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.
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
- 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.
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:
- 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?
- 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
- 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?
- 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
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:
- You must use a dividend-paying whole life insurance policy
- 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)
- The policy must incorporate a flexible policy design, to help keep up with your potentially changing financial situation
- You, as the policy owner, must be an “honest banker”
- 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.