals and families who would benefit tremendously by using this personal banking strategy:
Although the strategy of becoming your own banker will not be the best solution for everybody, many who hear about the concept simply pass it off as a scam or consider the strategy to be too complex to understand. Let’s take a look at some common sense examples.
All of us know that very few things in life are actually free, especially when it comes to borrowing money. Certainly, as a breadwinner for your family, you want to minimize your cost of borrowing money each time you want to make a purchase.
Let’s imagine that you want to add-on to your home and the best bid you received was $40,000. You want to finance the loan for 5 years so the payments are very manageable and your lender has agreed on a 6% rate of interest. For the term of your loan, you would pay $6,398.72 in interest for a total cost to you of $46,398.72.
Now, rather than borrowing that money from your bank, you borrow it from your insurance policy and pay the same amount of interest. You would come out ahead because the $40,000 you borrowed would remain in your cash value account and continue to earn interest while you repay your loan. In fact, you would actually end up with more money than when you started. Makes sense to me.
What makes even better sense is that you can repay your policy loan as you want to or not at all. If you elect to not repay the loan, your insurance company would simply deduct the amount of the outstanding loan an interest from your death benefit.
Since you are borrowing money from your insurance policy (your bank) your only restriction is that you can only borrow up to the amount of the available cash value at the time of the loan