Private Family Banking

Private family banking (PFB) is a strategy that involves using whole life insurance policies to build a multi-generational bank… kind of. In this article you will learn more about PFB, what it is, what it is not, and if there are benefits.

What is Private Family Banking (PFB)?

Whole life insurance policies develop cash value. Cash value in a whole life insurance policy can be borrowed as a loan against the policy. That’s where PFB comes in. In short PFB is a financial strategy that promotes: First, funding whole life insurance policies to develop cash value; and second, borrowing money against your policies to:

  • Payoff debt
  • Payoff mortgages
  • Finance business
  • Finance cars
  • Fund college and
  • Fund retirement

Some people who promote this idea call whole life insurance policies “banks”. They may refer to a whole life policy as your family bank.

Why Use Private Family Banking?

There are a number of reasons to use this financial strategy. Here are the top 5 reasons for using a “family bank”:

  1. Protection is critical for financial security. A family bank, which in reality is a whole life insurance policy, not only has policy cash value that the policy owner can use like a line of credit during their lifetime, but also provides a death benefit that gives a family financial protection.
  2. Growth is another important consideration when purchasing your family bank. A whole life policy provides a guaranteed return on premium monies. In addition to the guaranteed return, there is also the opportunity to earn dividends in a whole life insurance policy, if the policy is with a mutual life insurance company. 
  3. Access. Being able to access money to do any of the things listed above is critical to make the PFB strategy work. Other financial products are not as attractive as whole life insurance because access is more limited or penalized in many typical financial products.
  4. No market risk. Using whole life insurance as your family bank eliminates the need to assume market risk because growth is already built into the policy and guaranteed.
  5. Taxes. Last, but far from least, are the tax benefits of using whole life insurance as your family bank. First of all, policy loans which are the foundation for using the PFB strategy are tax free. Whole life insurance itself grows on a tax deferred basis. This means that as long as the money stays in the policy no taxes are due on the growth.  In the case of withdrawal, money is taxed on a first in first out (FIFO) basis. This is ideal because the policy owner can withdraw everything they’ve paid in premiums (cost-basis) tax free. Policy dividends are also tax free up to cost-basis, and the policy death benefit is tax free to the heirs.

How to Start a Private Bank

Starting a family bank can be intimidating. There’s a lot to know. There are a few things to watch out for, and a couple of “must haves” if you want your bank to perform well. Getting setup badly will cost you money.

As you know by now, a PFB is really a whole life insurance policy. Buying a whole life insurance policy isn’t hard, but buying a whole life insurance policy that is designed to work with PFB is critically important.

Whole life insurance accumulates cash value relatively slowly, but with a paid up insurance rider attached to the policy, it can accumulate cash value much faster. Cash value is critical when using the PFB strategy, so having the right amount of paid up insurance on a whole life insurance policy that will be used for PFB is important. 

But adding a paid up insurance rider to a whole life policy could cause a different problem. If you get a policy with too much paid up insurance, it will become a Modified Endowment Contract (MEC). This will cause different tax implications which are often better to avoid.  At Life Benefits we like to design whole life insurance policies with enough paid up insurance to maximize the cash value, without letting the policy become a MEC.

Buying a policy with a mutual life insurance company will also give you the potential to earn dividends from the insurance company. Although dividend payments are not guaranteed, many mutual life insurance companies in the U.S. have been paying a dividend every single year for the last 100 years.  At Life Benefits we sell life insurance policies from 5 different mutual life insurance companies. The companies we represent have been paying dividends every year for the last 96-128 years, depending on the company.

There are two different ways insurance companies calculate dividends. The two ways are direct recognition and non-direct recognition. Although the debate continues over which way is the better way, this is not as important as getting a well designed policy.  If you wish, you can go here to read more about direct recognition vs. non-direct recognition I own whole life policies with companies that are direct recognition, non-direct recognition and with a company that allows you to select between one option or the other every year. I like both options for different reasons.

In addition to having a paid up insurance rider on a policy with a mutual company, there are also other riders that may be advantageous to have on your policy, although not necessary. These riders include the:

  • Term insurance rider
  • Waiver of premium for disability rider
  • Long-term care rider
  • Accidental death benefit rider
  • Accelerated benefit rider
  • Guaranteed insurability rider
  • Child benefit rider

Some of these riders require additional premium and some of them are free to attach to a policy. We will discuss the term rider in this article because there is a lot of uncertainty as to whether it makes a PFB policy better or not.

There are some life insurance agents who swear by putting a term insurance rider on every PFB policy. At Life Benefits, we have a love-hate relationship with the term rider because although it can be used to boost the cash value, it’s not always the best option for the customer. The term rider is a paid for rider, so there is additional cost for it.  In years past, it was very rare when putting a term rider on a policy made the best financial sense. More recently, with newer policy products, we are seeing more policies that benefit from having a term rider. As far as we have found, there is no “one size fits most”, so we continue to evaluate the results case-by-case.

The other riders in the list above are not riders that are required to set up a policy that will work well for PFB. But they provide protection in additional areas, and at Life Benefits, we use them to maximize a customer’s protection as appropriate.

The last thing I’ll mention here is that some companies will charge a fixed interest rate, and some companies charge a variable interest rate on policy loans. If you plan to take policy loans against your cash value to use the PFB strategy, this will be helpful information to know when you are buying a policy.

Getting a good policy, set up the way I just described, is how you start a private bank.

Is PFB really your own private bank?

No, PFB is not a private bank by any stretch of the imagination. In this article I use the “bank” terminology for the benefit of the reader who is looking for information about “private banking” and is used to seeing or hearing the “banking” vernacular already.  

For what it’s worth, the banking vernacular is rooted in the Infinite Banking Concept which was first written about by R. Nelson Nash. In his book Becoming Your Own Banker, Mr. Nash described how you can use whole life insurance to effectively create your own monetary system. Since you are the one in control of the money you lend and the money you borrow, you can in a sense, become your own banker.

Since the spread of the Infinite Banking Concept other strategies have popped up that are based on the same root idea with some variations.  A Private/Personal or Family Banking system (PFB) is one of them, with another one being: Bank on Yourself. That’s how the term “bank” and “banking” got involved in the equation.

So now, maybe you’re wondering, what should you call the PFB strategy since it’s not really banking and it’s definitely not a private bank!  At Life Benefits, we just refer to the whole life insurance policy as a high cash value whole life policy, and when you borrow money against your policy to pay off debt, finance a purchase, or fund an opportunity we call that managing your money. You can call this anything you want. Maybe you’ll even make up your own name for it.

Conclusion

To summarize, PFB, or whatever you want to call it, is a strategy that can give you lots of advantages with your finances. To get the greatest advantages from a strategy like this, the most important thing is that you get a good policy that has been designed to have high cash value and good growth.

The next most important thing is to work with an agent or company who can give you the educational support and service you need after you buy your policy.

If you are considering this strategy, I recommend that you schedule an appointment with us at Life Benefits to see what kind of policy is possible for you.  Working with Life Benefits can save you lots of time and uncertainty because we already know how to design the best policy for high cash values and good growth. You can schedule a complimentary appointment here.

And finally, if you already have a life insurance policy, or an illustration from another life insurance agent of a policy that you’re considering purchasing, I recommend that you take advantage of Life Benefits’ complimentary independent insurance review service to see if it’s a good policy that will give you high cash values and good growth.  We review lots of illustrations and we know what to look for. You can request an independent insurance review here.

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