Personal Finance Blog for Retirement and Investment Advice

Here’s What Michael Kitces Missed in His Bank On Yourself Review, Part 1

Financial planner and investment advisor Michael Kitces understands a lot about many areas of money and finance. He has been to school. He has twice as many letters after his name as he has in his name. Literally.

Surprisingly, Kitces does not understand some basic fundamentals of the Bank On Yourself strategy for personal finance.

Kitces wrote a review of the Bank On Yourself concept. And while he got some of the fundamentals right, he missed some very important points.

From time to time, readers ask us about Kitces’ article, so I want to clear up the misconceptions in it. I’ll cover four things he got right about the Bank On Yourself strategy, then I’ll reveal the things Kitces got wrong—including five fundamental concepts.

Here’s What Michael Kitces Got Right in His Bank On Yourself Review …

In his Bank On Yourself review, Michael Kitces correctly stated four things:

1. Kitces: Permanent life insurance “gives an insurance company the means to provide policy owners a personal loan at favorable interest rates, because the cash value provides collateral for the loan”

Well stated! You can’t take out a life insurance policy loan unless you have a life insurance policy with enough cash value to serve as collateral for the loan. And the interest charged for policy loans is generally at competitive, below-market rates.

2. Kitces: “Even as cash value life insurance operates as collateral for a life insurance policy loan, it also remains invested, earning a rate of return that slows the erosion of the net equity in the policy”

Here, Kitces is saying the way life insurance policy loans work allows your cash value to keep growing when you take a loan, so that total growth doesn’t lose as much as it otherwise would. He’s partially correct. However, we’ll show you (and Mr. Kitces) why, with a true Bank On Yourself-type policy loan, growth of your cash value does not slow at all!

Michael Kitces grasps that you can borrow against your cash value and your policy continues growing. But he missed the feature with a really weird name that keeps the growth of your cash from slowing down at all when you take out a life insurance policy loan! More on that coming up.

3. Kitces: “Bank On Yourself is ‘legit,’ in that borrowing and repaying life insurance loans is a way to tap the cash value of a life insurance policy without surrendering it”

Thank you, Michael Kitces! We do appreciate your acknowledgement that Bank On Yourself is, indeed, a legitimate financial strategy.

4. Kitces: If a policy owner takes a loan and never repays it, eventually the policy could lapse and result in a potentially significant taxable gain

While that is true, by his line of reasoning, you shouldn’t take out a home mortgage because if you never repay it, eventually the loan could be called and you could lose your home. “Logic” like that isn’t particularly helpful, is it? I believe it should be no surprise that there are almost always bad consequences when you don’t repay a debt you legally owe.

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And while Mr. Kitces continually harps on the potential drawbacks of unpaid policy loans, he makes no mention of the consequences of not paying back loans from other sources:

  • Late fees
  • Black marks on your credit report—which can affect everything from your ability to get a job to how much you pay for auto insurance
  • Collection calls
  • Repossession
  • Foreclosure
  • Loss of all your equity
  • In the case of cancelled or forgiven debt, significant tax consequences

For example, did you know that if you negotiate forgiveness of all or even part of your credit card balance, you will owe income tax on the portion of your debt that’s forgiven? The IRS considers it income to you!

I commend Kitces for what he got right. He clearly understands that being able to borrow against your life insurance policy “at favorable interest rates” is one of the living benefits of permanent life insurance policies.

But while he understands this, he doesn’t seem to appreciate it.

He’s like the farmer who is told, “Hey, that rock you found on your land is a diamond.” And the farmer replies, “Okay. So what’s a diamond?”

Understanding and appreciating are two different things, and that’s where Kitces’ critique comes up short.

Perhaps he doesn’t appreciate the powerful advantages of a life insurance policy loan because Michael Kitces got five key fundamentals wrong in his Bank On Yourself review. I’ll reveal exactly what they are, shortly.

That’s enough to make me wonder if he ever read my New York Times best-selling book, The Bank On Yourself Revolution or reviewed the Bank On Yourself website.

You don’t even need to buy my book to understand how the Bank On Yourself concept works. You can download my FREE Report, 5 Simple Steps to Bypass Wall Street, Fire Your Banker, and Take Control of Your Financial Future, right here.

“Bank On Yourself” is a phrase I coined and trademarked to describe a very specific concept

Michael Kitces doesn’t get to write a review of the Bank On Yourself concept and redefine my phrase, “Bank On Yourself,” however he chooses, just to fit his interpretation of how the concept works.

That’s like making a Cobb salad (named after Robert Cobb, the restaurant owner who created it in the 1930s) with eggplant instead of eggs and claiming it’s still a Cobb salad.

Michael Kitces’ Review of Bank On Yourself Has Some Very Basic Flaws

Ten times Kitces said a life insurance loan is nothing more than a personal loan using cash value as collateral.

He repeats this over and over again like a chant, as though if he says it enough times, you’ll believe it to be the gospel truth.

By repeating this chant, Kitces diminishes the value of policy loans, apparently hoping you’ll conclude, “Oh, so the Bank On Yourself strategy is no big deal.”

Kitces is correct that a life insurance loan is essentially a personal loan, using your cash value as collateral. But that’s like saying the Mona Lisa is really nothing more than paint on a piece of stretched canvas.

I question Kitces’ repeated characterization that “a life insurance loan is nothing more than a personal loan using cash value as collateral.”

It is precisely because your cash value is being used as collateral that a life insurance policy loan using the right kind of policy as collateral is the best way to finance a major purchase.

Kitces says that banking on yourself is “simply taking out a personal loan, not unlike a credit card loan, a mortgage, or a P2P [peer-to-peer] loan, for which loan interest will be paid. The difference is simply that the loan happens to come from a life insurance company.”

That is a monumental oversimplification!

The reality is, we should be very glad a life insurance company is providing the loan, for these reasons:

    1. On your own, would you know how to make your money grow every year by a larger dollar amount—guaranteed—regardless of what’s happening in the market or the economy?
    2. Do you have a 160-year-plus track record of doing that? Whole life insurance is an asset that has grown in value every year for more than 160 years
    3. Would you know how to make your money continue growing even when you’re using it?

For example, if you have $100,000 of cash value and take a $50,000 loan against your cash value, you will receive the $50,000 loan and still have the $100,000 cash value earning the same growth as if you hadn’t borrowed a penny—if your policy is designed in the true Bank On Yourself way. What financial vehicle gives you that advantage, other than life insurance policy loans?

  1. Could you do any of this without automatically incurring an income tax liability? Here’s some straight talk about the tax advantages of life insurance

Kitces also wants you to think that when you own a whole life insurance policy, you have given up control of your cash value. He states that “the life insurance company controls the cash value.”

I’m not sure exactly what he’s trying to say, but as I explain on page 155 of The Bank On Yourself Revolution, “You are contractually guaranteed to be first in line to get access to your cash value, and you can’t be turned down for a loan. You don’t need to fill out any nosey credit applications or pledge your firstborn.”

Let me ask you this: If you, the policy owner, can access your cash value whenever and however you want to, how can Michael Kitces be correct when he says “the life insurance company controls the cash value? Aren’t you clearly in control of your cash value”?


The Five Fundamental Requirements of Banking On Yourself Michael Kitces Missed

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As I mentioned earlier, in Michael Kitces’ review of Bank On Yourself, he redefined my trademarked phrase, Bank On Yourself, to fit his interpretation of the concept. Kitces missed these five critical requirements, as explained in my book and on my website, which means he made his Cobb salad with eggplant instead of eggs:

  1. You must use a dividend-paying whole life insurance policy
  2. The policy must have a “non-direct recognition” policy loan feature (That’s the weird name I mentioned earlier. It allows you to use your money through a life insurance policy loan—and still have it growing for you as though you never touched it! I’ll explain in more detail in part 2 of this article)
  3. The policy must incorporate a flexible policy design, to help keep up with your potentially changing financial situation
  4. You, as the policy owner, must be an “honest banker”
  5. You must work with a knowledgeable advisor who will coach you on how to use your policy through the years, to maximize the growth, minimize the taxes you’ll pay, and help make sure your policy doesn’t lapse

In part 2 of this article, “Mr. Kitces – This Is How Life Insurance Policy Loans Work,” I’ll show you how Mr. Kitces misunderstood—or simply missed—each of these five requirements for banking on yourself, and why it’s so important that you understand them, in order to receive all the benefits available to you when you Bank On Yourself.

Why Most Early Proponents of the 401(k) Now Say It’s a Failure

Herbert Whitehouse was one of the first proponents of the 401(k) 35 years ago, when he was a human resources executive at Johnson & Johnson.

Today the 65-year-old Whitehouse says he will have to work into his mid-70s if he wants to maintain his standard of living, after his own 401(k) took a hit in 2008.

Whitehouse is one of a chorus of early 401(k) supporters who have changed their minds.

A recent article in the Wall Street Journal reveals how pre-retirees at all income levels are falling shortway short – of the amount of money they need to have to be able to retire.

Fully half of those between ages 50-64 have less than one year of their income saved.

The top 10% (those making $251,000 or more annually) have an average of only two years of their income saved.

The article mentions that “financial experts recommend that people amass at least eight times their annual salary to retire.”

Those “experts” ought to have their heads examined, because even a $1 million nest-egg would provide you only $28,000 a year at the current recommended withdrawal rate of 2.8% per year. [Read more…]

4 Mistakes to Avoid to Make This Your Best Year Yet

It’s a brand new year, and I’m very excited! Are you?

Are you reviewing last year’s goals and accomplishments? Taking note of who you’ve become in the process of pursuing your dreams? Setting your sights on even more growth and achievement in 2017?

When you look at the key areas of your life – your finances, relationships, health, career and personal/spiritual growth – can you see how far you’ve come in the past twelve months?

Or when you think back to January 2016, do you realize that you’re almost exactly where you were twelve months ago?

Bummer.

Or as Yogi Berra said,

It’s like déjà vu all over again.”

If your life is beginning to feel like the movie Groundhog Day, you might be shooting yourself in the foot with one of the following four missteps:

Mistake #1: Repeating What Didn’t Work Last Year

[Read more…]

Six Reasons Your 401(k) is a Scam

I’m going to make a very bold statement that’s sure to get me some nasty blowback. But as a financial investigator who’s exposed the truth about the conventional financial wisdom, I’m used to that, so here goes…

401(k)s are a scam. Want proof?

Here Are Six Reasons Why 401(k)s Are a Scam…

Reason #1: The Tax-Deferral Scam

In our immediate-gratification society, deferring your taxes by funding your 401(k) sounds so good.

But when the tax man eventually comes calling, he won’t ask you to pay what your tax liability would have been if you’d been paying taxes all along. He’ll tell you what your tax liability is at the time your taxes are due.

So let me ask you a question: Can you tell me what your tax rate will be 30 years from now? Didn’t think so.

And 89% of the people we’ve surveyed believe tax rates can only go up over the long term, due to our country’s unsustainable debt and aging demographics. Unfortunately, if tax rates do go up and you’re successful in growing your nest-egg, you’ll only be paying higher taxes on a bigger number.

Oops! That destroys the whole “tax-deferral” argument.

Reason #2: The “Free Money” Scam

[Read more…]

SuperMoney Interviews Personal Finance Expert Pamela Yellen on Savings and Investing Strategies

Pamela Yellen, Founder of Bank On Yourself

Pamela Yellen, Founder of Bank On Yourself

I was recently interviewed by SuperMoney, a website that rates various financial products and the companies that provide them.

In this wide-ranging interview, I answered questions like these:

Why did you decide to start Bank On Yourself?

I reveal the frustrations my husband and I experienced following the conventional wisdom about investing and retirement planning. Maybe you can relate…

If someone were to say to you, “I don’t have the expertise to handle my finances. I’ll just hire some investment firm to deal with them,” how would you respond?

Here I discuss how and why 80% of all mutual funds, financial advisors and investment advisory services underperform the overall market. If the experts can’t even do it well, how can we regular folks be expected to? [Read more…]

7 Reasons the Economy is Worse than it Seems

Do you believe the economy has improved significantly since the Great Recession?

Or do you feel like we’re staring down the barrel of a cannon whose fuse has already been lit?

The stock markets should be down considerably by plenty of measures, but many investors appear to have been hypnotized to believe that nothing can go wrong.

I believe things are worse than they may seem on the surface, and extreme caution is warranted, for the 7 reasons I spell out here.

I’ll also give you some tips on how to protect yourself and have a “Plan B” in place in case the you-know-what does hit the fan.

Here Are 7 Reasons the Economy is Worse than It Seems…

1. Addiction to Stimulus and Low or Negative Interest Rates

[Read more…]

The Bank On Yourself No-Nonsense Guide to Life Insurance

Life insurance is a subject we don’t like to think about. It’s right up there with going to the dentist and writing the annual Christmas letter. (Do people still even do that?)

Thinking about life insurance is one more reminder that we may not live forever. Ugh.

But not going to the dentist doesn’t make things better. And not thinking about life insurance won’t help you live longer.

On the other hand, going to the dentist and thinking about life insurance are two really positive things you can do that are almost guaranteed to make your life better.

If peace of mind, a sense of security, and the knowledge that you’re doing all you can for your family and yourself are important to you, then it’s wise to spend a little time thinking about life insurance.

But life insurance doesn’t have to be complicated or boring—which is why we created this Consumer-Friendly Guide to Life Insurance.

Here are some interesting facts about life insurance that we cover in our Guide. Did you know that …

[Read more…]

Could the Government Seize Your 401(k) and IRA Money?

Is it far-fetched to wonder if the government could take control of your retirement savings in 401(k)s and IRAs?

Or is that just a paranoid conspiracy theory?

The fact of the matter is that it’s not far-fetched, or a conspiracy theory. The groundwork has already been laid.

And the government already gave banks the green light to seize your bank accounts.

Read on for the facts – and I urge you NOT to discount the importance and urgency of this issue affecting your hard-earned savings…

The Government Has BIG Plans for Your Retirement Savings

An article in American Thinker titled “The Feds Want Your Retirement Accounts” revealed that, “Quietly, behind the scenes, the groundwork is being laid for federal government confiscation of tax-deferred retirement accounts. Slowly the cat is being let out of the bag.”

And Bloomberg reported that,

The U.S. Consumer Financial Protection Bureau is weighing whether it should take a role in helping Americans manage the $19.4 trillion they’ve put into retirement savings.”

For the last 18 months, the Treasury Department has been testing the “myRA” program – which Obama created through executive order – no Congressional approval needed.

The myRA, which stands for “My Retirement Account” supposedly “guarantees a decent return with no risk of loss.”

And the only investment allowed in this account is a low-yielding Treasury security.

Of course, the Treasury wants to get more people signed up for this program, because it means more funds flowing right back into the U.S. Treasury to help the government meet its voracious borrowing needs. How convenient… [Read more…]

Dalbar 2016 Report: Many Investors Haven’t Even Kept Up With Inflation

The latest report from DALBAR reveals the harsh reality about the actual returns stock market investors have been getting for the last 30 years.

Would it surprise you to know that many investors haven’t even been able to keep up with inflation for the last three decades?

Many investors haven’t, according to the 2016 Quantitative Analysis of Investor Behavior.

Here are the facts about actual long-term investor returns

The average investor in asset allocation mutual funds (which spread your money among a variety of classes) earned only 1.65% per year over the last three decades!

These investors didn’t even come close to beating inflation, which averaged 2.6% per year.

The average investor in equity mutual funds averaged only 3.66% per yearbeating inflation by only 1% per year. (Was that worth the roller-coaster ride and sleepless nights?) [Read more…]

What’s In “The Big Black Book of Income Secrets”?

If you receive emails from investment advisory services, you may have gotten a sales pitch for The Big Black Book of Income Secrets from the Palm Beach Research Group.

The promo promises you’ll discover “30 unique income tools” in The Big Black Book of Income Secrets.

The offer entices you with a “risk-free 60-day trial subscription to the Palm Beach Letter.” If you’re not satisfied before the two-month trial is up, you’re told you can get a refund and keep the book and some “bonus” reports that are included in the offer.

To find out if The Big Black Book of Income Secrets lived up to its promises, we signed up for the “Platinum Subscription” for $99 for the first year, which comes with additional “bonus” reports.

Three weeks later, the book arrived, containing 22 (not 30 as promised) strategies, with a cover letter from the Publisher, Tom Dyson, explaining that we could log into their website to access the reports we signed on for and back issues of the Palm Beach Letter. (I guess for $99, they can’t afford to mail you hard copies of the reports.)

The First Red Flag in The Big Black Book of Income Secrets is “Income For Life”

[Read more…]