Bank on Yourself: Three Alternatives to Consider Instead of Borrowing a Lifelong Policy

“The Bank on Yourself Revolution” is a book released in 2014. It was written by author Pam Ellen as a sequel 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 banks for their business practices, while punishing them for stealing middle-class wealth. She insults the “financial entertainers” for providing the public with substandard and generalized investment advice and states that these tips are more promising and insufficient. As a solution, Ellen encourages her readers to seek the help of one of her specially trained “authorized advisors” to give them advice on developing a special type of financial instrument that allows a person to self “spend your way to wealth.”

The concept, which an authorized consultant will show the reader who follows the advice, revolves around a strategy that requires a person to keep cash in a cash value insurance field created by a mutual insurance company. The life insurance company that creates the policy will then give the policyholder the opportunity to take out various loans under equity so they can “spend their money” and the actual asset “continues to grow” faster than the interest charged on the loan.

The asset continues to grow because the insurance company will continue to pay dividends on equity that has been borrowed.

If someone can borrow an asset at one rate but get a profit higher than the loan requires, there is an opportunity to get an arbitrage profit.

When a lender makes a loan under an asset with equity, the loan is called “secured loan” because the asset is held as collateral for the repayment of the loan if the borrower does not repay it in other ways .. If the owner and the asset / borrower can get a better rate of return with their asset than the interest rate on that loan they charge against it, then it can be argued that a person can spend their money but at the same time make money on it.

The uniqueness of a life insurance contract is that borrowed money usually does not have to be repaid on a certain schedule like most loans from other lenders. Therefore, non-payment of the loan “on time” will not affect the credit score of individuals and will not lead to bankruptcy.

I am not an authorized representative of the Bank on Yourself, but I understand the idea of ​​it. Because all life has a minimum guaranteed return on contracts, it will never lose money due to market losses. The type of entire life insurance policy it promotes is one that is known as a “direct participation dividend payment policy” that will allow the policyholder to receive a portion of the life insurance company’s excess profits even for money that has been borrowed against.

I think in general life insurance in cash equivalent is a financial product that more people need to own to get the many rich features they offer that no other financial product has. However, I don’t believe that relying on this product 100% is a viable solution to fund every purchase a person will ever make again. After all, it is a loan, and it is charged interest. If money is available from other sources, which is cheaper than borrowing from a life insurance policy, then you should consider these other sources. Thus, money placed in a life insurance policy may continue to grow faster than the cost of acquiring money from another source. Who cares if someone or any company makes a profit from a financial service that benefits them more? You don’t care if you want to accumulate wealth.

Where are the other sources of capital that can provide a person with lower financing costs than getting a loan under an insurance policy? Here are three I could consider:

1) An unsecured loan from a bank or credit card company – If a person has good credit, there are many banks and companies that issue credit cards that will be happy to give a person credit so that he can do whatever he wants. The interest rate on these loans can be extremely low. I saw that less than 1%. You can use these loans to buy. If a lender gives a loan to a person in this way, he takes a risk. A person who owns a life insurance money policy can still have their money on anything that may arise as long as it continues to grow at a higher rate than the interest charged.

2) Loan secured by an investment portfolio – One of the best parts of a life insurance policy in cash equivalent is that it is guaranteed not to deteriorate under the contract. This does not apply to stocks, bonds and real estate investment funds that are in a brokerage account. These assets, if they are in non-retirement accounts, can also be borrowed. In this way, a person can invest and spend their own capital, achieving the same goal of “spending and getting rich” as “Bank for yourself”. Loans for investment assets can be issued on a margin account. As long as the investment remains above the minimum margin account, these loans do not need to be repaid in the same way as a loan on a life insurance policy.

3) Own share loan – For people who own equity, there is a possibility that they can take a loan for home capital. Home equity loans are also a type of mortgage loan. Unlike margin accounts or loans for an entire life insurance policy, equity loans require at least interest payments. Equity loans can work better than life insurance loans because they use an asset that is not usually liquid. If the borrower has the ability to convert an illiquid asset into cash without selling it, while maintaining full control over such a liquid asset as life insurance at the cost of cash, then the risk to the borrower is less than using liquid assets as collateral. The reason is that if anything happens in the future if banks do not borrow money (like what happened in 2008-2009), the borrower will have more flexibility in their financial life to manage change.

Life insurance “Bank on yourself” – a great purchase, but it is not always the best alternative – to find the cheapest money to make purchases and “earn your way to wealth.” If an individual can borrow a lower rate than the rate that the insurance company charges with the policy, it will allow the person to accumulate wealth faster.

There are other considerations concerning lifelong “Bank on Yourself” policies that also need to be addressed.

This article is not intended for specific advice. Specific recommendations will vary by person. Working with a financial planner can help you determine which course is right for you.