Have you ever considered having a private family banking system? It is easier than you think.
Let’s take a look at what family banking is and see how this financial tool is used for optimal growth and protection of your family’s wealth. I will outline the value of having your own family banking system. Then, we will discover how to use your private family bank to pass on a legacy for generations to come. This is exactly the process that I am using for my family.
What is a Private Family Bank?
We know that a bank is a financial institution where you can make deposits or take out loans. Banks are in business to make a profit. When banks are successful they make good profits. They charge more in interest on a loan than they will pay in interest on money in your savings or checking accounts. This is how banks make money. They will charge you a much higher amount to borrow a dollar from them than they pay you to borrow one of your dollars.
For example, the current interest rate paid to you on your savings is around .01%. The current interest they charge when you use their money can vary between 4-6% for home equity loans and 8%-21% on credit cards.
So, what kind of return is a bank getting on your money? Let’s keep it simple. If the bank pays you a 1% interest (not the current .01%) and they charge you 4% interest on the money they loan to you, they are making a 400% return on your dollar!
How? In real dollars here is how it works. Let’s keep it simple. You save $100 in the bank (in effect you are loaning your money to the bank). They pay you 1% or $1.00. You decide to borrow $100 and they charge you 4% or $4.00 in interest. $4 divided by $1 = 4. This converts to a return of 400% for the bank. Now can you imagine what the return is when the bank is actually paying you .01%?
Have you ever thought that there might be a better way?
Private family banking is a system where you save money in mutually traded whole life insurance companies instead of in a bank. The insurance company is your bank. They pay you a guaranteed rate of interest—much higher than you would earn in even high-interest savings account or CD—and will also pay out non-guaranteed dividends based on annual performance. It’s worth noting that the mutual whole life insurance companies have paid out dividends for well over 100 years. If you need a loan, it’s a private contract between you and your insurance carrier, not a bank. Interest rates are typically lower and you decide the pay-back terms.
By creating a private family bank using whole life insurance, banks (or the IRS) don’t tell you what to do with your money—how to save it, how to borrow it, and what to spend the borrowed money on. When you borrow money, no approval is needed, no certain credit check, no loan collateral like a home, car, or business.
The private family banking system is a concept that’s easy to implement and understand, and one that has been proven successful for hundreds of years, provided you use whole life insurance as your banking vehicle.
Whole Life Insurance: The Ideal Banking Tool
Many individuals think that life insurance only has to do with a death benefit. That is true, but not the whole truth. The whole truth depends on what type of insurance you buy.
The most common type of insurance—term life insurance—offers a death benefit to beneficiaries if the policyholder dies within a specified time period (term). If the policyholder is still surviving at the end of the term, the policy is canceled and no death benefit is issued. The key reason why term life insurance policies are often so inexpensive is that the likelihood of a payout for the insurance company is small. Most of the time, any money spent on policy premiums for term life insurance is lost. Statistics show that only 1% – 2% of term policies are in-force and used when death occurs. (People drop the policies or don’t want to pay the higher rates later in life.)
Whole life insurance can be more expensive than term life insurance, but a payout from the insurance company is guaranteed. The “term” of a whole life insurance policy is your whole life. It won’t expire. But a guaranteed death benefit isn’t the only perk of a whole life policy.
Whole life insurance comes with a built-in savings component. When you pay your policy premium, part of it goes toward your death benefit, but the rest goes toward the cash surrender value of the policy, also known as cash value. Every time you make a premium payment, you’re increasing the cash value of the policy, much like you increase savings in a bank account. Plus, your guaranteed interest from your mutual insurance company and potential dividends also go toward increasing your cash value.
The cash value is what allows you to borrow against yourself (typically tax-free), earn an annual rate of return, and provide your family with a legacy. Cash value also allows you to build wealth through your private family banking system.
Your cash value compounds over time. As with any account earning compound interest, the earlier you start and the more money you put into it, the quicker your wealth will grow and you’ll end up with much greater wealth in the long run.
How Can It Be Private Family Bank?
Banks do two functions:
- Store Money – when the premium is paid you are storing
- Loan Money – There are two ways you can access the cash value of your whole life insurance policy.
- One way is to make a withdrawal, which has tax implications. Because the interest and dividends you earn from your insurance company are tax-deferred, the IRS requires their cut when you make a permanent deduction from the cash value of your policy.
- The other way to access the cash value of your whole life insurance policy is to take out a policy loan. Policy loans allow you to use your earned interest and dividends tax-free. As previously mentioned, when you take out a policy loan, you’re not required to go through a credit check or have a certain credit score, you don’t need bank approval—simply submit a request to your insurance company, and funds are usually transferred to your preferred bank account within a few days—and you don’t have to put up personal assets as collateral. Plus, you choose the payback schedule.
What Happens If I Don’t Pay Back the Loan?
Because mutually insurance companies are owned by policyholders, these types of life insurance companies can use the death benefit reserves as collateral when a policy owner wants to take out a loan. Essentially, your death benefit is your collateral.
Unlike banks, which use fractional reserve lending, is authorized to lend out 90% of a depositor’s dollar and keep only 10%, life insurance companies lend out 100% of the policy owner’s dollar because the dollar coincides with the amount of death benefit on reserve. This is also why it’s practically impossible to default on a policy loan. Any unpaid loan amount is deducted from the death benefit of the policy.
This lending strategy ensures certainty and security. With life insurance, there is no such thing as “bank” insolvency or regulation laws suddenly changing. A mutually owned life insurance company is a private business with a private contract between themselves and policyholders.
If you’re ever investing your cash value into other performing assets and something goes awry, you are financially safe. You determine the terms of your policy loan. This concept is what makes whole life insurance a foundational asset. You can find ways to enhance your wealth without being at risk.
For more on bank loans vs. policy loans, download this free infographic.
In the next issue, we will discover the multiple benefits of having your own Private Bank using and using it just like you would a bank, but without the downsides.
If would like more information, email or call me at 517-896-7268.