Here’s What Michael Kitces Missed in His Bank On Yourself Review, Part 2

In part 1 of this article, I explained that financial planner and investment advisor Michael Kitces wrote a review of the Bank On Yourself concept that redefined my trademarked phrase, “Bank On Yourself” to fit his interpretation of how the concept works.

Now I’ll show you how Kitces missed five critical key requirements of the Bank On Yourself concept—and why it’s so important that you don’t make the same mistake.

To review, to truly be banking on yourself

  1. You must use a dividend-paying whole life insurance policy
  2. The policy must have a “non-direct recognition” policy loan feature
  3. The policy must incorporate a flexible policy design
  4. You, as the policy owner, must be an “honest banker”
  5. You must work with a knowledgeable advisor

Let’s See How Michael Kitces Misunderstood—or Simply Missed—Each of These Five Requirements of Bank On Yourself:

1. You must use a dividend-paying whole life insurance policy

In Kitces’ review of Bank On Yourself, he focused on using something other than dividend-paying whole life insurance as collateral for your life insurance policy loans.

Michael Kitces thinks you can do “banking on yourself” with some form of universal life insurance.

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Most of the references and examples in Kitces’ review of Bank On Yourself assume you’re using indexed universal life (IUL)—also called equity-indexed universal life (EIUL)—for Bank On Yourself. But now you’ve got a Cobb salad made with eggplant, not eggs! It just ain’t the same!

Indexed universal life and equity-indexed universal life policies are absolutely not appropriate for the Bank On Yourself concept—especially if you plan to take policy loans. And I never, ever recommend using any form of insurance other than whole life insurance for Bank On Yourself policies. Without whole life as the basis for your strategy, you aren’t really following the Bank On Yourself concept!

Kitces mentions whole life insurance exactly twice in his article, but one of those times, he talks about the “crediting rate” of a “whole life” policy. He should know that “crediting rates” are features of indexed universal life policies—not whole life policies. So even when Kitces thinks he’s talking about whole life insurance, he’s really talking about indexed universal life policies.

I’ve spent hundreds of hours researching IUL and I summarized my findings in an exposé titled 7 Reasons to Be Wary of Indexed Universal Life Insurance.

Whole life insurance has more guarantees than any other type of life insurance policy—and more guarantees than any other financial vehicle. Whole life is the only form of life insurance recommended for the Bank On Yourself concept. No exceptions!

2. A Bank On Yourself policy must have a “non-direct recognition” policy loan feature

This, too, is an essential requirement, but Kitces only mentions non-direct recognition in passing, as if it weren’t important. This tells you he is not talking about the Bank On Yourself concept, even though he claims to be.

I want you to understand why this odd term, non-direct recognition policy loan, is so important. I’m going to make several references to my most recent best-selling book, The Bank On Yourself Revolution.

With a non-direct recognition policy loan, “the insurance company doesn’t recognize that you took a policy loan when they dole out the dividends. If you don’t have a non-direct recognition loan, they’ll pay you a different dividend on that portion of your cash value that you borrowed against.” (The Bank On Yourself Revolution, page 160)

With a non-direct recognition loan, the insurance company will “credit you the exact same dividend even when you’ve taken a loan on your policy. That lets you use your money and still have it growing for you as though you never touched it.” (The Bank On Yourself Revolution, page 256)

Note: 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.

Kitces also shows his lack of understanding when he says, “Trying to Bank On Yourself doesn’t work very well when ultimately the loan interest isn’t actually something you pay back to yourself; it simply repays the life insurance company.”

Here’s how I explain this in The Bank On Yourself Revolution, on pages 158 and 159:

When you take a policy loan, the money doesn’t actually come from your policy. It comes out of the company’s general fund because all the cash value of all the policies is pooled together. Your policy’s cash value and death benefit are used as collateral for the loan.

As you pay back a loan, it works the same way in the opposite direction. The payments you make don’t go back into your policy. They go back into the company’s general fund.

The company applies your payments of principal to reduce your loan balance. Then at the end of each year, the company calculates their income from all sources, including the loan interest you and others paid, and they calculate the company’s expenses and the death claims they paid out.

If that yields better results than the worst-case scenario they projected, they pay a dividend to all the policy owners. So you end up getting the benefit of the interest you pay through a combination of guaranteed annual increases plus any dividends the company pays.

That means both the principal and interest you pay can ultimately end up in your Bank On Yourself policy for you to use again—for a car, vacation, business equipment, a college education, retirement, or whatever you want.

And here’s a typical example that demonstrates how the interest you pay when you take a policy loan from a Bank On Yourself-type policy benefits you, as policy owner. This is from page 159 of my book:

If your policy is from one of the companies that offer this [non-direct recognition policy loan] feature, when you pay your loans back at the exact same interest rate the company charges, you’ll end up with exactly the same cash value as you would have if you didn’t use your plan to finance purchases.

For example, suppose your policy is projected to have $400,000 of cash value in Year 25. And let’s say you decided to borrow $30,000 in the fifth year to buy a car, then you pay it back at the interest rate the company charges over the next five years.

Then you repeat that cycle three more times. At the end of twenty-five years, your cash value would still be $400,000—the same as if you hadn’t used it to finance anything.

See for yourself how Michael Kitces missed the boat about Bank On Yourself-style policy loans, by looking at the above example of using the right kind of life insurance policy loans to purchase a series of automobiles: You end up with the same cash value after paying interest on your policy loans as if you had never borrowed a dime.

So who benefited from the interest you paid to the life insurance company, if not you?

A life insurance loan is the only financial strategy vehicle I know of that provides uninterrupted growth of your money while you use it—if you’re using as collateral a life insurance policy with a non-direct recognition policy loan feature!

3. The policy must incorporate a flexible policy design, to help keep up with your potentially changing financial situation

Michael Kitces talks again and again about how policies lapse and incur huge tax obligations.

Well, that might happen—but it’s much less likely to happen if you don’t ignore the last three requirements of Bank On Yourself life insurance, beginning with flexible policy design.

Life insurance policies recommended by the Bank On Yourself Authorized Advisors include a flexible Paid-Up Additions Rider (PUAR). Premium dollars used to purchase paid-up additions make your cash value grow much faster than a policy that doesn’t include this rider, especially in the early years of the policy.

And at least 50 percent of your premium in a Bank On Yourself-type policy will typically be directed into this rider.

Some companies that offer a paid-up additions rider don’t give you much flexibility in paying for it. Bank On Yourself Advisors prefer companies that allow you to pay a portion of your PUAR premium when and how you want, and allow you to make partial payments or skip payments and make up for them in the future!

Some companies allow you to even withdraw some or all of your paid-up additions and put them back in later.

And with the life insurance companies recommended by Bank On Yourself Authorized Advisors, PUAR premiums are optional! If you can’t pay your PUAR premium, you don’t have to. Your life insurance policy remains in force, and if you wish to catch up later and purchase some of the paid-up additions you didn’t buy when things were tight, you can do that.

Policy owners who have loans against their Bank On Yourself-type policies can use this flexibility to help keep their policies from lapsing.

And it’s important to realize that simply paying the interest due on your loan each year will help prevent your policy from lapsing.

4. To truly be banking on yourself, you, the policy owner, must be an “honest banker”

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In his review of Bank On Yourself, Michael Kitces doesn’t seem to get that.

Again and again he implies you will not repay your loan, which means, of course, that tax consequences are inevitable.

Kitces uses examples of policy owners taking loans and never paying them back, apparently to scare you into never making the “mistake” of taking a life insurance policy loan.

That’s the kind of logic that says, “Never borrow money to buy a home for your family, because you’ll lose your home when you don’t pay back your loan.”

As I explain on the Bank On Yourself website, if you borrow money from a bank and don’t pay it back, you’re a thief. You’re stealing from the bank.

If you have a life insurance policy loan—which is ultimately like a loan from yourself—and you don’t pay it back, you’re still a thief. Only this time, you’re stealing from yourself, which is even dumber.

If you’re not an honest banker—if you ignore the importance of paying off your life insurance loan—you’re shooting yourself in the foot.

If you’re taking loans to fund your retirement, you do not generally expect to pay them back. However, you will see in the next section how you can avoid having your policy lapse at that point.

5. You must work with an advisor who truly understands the Bank On Yourself concept and 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

A Bank On Yourself Authorized Advisor will offer you ongoing coaching and support and show you the most effective ways to use your policy. He or she will monitor your policy loans with you and offer suggestions on modifying your policy, if necessary, to be sure it does not lapse.

In case of prolonged financial hardship, for example, your advisor may suggest making your policy a “reduced paid up” policy. This means no more premiums will ever be due and the death benefit will be reduced. This can be done at any time after the seventh year of a policy.

Kitces doesn’t talk about this—even in an article he wrote about life insurance loan rescue strategies—so it’s possible he is unaware of this helpful feature, which can be a lifesaver.

If unpaid policy loan interest is increasing your loan balance to the point where the policy could lapse, you will also have at least two other very helpful options Michael Kitces failed to mention in his review of Bank On Yourself:

  1. If you convert your policy to a reduced paid up policy, the amount of money you had been sending to the insurance company each month to pay your premium can now be used to repay the loan. This can be extremely effective in taming a life insurance policy loan that’s gotten out of hand.
  2. You can withdraw dividends from your policy—tax free—an amount up to your cost basis (generally defined as the total premiums you’ve paid in, minus any money you’ve already withdrawn—not borrowed) from your policy, and use that to pay down the loan. This will help lower the interest costs and make the loan payments more manageable.

These are some of the many options that your Bank On Yourself Authorized Advisor can discuss with you, should the need arise. As you can see, there is a lot of flexibility in avoiding tax consequences due to a lapsed policy when banking on yourself that Michael Kitces seems unaware of.

If you’d like to find out what your guaranteed, bottom-line numbers and results could be if you added the Bank On Yourself concept to your plan, request a free, no-obligation Analysis here.

You’ll also see how much your lifetime wealth could increase, simply by using a Bank On Yourself policy to pay for major purchases, rather than by financing, leasing, or even directly paying cash for them. And you’ll get a referral to one of the Authorized Advisors. So request your free Analysis now.

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You Can Take This to the Bank!

Life insurance policy loans—if they’re done the Bank On Yourself way—are the eighth wonder of the world. But it’s important to keep in mind the five key requirements I explained above.

In the next article in this series, “What Kitces Missed About Life Insurance Loans,” I’ll show you why you actually finance everything you buy, and why accessing capital for major purchases or emergencies through Bank On Yourself-type policy loans beats any other type of financing you can think of—something Michael Kitces missed entirely!

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”

[Read more…]

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…]

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…]

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…]

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…]

Do You Have As Much Saved for Retirement As the Average Person?

How do you think you compare to other people when it comes to how much you’ve saved for retirement?

The results of a new survey from the Employee Benefit Research Institute (EBRI) reveal some surprising insights into America’s preparedness for retirement.

Read on for the highlights of the 2016 Retirement Confidence Survey and a 6-Step Action Blueprint to make sure your money lasts as long as you do…

The survey revealed that 54% of all workers report less than $25,000 in household savings and investments, excluding the value of their primary home.

That includes 26% who say they have less than $1,000 in savings.

10% have between $25,000-$49,999 saved, 10% have between $50,000 and $99,999 saved, and 12% have between $100,000-$249,999.

And how many have saved $250,000 or more? Just 14%.

Are people close to retirement any better prepared?

[Read more…]

The Ticking Tax Time-Bomb of Conventional Retirement Plans

One of the biggest selling points of 401(k) and IRA retirement plans is that the money you put into them isn’t taxed right away. Bring out the bubbly to celebrate, right?!

Not so fast.

First of all, some people – hopefully not you! – mistakenly believe money placed into these retirement plans is “tax free.” It isn’t. It is “tax deferred,” meaning that you will pay tax on that money when you withdraw from your retirement plan down the line.

Deferred taxes might sound good, but deferring your taxes is like putting off a visit to the dentist. The problem compounds and will only get worse.

Deferring taxes creates a dangerous potential tax time bomb because you don’t have the answers to two critical questions…

First, what will the tax rates be when you retire? And what will they be 20 or 30 years later?

[Read more…]

Is Your Money Frozen in Your Retirement Plan?

One of my biggest beefs with government-controlled retirement plans, such as 401(k)s, IRAs, 403(b)s and Roth Plans, is the total lack of liquidity. The money you’ve socked away in your conventional retirement plan is about as solidly frozen as the iceberg that sank the Titanic! And because of this, if your financial ship hits rough waters, you might end up sinking as well.

Here’s the critical question: How quickly and easily can you get your hands on all the money in your retirement account if you need it before age 59½?

We all know life happens. Cars break down. Roofs need replacing. A tough medical diagnosis can create mountains of unexpected bills to pay.

Every year many participants in employer-sponsored government-controlled retirement plans make early withdrawals for a number of reasons. And every year, the IRS collects penalties related to those early withdrawals.

In fact, in the last year for which statistics are available, the Internal Revenue Service collected $5.7 billion dollars in penalties from Americans who took out $57 billion from their retirement funds before they were supposed to. [Read more…]

Who’s Got Control of Your Retirement Plan?

Do you remember playing with that kid in the neighborhood who set up a game, and then changed the rules as the game went on to suit himself? Just like those games, you’ll never come out winning with your retirement plan if someone else sets – and constantly changes – the rules!

Here’s one of those inconvenient truths: When your retirement savings are in a government-controlled plan sponsored by your employer, your employer can change the rules at any time. And so can the government.

Despite the mass of paperwork your employer handed you when you first began your retirement plan, your employer’s retirement plan rules are not set in concrete. Employers can change their rules, even in midstream.

For example, not too long ago, IBM decided to change its retirement plan rules. Up until that time, IBM gave employees their 401(k) match with each pay check. But some smart bean counter pointed out that Big Blue could save a bundle if they waited to give the match until the very last day of the year instead of throughout the year.

So what’s the big deal?

[Read more…]