Bank on Yourself or Be Your Own Bank What's the Negatives.
- Thread starter SamIam
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- 11,277
Negatives:
1) It is not a "set it and forget it" strategy. The agent must be committed to ongoing service of these policies.
#2 & #3 are copied from my own disclosure form that I've created in regards to permanent life insurance policies:
2) Cancelling / Lapsing / Surrendering Policy with Outstanding Loans: If you have a policy with an outstanding loan against it, and you are considering surrendering your policy, please consult with the insurance company and your agent about any possible tax consequences of surrendering your policy. You should also consult with a tax advisor in your state.
Another Northwestern Mutual Life Insurance Tax Disaster
3) The tax advantages of life insurance are only good as the policy stays in-force. If you cancel / lapse / surrender the policy, you may owe taxes upon the distribution or on any gains that you have earned in the policy.
4) Failure to emphasize that annual loan interest due needs to be paid out of your own pocket to make this work.
For example: Assume you have $100,000 earning 5% in your policy ($5,000)
You take out a loan for $50,000 at 5% cost ($2,500).
If you don't pay the $2,500 per year out of pocket, your net gain in your policy will only be $2,500. As long as you pay the loan interest each year, then you are restoring the full gain your policy earns.
1) It is not a "set it and forget it" strategy. The agent must be committed to ongoing service of these policies.
#2 & #3 are copied from my own disclosure form that I've created in regards to permanent life insurance policies:
2) Cancelling / Lapsing / Surrendering Policy with Outstanding Loans: If you have a policy with an outstanding loan against it, and you are considering surrendering your policy, please consult with the insurance company and your agent about any possible tax consequences of surrendering your policy. You should also consult with a tax advisor in your state.
Another Northwestern Mutual Life Insurance Tax Disaster
3) The tax advantages of life insurance are only good as the policy stays in-force. If you cancel / lapse / surrender the policy, you may owe taxes upon the distribution or on any gains that you have earned in the policy.
4) Failure to emphasize that annual loan interest due needs to be paid out of your own pocket to make this work.
For example: Assume you have $100,000 earning 5% in your policy ($5,000)
You take out a loan for $50,000 at 5% cost ($2,500).
If you don't pay the $2,500 per year out of pocket, your net gain in your policy will only be $2,500. As long as you pay the loan interest each year, then you are restoring the full gain your policy earns.
While I've never sold using this method, I think #1 is probably one of the biggest issues. Not necessarily from the agents side, but from the insured's side. Since this is a long term strategy, it is sometimes difficult for the client to remember why they are paying such a high premium on their life insurance policy. Thus the reason it isn't a set it and forget it strategy.
As I'm sure you know, this strategy is definitely for the more sophisticated client. And just because a person has the money to pay these premiums doesn't mean they are sophisticated.
Good stuff DHK.
- 11,277
I think it depends on your definition of "sophisticated". It's not necessarily the same definition of "sophisticated" that the SEC uses. Sophisticated Investor Definition | Investopedia
I would say a financially responsible person. A person who realizes that when you borrow from your life insurance policy, you are acting as banker AND borrower. Which means it's not "free money", but a more advantageous way to borrow... as long as they continue to make the same premium payments.
It's not a hard strategy to implement or understand. It just needs to be reviewed on a regular basis. This means client reviews on at least an annual basis. Good agents review with their clients on a periodic basis anyway, not abandon them after the sale.
It take NO MORE responsibility and understanding than taking a loan against a 401(k).
The difference is with the 401(k),
1) You cannot contribute for 6 months after taking the loan (not so with life insurance).
2) Payments are automatically deducted from your salary (not so with life insurance).
3) If you are let go from your job, the loan amount must be repaid within 60 days. (Not so with life insurance).
4) If you don't repay within 60 days, the entire loan amount is subject to income taxation (VERY SIMILAR to life insurance if you cancel the policy).
5) If you're under age 59 1/2, the amount of the loan is also subject to a 10% penalty (not so with life insurance).
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This is important too. This is why I prepare a 3-page "plan".
Page 1: Outlines the current assumptions, goals, objectives, and recommendations.
Page 2: Current situation
Page 3: Proposed solution (along with additional notes on the advantages)
I include this and let the client keep this, in addition to delivering an additional copy upon policy delivery. Every year, you simply review their "Page 1" and ensure that everything is still aligned with what their objectives are.
But if you just want to "sell and dash", it isn't good for the client or the insurance company... and won't be good for your own long-term reputation in your community either.
John Savage said that he saw his clients every year even though he knows they'll never buy again. Why? They're his clients. And with good service, comes your ability and credibility to ask for and receive professional introductions.
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I would say a financially responsible person. A person who realizes that when you borrow from your life insurance policy, you are acting as banker AND borrower. Which means it's not "free money", but a more advantageous way to borrow... as long as they continue to make the same premium payments.
It's not a hard strategy to implement or understand. It just needs to be reviewed on a regular basis. This means client reviews on at least an annual basis. Good agents review with their clients on a periodic basis anyway, not abandon them after the sale.
It take NO MORE responsibility and understanding than taking a loan against a 401(k).
The difference is with the 401(k),
1) You cannot contribute for 6 months after taking the loan (not so with life insurance).
2) Payments are automatically deducted from your salary (not so with life insurance).
3) If you are let go from your job, the loan amount must be repaid within 60 days. (Not so with life insurance).
4) If you don't repay within 60 days, the entire loan amount is subject to income taxation (VERY SIMILAR to life insurance if you cancel the policy).
5) If you're under age 59 1/2, the amount of the loan is also subject to a 10% penalty (not so with life insurance).
----------
This is important too. This is why I prepare a 3-page "plan".
Page 1: Outlines the current assumptions, goals, objectives, and recommendations.
Page 2: Current situation
Page 3: Proposed solution (along with additional notes on the advantages)
I include this and let the client keep this, in addition to delivering an additional copy upon policy delivery. Every year, you simply review their "Page 1" and ensure that everything is still aligned with what their objectives are.
But if you just want to "sell and dash", it isn't good for the client or the insurance company... and won't be good for your own long-term reputation in your community either.
John Savage said that he saw his clients every year even though he knows they'll never buy again. Why? They're his clients. And with good service, comes your ability and credibility to ask for and receive professional introductions.
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- #5
I get all that but I'm talking the concept itself as far as buying cars and everything else with it. When I sell for example an IUL I usually sell it on a min death benefit max cash and let that thing accumulate until retirement. If they need more life insurance I will sell them cheap term.
But this concept is basically saying use this concept to buy all your big purchases. For someone who has done the research on these concepts what's the downfalls because these IMO's are saying it's all rosy.
Case in point I bought my last car with a 1.9% fiance rate why would I borrow from the policy at a higher rate? Something tells me their has to be more negatives than just making sure the policy is structured correctly. Maybe I'm wrong?
But this concept is basically saying use this concept to buy all your big purchases. For someone who has done the research on these concepts what's the downfalls because these IMO's are saying it's all rosy.
Case in point I bought my last car with a 1.9% fiance rate why would I borrow from the policy at a higher rate? Something tells me their has to be more negatives than just making sure the policy is structured correctly. Maybe I'm wrong?
It depends. No "concept" or "sales pitch" is the end all, cure all, etc.
Using a policy -- to borrow, pledge for a loan, etc. -- can be very powerful and beneficial. In recent years, I've had innumerable clients use a "cash value line of credit" program offered by a few banks. Now, first, it only applies to whole life policies; and second, it only applies to policies issued by mutual companies. That said, for most, it is more beneficial, and far "lower costs" -- to borrow from a bank/line of credit at 3.45% and allow the policy to fully gestate and continue to perform at optimum efficiency and effectiveness.
Now, there are banks that will "loan" money against UL policies, but they are not a line of credit. More commonly, they are traditional type, "personal" loans (limited terms, P&I, etc.), which is very unlike the line of credit. The latter, for the programs I've used and been involved with, are interest only, 4 year terms (and then renew), and the entire process is quick, simple, and painless. I've done it on my own policies. I'd rather pay 3.45% and allow my policy to continue on as is, than borrow at 4% to 5%. There is also the tax deductibility question, but that's another issue.
I do think the concept of using a policy, during lifetime, in some form or fashion, can be very beneficial and powerful.
Using a policy -- to borrow, pledge for a loan, etc. -- can be very powerful and beneficial. In recent years, I've had innumerable clients use a "cash value line of credit" program offered by a few banks. Now, first, it only applies to whole life policies; and second, it only applies to policies issued by mutual companies. That said, for most, it is more beneficial, and far "lower costs" -- to borrow from a bank/line of credit at 3.45% and allow the policy to fully gestate and continue to perform at optimum efficiency and effectiveness.
Now, there are banks that will "loan" money against UL policies, but they are not a line of credit. More commonly, they are traditional type, "personal" loans (limited terms, P&I, etc.), which is very unlike the line of credit. The latter, for the programs I've used and been involved with, are interest only, 4 year terms (and then renew), and the entire process is quick, simple, and painless. I've done it on my own policies. I'd rather pay 3.45% and allow my policy to continue on as is, than borrow at 4% to 5%. There is also the tax deductibility question, but that's another issue.
I do think the concept of using a policy, during lifetime, in some form or fashion, can be very beneficial and powerful.
- 11,277
I think you're wrong... but smart enough to question everything!
Remember: Cash is KING! If you had cash, would you still buy a NEW car? Or a used car that's 2-3 years old?
Here's another positive to using life insurance: Should something happen to your employment (cash flow), your car loan still requires payment every month. Skip 2 months, and your car is repossessed.
Not so with Life insurance. Not only do you need to pay ONLY the annual interest due... but you can even skip that too! Plus - the loan from life insurance does NOT show up on your credit reports!
However, your point is good that if you can find a cheaper borrowing source (such as 1.9%), I'd use that. (Of course, the best financing deals are on NEW cars... so you're paying a lot more for the car than if you bought a quality used car.)
Just make sure you have enough in your life insurance so you can take out a loan to pay off that loan (or make some payments) if and when you need to. This helps preserve credit scores and standing, which will make it easier to find new employment.
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BTW, you'll notice that I completely avoid the idea of "overpaying yourself interest". It over-complicates the concept.
That idea is the idea that if "market borrowing rates" are around 12%, and you can borrow at 5%, then you should pay yourself the 12% that you would've paid to another lender.
Well, a smart credit shopper (like yourself) is going to look for the best rates & terms they qualify for.
Why would I "pay myself" higher interest? The only reason is to accelerate the loan payoff. That's it.
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Bank on Yourself®, Infinite Banking, et. al. Unraveled
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Oh... one more "negative" - depending on how you look at it.
Outstanding loans decrease your NET death benefit.
But is that really an issue? I don't think so. The reason is because life insurance proceeds should be used to repay all outstanding debts. The life insurance loan just gets repaid first, that's all.
Remember: Cash is KING! If you had cash, would you still buy a NEW car? Or a used car that's 2-3 years old?
Here's another positive to using life insurance: Should something happen to your employment (cash flow), your car loan still requires payment every month. Skip 2 months, and your car is repossessed.
Not so with Life insurance. Not only do you need to pay ONLY the annual interest due... but you can even skip that too! Plus - the loan from life insurance does NOT show up on your credit reports!
However, your point is good that if you can find a cheaper borrowing source (such as 1.9%), I'd use that. (Of course, the best financing deals are on NEW cars... so you're paying a lot more for the car than if you bought a quality used car.)
Just make sure you have enough in your life insurance so you can take out a loan to pay off that loan (or make some payments) if and when you need to. This helps preserve credit scores and standing, which will make it easier to find new employment.
----------
BTW, you'll notice that I completely avoid the idea of "overpaying yourself interest". It over-complicates the concept.
That idea is the idea that if "market borrowing rates" are around 12%, and you can borrow at 5%, then you should pay yourself the 12% that you would've paid to another lender.
Well, a smart credit shopper (like yourself) is going to look for the best rates & terms they qualify for.
Why would I "pay myself" higher interest? The only reason is to accelerate the loan payoff. That's it.
----------
Bank on Yourself®, Infinite Banking, et. al. Unraveled
----------
Oh... one more "negative" - depending on how you look at it.
Outstanding loans decrease your NET death benefit.
But is that really an issue? I don't think so. The reason is because life insurance proceeds should be used to repay all outstanding debts. The life insurance loan just gets repaid first, that's all.
- 10,329
Can the concept work? Sure. Will it work for the majority of people? Probably not.
I had the "pleasure" of being part of a Nelson Nash seminar at an old agency I was with. It was a very small setting and we got to ask lots of questions. For those of you who dont know, Nelson Nash is the originator of the concept with his Infinite Banking book called "Becoming your Own Banker" which was originally published back in the 90s.
All of the other versions are just a copy of his original version.
The biggest downfall is that it takes a significant amount of either money or time to implement the program effectively. Especially if you use a WL policy.
Assuming a $10k/y contribution:
To "finance" a $50k car, it would take around 9 years for the policy to be at that point. And that would max out the Loans on that policy most likely... or at least be close.
Now after you could do small stuff such as a $20k used car or a $20k home remodel after about 5 years.
But my point is that most people do not want to wait that long. Delayed gratification is not a popular concept in today's society.
The other issue is that one of the core concepts is using a non-direct recognition policy. Not all policies are NDR. With IUL many have that option, but many also come with a higher loan rate with that option.
I had the "pleasure" of being part of a Nelson Nash seminar at an old agency I was with. It was a very small setting and we got to ask lots of questions. For those of you who dont know, Nelson Nash is the originator of the concept with his Infinite Banking book called "Becoming your Own Banker" which was originally published back in the 90s.
All of the other versions are just a copy of his original version.
The biggest downfall is that it takes a significant amount of either money or time to implement the program effectively. Especially if you use a WL policy.
Assuming a $10k/y contribution:
To "finance" a $50k car, it would take around 9 years for the policy to be at that point. And that would max out the Loans on that policy most likely... or at least be close.
Now after you could do small stuff such as a $20k used car or a $20k home remodel after about 5 years.
But my point is that most people do not want to wait that long. Delayed gratification is not a popular concept in today's society.
The other issue is that one of the core concepts is using a non-direct recognition policy. Not all policies are NDR. With IUL many have that option, but many also come with a higher loan rate with that option.
- 11,277
Click the link at the bottom for the video. It's all there.
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