Bill Williams is an enthusiastic believer in the Bank On Yourself concept because of how it has helped his family financially. He wrote to me several years ago, and I included his letter on page 228 of my 2014 New York Times best-selling book, The Bank On Yourself Revolution:
Thanks for all the good things you are doing, Pamela. I am working with my Bank On Yourself Advisor to set up my third policy, and I am so appreciative of her guidance and expertise. She has been tremendously supportive.
The real “snake oil” is all of the purported advice about savings and investing we have been fed by the “experts” in the past. I get so upset by the advice to invest with before-tax dollars into 401(k)s or 403(b)s.
I’m over sixty years old and know when I turn 70½, I’m going to have to take required withdrawals from my plans and have the added burden of paying taxes on them. After all, the IRS wants to get its hands on the taxes they let me avoid paying all those years.
I wish not only that I had learned about Bank On Yourself earlier, but that the concept could be taught to the masses when they are young enough to get the maximum benefit from it.
Here’s why I say that: I think of all of the purchases I’ve made through the years where Bank On Yourself would have been a much better means to fund them. As an example, my son’s college expenses, which I paid every cent by selling stock and mutual funds and taking a loan from a 401(k).
Needless to say, my son received a great education (to his credit), but dear old dad has nothing to show for it. I had to put money into the stocks, 401(k), and mutual fund, so I had the resources—which could have been so much more powerful in a Bank On Yourself policy! It’s as simple as that. If I had done that, I would now still have the policies, which would have even more value.
I am depleting an IRA to fund my third policy and to help fund my first two Bank On Yourself-type policies. I just hope I live long enough to enjoy all the benefits.
Bill Williams writes again, about Bank On Yourself, tax-free retirement, and dividend-paying whole life insurance
In February 2017 Bill contacted me again, bringing me up to date on what’s happening as he approaches age 70½, when he’ll need to begin taking required minimum distributions (RMDs) from his tax-deferred retirement savings.
Bill had only two Bank On Yourself-type dividend-paying whole life insurance policies when he wrote to me the first time. Now he has three!
Hi, Pamela. You quoted me in your book.
I funded my son’s college education by depleting a mutual fund first and then borrowing from a 401(k) at work. Well, the mutual funds are now all dried up and the 401(k) did not earn as much as it would have if the funds were still in it. I did pay back the 401(k).
If I’d had a Bank On Yourself-type policy, I could have borrowed from it—I now have three policies—and they would have continued to grow. I would now have more cash value and death benefit.
Finding this out was the first time I said (out loud), I wish I had learned about Bank On Yourself sooner.
The second experience is one that probably more people can relate to. I bought a car in 2011 and took out a conventional loan to pay for it. After paying the loan premiums for several months, I had a real aha! moment.
I looked at the loan value in my policies and determined I had sufficient value to borrow against one of them to the tune of about $30,000. So I did. I paid off the car loan and then paid off the Bank On Yourself life insurance policy loan as well.
But here’s the good part. When you’ve paid off a car loan to a bank, all you have is the car. But when you’ve paid off a Bank On Yourself policy loan, not only do you have the car, but you also have the loan value back in your own policy to use again.
It’s actually higher because the policy dividend and the annual policy premiums increase the policy values—the death benefit, the cash value, and the amount available to borrow. It truly is a win-win-win situation.
Why didn’t I learn about Bank On Yourself earlier? I am so glad I eventually did.
“Oh, by the way, with the help of my advisor, we are plotting future benefits, since I turn 70½ this year. Can you say “tax free retirement”?
How Life Insurance Policy Loans Work with Bank On Yourself-Style Dividend-Paying Whole Life Insurance
Bill knows that life insurance policy loans are one of the living benefits of dividend-paying whole life insurance policies.
If you would like to learn more about these living benefits, the first thing you need to do is get with a Bank On Yourself Authorized Advisor to see if such a policy makes sense for you.
Your advisor will show you how your policy can build a sizeable cash value over a relatively short period of time. This is good because the maximum size of a policy loan is based on the amount of cash value in your policy. You can borrow between 85% and 90% of your cash value. And there are no questions asked.
I suggest you let your advisor assist you with your loan request the first time, so you get the details you need about how life insurance policy loans work. Then send the insurance company an email and tell them your policy number and the amount of money you want to borrow. Also, tell them where to deposit the funds or mail the check.
That’s it! You should have your money inside of a week—funds typically arrive in three or four days.
What if you die while you still owe money on your life insurance policy loan?
All life insurance policy loans will be repaid, either by you, the policy owner (while the insured individual is still living), or by the life insurance company on your behalf (after the insured passes away). If you have a policy loan balance (including any unpaid interest) when the insured dies, the company simply uses a portion of the death benefit to pay off the loan, then sends the life insurance policy beneficiaries the balance. (There are no processing fees, service fees, loan closure fees, or any other such nonsense.)
For example, let’s say you have a dividend-paying whole life insurance policy with a death benefit of $530,000 and a cash value of $200,000.
And then you borrow $30,000 to purchase a new car, planning to pay back your loan over six years. You get the money in three days, buy the car, and then what?
The worst-case scenario would be if you were to pass away that very afternoon. That would be tragic. But things like that do happen.
What would happen to your life insurance policy loan? Your beneficiary would receive a death benefit check of approximately $500,000, rather than $530,000, and the $30,000 loan would be completely paid off.
Plus, your beneficiary would also have that brand new car.
What if you can’t make the policy loan payments you’d planned to make?
With a Bank On Yourself policy loan, you pay off your loan on your schedule. Now, you do pay interest—simple interest—on your loan. At the end of each policy year, any unpaid interest is simply added to your loan balance. So you do want to pay down your loan responsibly.
But if you miss a payment or two, nothing much happens. You’ll owe some interest, but, unlike with traditional financing, there are no late fees, no delinquency fees, no black marks on your credit, nor any other bad consequences.
And the interest on life insurance policy loans is typically at a below-market, competitive rate.
Your Cash Value Does Double Duty When You Have a Bank On Yourself-Type Life Insurance Policy Loan
One of the most fascinating aspects of life insurance policy loans from a Bank On Yourself-type dividend-paying whole life insurance policy is that even though you’re putting your cash value up as collateral, your cash value grows just the same as if you hadn’t touched it.
Space doesn’t allow me to go into that amazing bit of financial wizardry here. But FAQ #5 in this article explains how your cash value can grow just as if you hadn’t touched a dime of it.
Why Life Insurance Policy Loans Beat 401(k) Loans
Bill Williams borrowed against his 401(k) plan to help put his son through college. But there are many problems with 401(k) loans. In fact, we did a full exposé on the dangers of 401(k) plan loans compared to life insurance policy loans. There are many issues. Here are two of the biggest:
- The IRS has strict regulations regarding loan repayments. If you violate the rules, you will pay taxes and penalties
- If you lose or change your job and have an outstanding 401(k) loan, your loan must generally be fully repaid in 60 days or less, or you will pay taxes and penalties
Just think about that. Suppose you get a letter from the IRS saying you owe an additional $25,000 in taxes. You weren’t expecting that! But no problem, right? You just take a $25,000 401(k) policy loan to pay the IRS what you owe. But then, your employer has a slump in sales and revenue, and you get laid off. Now you’re unemployed. No income. And perhaps no prospects for a decent job in the foreseeable future.
Maybe you could live with that. But now you have this $25,000 loan that must be repaid in two months. If you don’t pay it, the $25,000 will be treated as income to you, thus boosting your income for the year by $25,000. Will that bump you to the next higher tax bracket, so you end up paying more taxes on all your income?
That’s entirely possible!
So maybe now, in addition to your “regular” income tax, you’ll owe $7,500 in taxes on your 401(k) loan. Plus, you’ll owe 10%—$2,500 dollars—in penalties, unless you’re more than 59½ years old. So the $25,000 has been paid to the IRS, you have no income, and you owe Uncle Sam $10,000 in taxes and penalties just on that one loan.
Why take that risk?
Why Insurance Policy Loans Beat Drawing Down Mutual Funds
Before borrowing from his 401(k) plan to help his son through college, Bill took money out of his mutual fund. The result? In Bill’s words, “Well, the mutual funds are now all dried up.”
It’s usually not a good idea to raid your mutual funds or other stock market accounts whenever you need money. Here’s why:
- You have to sell shares to get money out of a mutual fund. If the market is down when you sell, you lose
- Then, if the market recovers, you lose again because you’re not in it!
- You may incur a sales charge or fees when you sell shares or re-buy them later
Bill’s Upcoming Tax-Free Retirement, Thanks to Bank On Yourself
Bill closed his most recent message to me by saying, “Oh, by the way, with the help of my advisor, we are plotting future benefits, since I turn 70½ this year. Can you say ‘tax free retirement’?”
How is that possible? Bill’s Bank On Yourself Authorized Advisor, Aurael Christall, explains:
Bill has been moving his savings out of his tax deferred IRAs and into three Bank On Yourself-type whole life policies incrementally for almost seven years now.
Of course, he has to pay the tax when he takes a withdrawal from his IRAs, but after moving the money to his Bank On Yourself plan, he will be able to continue to grow his money and take income in retirement—all without creating a taxable event.”
Twice in his most recent letter to me, Bill said he wished he had learned about Bank On Yourself sooner. I’m sure he would tell you, “The best time to discover the advantages of Bank On Yourself is right now!” That’s why I want you to have my free Safe Wealth-Building Report, “5 Simple Steps to Bypass Wall Street, Beat the Banks at Their Own Game and Take Control of Your Financial Future!”
Bill also met with a Bank On Yourself Authorized Advisor for a free, no-obligation analysis of his situation. You, too, can meet with a Bank On Yourself Authorized Advisor. There’s no cost, no obligation, and no pressure. Begin by requesting a free analysis, to discover what a Bank On Yourself plan can do for you. I’ll also see that you get connected with a qualified, specially-trained Advisor who will answer all your questions.