The Problem with Bank on Yourself

As Nerdwallet.com reports, “First there was LEAP, then there was Infinite Banking, also known as Becoming Your Own Banker. Now it’s Bank on Yourself by Pamela Yellen.” All of these books turned into viral life insurance strategies. In essence, each of these different sales programs attempts to accomplish the following by selling a permanent life insurance policy:

  1. Save you money
  2. Allow you to refinance your debt to save interest costs
  3. Minimize your taxes, today and in retirement
  4. Create a guaranteed source of cash flow for you both today and in retirement

There isn’t much to complain about with any of these objectives. But exactly how each of these different sales programs actually delivers on their promises can end up being a completely different story, and that story is something you should consider before you jump in with both feet.

I was recruited to work for Bank On Yourself and turned the offer down. You can read more about that here. Let’s take a look at the Bank on Yourself pros and cons why we do things a little differently at Life Benefits.

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So What is the Problem With BOY?

If you’re familiar with Bank on Yourself (BOY) or have read Bank on Yourself reviews, you may have noticed Bank on Yourself advisors claiming they can “reduce and ultimately eliminate the control banks and financial institutions have over you.” As extremely appealing as that and the four points above may sound, Bank On Yourself problems can hinder financial success. 

It’s not very logical to believe that you can eliminate the control that banks and financial institutions have over you when you acknowledge the fact that the Federal Reserve Bank conducts monetary policy. The bank does this by controlling “short-term interest rates and influencing the cost and availability of credit.” This affects long-term interest rates, currency exchange rates, prices of equities, and other assets, and thus your wealth.

Furthermore, central banks and financial institutions around the world do comparable things as the Federal Reserve Bank does. So, when all this banking regulation and management collectively collude, the economy that you live in, is still controlled by the banks and financial institutions of the world. This humble fact remains stubbornly true, even if you end up purchasing one or more life insurance policies that a Bank on Yourself, LEAP, or IBC advisor might sell to you. 

That purchasing life insurance can somehow “eliminate the control banks and financial institutions have over you” is at the very least unreasonable but quickly becomes laughable when you realize that the board members, operating officers, and presidents of various life insurance companies sit on the board of the Federal Reserve Bank which is controlling the monetary policy. But Bank on Yourself claims in their marketing material that this control can be eliminated by purchasing one of the life insurance policies that they sell.  Regardless of Bank on Yourself reviews, Pamela Yellen, or what any Bank on Yourself advisor tells you purchasing permanent life insurance won’t protect you from the banks or the financial institutions of the world.

What are Some of the Pros of Owning Participating Whole Life Insurance?

While life insurance might not protect you from banks or other financial institutions, owning a participating whole life insurance policy can still provide many benefits for your financial freedom. Instead of viewing Bank on Yourself as a way to escape banks and financial institutions, look at the strategy of using participating whole life insurance as a way to offset negative financial effects that come from using mainstream financial programs.

Here’s a look at some of the bigger picture pros to owning participating whole life insurance and how it came to be.

1. Tax-deferred growth is a genuine guaranteed feature of participating whole life insurance. This fact has been consistently understood and accepted since the earliest participating whole life insurance policies were issued in 1706 by the Amicable Society of London. A few years prior to this, James Dodson, a mathematician and actuary, was able to offset the risks assumed by the insurer when he tied those risks to premiums paid by the policyholder. This allowed for the advancement of permanent whole life insurance policies. Dodson’s protégé, Edward Mores, successfully established the Society for Equitable Assurances on Lives and Survivorship in 1762, which became the first mutual insurer, laying the foundation for modern day mutual or participating whole life insurance.

In the United States, Benjamin Franklin was instrumental in influencing the Presbyterian Church to start The Presbyterian Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759. He did this after successfully opening The Philadelphia Contribution for the Insuring of Houses from Loss of Fire in 1752. Yet, the United States never mandated life insurance coverage as other countries did, including Germany and Britain, until 1935 when the Social Security Act was enacted. By “1939, the Title VIII taxing provisions were taken away from the Social Security Administration and given to the Internal Revenue Code and were renamed as the Federal Insurance Contributions Act.” This act took away the liberty of individuals to contribute more to their mutual whole life insurance policies by mandating contributions to the government insurance program instead. Today, 80 years later, 90% of Americans retire dependent on Social Security Benefits instead of their mutually owned life insurance.

2. Tax-free loans and withdrawals are a benefit to owning participating whole life insurance. But remember that this isn’t a unique benefit available only to participating whole life insurance owners. That is because there is never any income tax assessed on a loan. Not even if that loan is taken from a bank or a financial institution. Life insurance is not special in offering the ability to take tax-free loans.  And this can be said of tax-free withdrawals as well. The tax-free withdrawal clause in participating whole life insurance is not exclusive to life insurance. Tax-free withdrawals can be taken from checking accounts and most savings accounts at banks and credit unions nationwide. But a cautionary word is in order here because NOT all life insurance loans and withdrawals made against participating whole life insurance policies are tax-free. It is important to understand therefore, when and why a loan or withdrawal might become a tax liability instead of remaining tax-free as LEAP, IBC and Bank on Yourself advisors teach.

3. The advantages of owning participating whole life insurance are the same as they were 250 years ago. 

  • After one premium is paid, the face value provides a guaranteed return of principal and more.
  • It instantly makes the policy owner a “partner” in the company.
  • It provides a better than average return on the premiums paid.
  • It allows one to give, or to use, all the cash value of the policy and still leave a tax-free legacy.
  • It delivers liquidity without interrupting the compounding growth guaranteed in the policy.

These were the reasons that John Wanamaker, The Prince of Shopkeepers and Post Master General of the United States, reported as to why his life was the most insured life in America. At the time, Wanamaker was paying the equivalent of $2.36 million in premiums annually for an equivalent of $52.52 million in coverage.

Of course, long before the income tax laws, bank regulations, and Social Security became part of the American economy, saving, avoiding interest, minimizing taxes (import, export, sales and user), and creating a guaranteed passive income were still important. And that is why participating whole life insurance became such a dynamic financial asset for millions of Americans. So much so, that The Federal Reserve Bank of Chicago reports that in 1989, 77% of all households in America owned life insurance.

Participating Whole Life Insurance became such a vital asset that J.C. Penney credits his participating whole life insurance to his ability to rebound after the stock market crash of 1929. “In 1922, J.C. Penney insured himself for $3 million dollars ($45.682 million in 2019 dollars). It was one of the largest life insurance policies ever issued up to that point in time, besides John Wanamaker’s life insurance policy mentioned earlier. The crash of 1929 sent the stock in Penney’s stores from 120 to 13 points overnight. Penney lost $40 million ($601,978,944 in 2019 dollars) as well as his sanity and ended up relinquishing his stores and checking into a mental institution.

“While living in that sanitarium, Penney heard the gospel hymn, “God Will Take Care of You” being sung by the other residents and was inspired to return to the real world. He started over by borrowing money against his participating whole life insurance policy and was soon back at the helm of his department stores as chairman of the board.” Years later, a young employee named Sam was taught how to “wrap a package with very little twine and very little paper and still make it look nice” when J.C. Penney dropped by one of his stores to observe and catchup with his employees. This same Sam was so inspired by Penney, that he went on to start his own store. Today Sam Walton’s Wal-Marts have surpassed J.C. Penney’s stores in both sales and locations and serve billions worldwide daily.

Quick, easy access to liquid cash, which Penney was able get to by leveraging his participating whole life insurance, is what is so special and unique about owning participating whole life insurance. Without this quick and easy access to liquid cash, J.C. Penney would have remained broke and possibly even institutionalized for the rest of his life.  Instead, Penney was able to change his own life and ended up improving the lives of millions of others, including influencing Sam Walton and ultimately the birth of Wal-Marts worldwide. 

The power of owning such an asset is simply astounding! Purely on the signature of the owner, a participating whole life insurance policy holder can borrow the insurance company’s money at any time, for any reason, and for however long they need it. There is no loan application, no loan underwriting, and no need for additional collateral besides the life insurance policy itself. But even more important, there are no requirements to show that the loan can be paid back. There isn’t any litmus test to prove you are sane, have a job, have a good business plan, or even a good credit score.

This aspect of participating whole life insurance is the most powerful reason to own this type of policy. But there are the other reasons mentioned with Bank on Yourself earlier that apply as well: 

  1. To save more of the money you make
  2. To provide you with alternative financing to save interest costs
  3. To minimize your taxes, both today and in retirement
  4. To create a guaranteed cash flow for you

As mentioned earlier on, there is nothing to complain about any of these four reasons to own participating whole life insurance. It is just that they pale when compared to how J.C. Penney put his life insurance to work for him and how that changed his life, and the lives of billions of others too…forever. And that is why owning participating whole life insurance is so important.

3 Things You Can Do To Become Wealthier57-page slide deck Many people are losing money with typical financial planning. Even people who were “set for life” are running out of money in retirement. Here’s an easy guide with 3 things you can do to become wealthier.
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Are There Any Cons to Owning Participating Whole Life Insurance?

As with most things in life, there are pros and cons to everything. Here are the most common problems facing participating whole life insurance owners.

  1. Obtaining a policy designed to create high cash values, rather than yielding high commissions for the selling agent                                                                
  2. Making the policy a tax liability by not precisely following the IRS rules and regulations when taking loans and withdrawals
  3. Causing the policy to become an expense instead of an asset if premium payments are stopped prematurely

In other words, all the “cons” of owning participating whole life insurance, whether using Bank on Yourself or not, are reflective of a policy owner’s misunderstanding, ignorance or lack of guidance concerning the rules and regulations surrounding the ownership of participating whole life insurance. All of these things can be avoided with due diligence on the part of the policy owner. And the “pros” to owning participating whole life are available to all willing to purchase it.

We can help you use life insurance correctly

At Life Benefits we specialize in designing life insurance policies that provide protection, help people keep more of the money they make, help people who want to grow their wealth and provide financial peace of mind.  Schedule a strategy session to see how using life insurance can work for you.

Dr. Tomas McFieDr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of Life Benefits which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, How to Build Sustainable Wealth, can be purchased here. 

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