That said, the system works in much the same way self-help systems work. It resonates with some people; not with others. Following it will absolutely create behaviors that assist in building more wealth over time. Whether you need to adopt those behaviors is where the possible controversy lies. In truth, they simply meant a blended whole life policy that maximized cash value.
Here's the ledger example of such a policy:. For a lot of whole life policies, the cash value after the first year would be zero. Within the first 10 policy years, the policy has more cash value than the sum of the premiums paid, and the gap between premiums paid and cash value continues to grow each and every year after that.
Instead, there is a design protocol that makes a policy better for the program. That design protocol is one that enhances the cash value of the whole life policy. Doing this gives the policy owner greater capacity to use the life insurance contract to finance major purchases. In other words, the program is a track to run on and most people find greater success in accomplishing most goals when they have a systematic path to follow.
The program doesn't really create additional dollars out of thin air as it sometimes suggests. It also requires you to buy whole life insurance to execute properly. This can be a major problem for individuals whose health precludes them from such a purchase.
It's also a system sometimes half-heartedly followed by life insurance agents who wish to espouse it only to the point where they sell a policy. Your article is, as with all these critiques, not completely factual itself, so let me see if I can help you, without muddying the waters more. Are they the same thing? You give him way too much credit. What did you expect him to say?
You may end up finding out more about that yourself in the not-too-distant future. Some direct-recogniton companies go to extremes to discourage their policyholders from taking loans, for example, my policy with a direct recognition company sends me documents yes, several to sign signifying that I acknowledge that my dividends may be reduced if I take a policy loan. Not the case with non-direct recognition.
They just ask how much I want to borrow, and continue to pay me the same dividend. I hope this helps clarify some of your misconceptions about this type of strategy. The first is the concept of the mutually-owned life insurance company.
Under current tax law, dividends paid to life insurance policyholders are tax-free, which means the after-tax returns on policies participating in the profits of the insurance company. The second engine driving the concept, again, is a concept little understood outside of insurance circles. The concept is direct recognition — or more precisely, the lack of it.
When a life insurance company practices direct recognition, they only pay dividends on the cash value left in a policy after any loans are taken out. Some insurers do not practice direct recognition. They charge interest on the loan, yes — but they do not stop paying the crediting rate and dividends on the money you borrowed against. That difference is key: When you borrow money against a life insurance policy, you are not really borrowing your own money.
You are borrowing from the general fund of the life insurance company — and using the cash value in your policy to secure the loan. This is the logic behind the policy of not practicing direct recognition. A policy that does not practice direct recognition allows you to arbitrage the difference between the minimum crediting rate on cash values, plus dividends on one hand, and the interest rate the insurance company charges on loans, on the other, to create a source of very cheap credit.
But it does mean that if the dividend rate is 5 percent and the interest rate is 6 percent, your cost of capital is now 1 percent. But with non-direct recognition companies, it does. It just takes a while to get to that point. The insurance company pays itself out of the death benefit, if need be, plus interest.
However, it works better if you do pay off the loan, so you can take advantage of the cheap financing again and again. Eventually, you can draw down your cash values to supplement your other sources of retirement income. Expenses are front-loaded. Banking on yourself could be the select strategy for people in a variety of circumstances, such as:. People who believe income tax rates will be higher in the future than they are now. People who are concerned they may be the target of lawsuits: Life insurance cash value often receives substantial protection from creditors, depending on your state.
How promoters and life insurance agents often explain how to be your own bank can be sensationalized and over-hyped. In fact, even the most popular publications seen below can be downright misleading at times:. You can access one of the most detailed and robust libraries of articles and videos explaining exactly how Whole Life insurance works for banking on our site. There is a unique combination of features, riders, and life insurance policy design techniques that allow for an overfunded whole life policy to optimize these 7 key benefits ideal to be your own bank:.
Also, contrary to popular belief, Indexed Universal Life IUL can also function quite well as your own private bank if it is designed and monitored correctly. You can read all about the pros and cons of IUL here. What I find so interesting is that if your local bank offered an account with these benefits, then people would be lining up around the corner to deposit money into. But since the whole life insurance industry has done such a terrible job of positively promoting its own wares, this concept remains one of the best-kept financial secrets in America.
Some of these financial gurus even have a hidden agenda to sell rivaling products when you pull back the sheets. Regardless, these blowhards will rarely ground their overstated opinion with detailed facts like you will find throughout our site. There is an infinite number of ways to design a policy for different financial goals. Here are the two opposite ends of the spectrum:. The agent helping you set up the policy should use a combination of policy design features and optional riders to allow for robust cash growth to occur early and often.
Want CE Credit for reading articles like this? Table of Contents Navigation. Executive Summary A popular feature of permanent life insurance is that it accumulates cash value that can grow over time — ensuring that if the policy is surrendered, the policyowner will still have something to show for it that cannot be forfeited.
Author: Michael Kitces Team Kitces. A life insurance loan is nothing more than a personal loan using policy cash value as collateral! Bank On Yourself actually pays loan interest to a life insurance company, not yourself! Stay In Touch. Continuing education that actually teaches you something. Join 47, of your fellow financial advicers getting the latest Nerd's Eye View blog content as it's released.
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