Is Bank On Yourself too good to be true?

A review of my book, Bank On Yourself, in the December 2010 issue of the American Association of Individual Investors (AAII) Newsletter declared that the concept is “too good to be true.”

The reason given was, “A life insurance policy loan is not truly a loan.  Rather, it is an advance that the insurer must eventually pay out.  Worse yet… policy loans can erode a life insurance policy over time.”  It also pointed to “potential tax liabilities.”

This review brought to mind one of my favorite quotes…

If you’re looking for an excuse, any one will do.”

– Dan Kennedy

So I wrote the editor and explained there was some misinformation in the review, and that I would like an opportunity to correct the record, pointing out that their motto is “Unbiased Investment Education.”unbiased investment education

The editor told me to let him know what I think is incorrect, and he “will take a look at it.”  I suspected he was just “humoring me,” but gave him the benefit of the doubt.  However, when I submitted my rebuttal, he replied that they would not publish it because “there are no factual corrections to be made.”

I informed AAII I would be publishing my rebuttal on this website, and let YOU decide who is taking things out of context, committing sins of omission, and twisting the “facts”… and who is being fair and unbiased.  We’ll pick three of the most interesting, insightful and/or humorous comments made on this blog and award the posters their choice of a $25 gift certificate for a restaurant in your area or a personally autographed copy of my “too good to be true” book.

Besides that, there are several points made in my rebuttal that I have not made elsewhere, so you will find value in reading this (I made it a bit more colorful for your reading pleasure)…

When you take a policy loan, you’re actually taking a loan against your cash value and using your death benefit as collateral for the loan.  Should the policy owner die with a loan outstanding, it will be deducted from the death benefit, along with any interest that has accrued.

So, in essence, an unpaid policy loan would be an advance against your death benefit, which in most cases will be far greater than your cash value.  With any other financial product, you wouldn’t even have a death benefit larger than your equity to use as collateral.

And what most people (and even most financial advisors and experts) don’t know is that in a dividend-paying whole life policy, both your cash value AND your death benefit grow exponentially, and the growth is both predictable and guaranteed.

Here’s an eye-opening personal example of how this works:

I started a new policy designed to maximize the power of the Bank On Yourself concept a little over four years ago.  The death benefit (known as the “face amount”) at that time was $605,000.

Just four years later, the death benefit had grown to $1,104,332 – an increase of over 82%.

Eye-OpenerOne and a half years ago, with almost $125,000 of cash value in the policy, I took a $100,000 policy loan to expand my business.  At the time, all my business-owner colleagues were crying on my shoulder about how their bank wouldn’t give them a penny – even those who had perfect credit and long-time relationships with their bankers. They were astonished to discover how I got access to capital by answering just one question:  How much do you want?

I am in the process of paying back that $100,000 policy loan now.  I set my own payback schedule, and I can reduce or skip payments if and when I need to.  Try doing that when you borrow from a bank, finance or credit card company!

Suppose I passed away with part or all of that loan unpaid?Which would you rather have scales graphic

My husband would get nearly $1 million, income-tax free.  That’s almost $400,000 more than the original death benefit was four years ago!  And it’s ten times the current equity remaining in the policy beyond the outstanding loan balance!

Meanwhile, I used those funds to grow my business, and I’ve already gotten close to a 100% return on that investment in my business.

So do you think it bothers my husband that if I die before I finish repaying the loan, he’ll “only” get $400,000 more than the original death benefit, rather than $500,000 more?  Or that he’ll “only” get ten times the current cash value?

And can you tell me any other product or strategy that could accomplish anything even close to this result?

Note to Bank On Yourself Blog readers: AAII’s response to this part of my rebuttal was that my statements “point out that the policy can be adversely affected by outstanding loans.”  And, thus, “no factual corrections need to be made in our magazine.”

Okay, let’s assume AAII didn’t take this wildly out of context.  Their statement that a policy loan “is an advance that the insurer must eventually pay out” is an error of fact.  If they already advanced it to you, they don’t have to pay it out again! (Duh!)  One problem is that  four different people on my team read this statement and each interpreted it a different way.  So it wouldn’t surprise me if you do the same.

Additional benefits of the Bank On Yourself method include:

Bank On Yourself dividend paying whole life insurance method gets exact same cash value and dividend as if you had not borrowed As mentioned in the AAII review, you continue to receive the exact same annual guaranteed cash value increase PLUS the exact same dividend you would receive if you had never borrowed a penny.  This let’s you use your money and still have it working for you.  And you don’t have to sell your investments to take advantage of this feature.

Please tell me where else can you get this advantage?

This is true for “non-direct recognition” policies, which don’t “recognize” you have taken a loan when crediting dividends.  The policies recommended by the Bank On Yourself Authorized Advisors meet the requirements that maximize the power of the concept.  These advisors also have advanced training in how to structure policies to maximize the growth of your cash value and minimize the taxes.  To get a referral to an Authorized Advisor, simply request a free Analysis that will show you how much your financial picture could improve if you added Bank On Yourself to your financial plan.Interest paid on Bank On Yourself dividend paying whole life insurance loans is as if you didn’t use your policy’s equity at allYou do pay interest on policy loans, and the interest rate is typically below commercially available rates.  However, as I explain on pages 100-103 of my best-selling book, the interest paid ultimately benefits the policy owner.  You will end up with the exact same cash value in your policy if you borrow from your policy and pay it back at the interest rate the company charges as you would if you didn’t use your policy’s equity at all.

The AAII review of my book never even mentions a central part of this concept:  It is not about just taking policy loans!  It’s about becoming your own source of financing.

Key Point

KeyIf you borrow from a bank and you don’t pay it back, you’re stealing from the bank. If you borrow money from your life insurance policy and don’t pay it back, you’re stealing from yourself. Once people realize this they become very disciplined and even excited about paying their policy loans back.

As noted in the AAII review, there are potential tax consequences to policy loans that are not repaid.  A policy that lapses or is surrendered can result in taxes being owed on the gain.  As long as you pay the premium and the loan interest, the policy will not lapse.

However, it should be pointed out that defaulting on or renegotiating mortgages or credit card and other debt can result in tax consequences, too.  A friend of mine settled $50,000 of credit card debt for 50 cents on the dollar.  She got slapped with a tax bill for the $25,000 that was “forgiven.”

Note to Bank On Yourself Blog readers: AAII’s response to this was, “Again, you reiterated what we wrote (about potential tax liabilities).”

Bank On Yourself dividend paying whole life insurance policies can accrue hundreds of thousands of dollars in cash valueCritics of whole life insurance will be surprised to learn that I had $125,000 of cash value in that policy when the policy was only 2-1/2 years old.  They might be even more surprised to know that I had tens of thousands of dollars of cash value at the end of the first year.

That’s because policies designed to maximize the power of the Bank On Yourself concept have riders incorporated into them that significantly increase the growth of the cash value.  You could have up to 40 times more cash value in your policy in the early years than you would in a traditionally designed policy (the kind most experts and advisors talk about), as explained in Chapters 3-6 of my book.  This allows you to use your policy as a powerful financial management tool right from the start.

(Note: No two policies are alike – each is custom tailored to the client’s unique goals and situation.  To find out what your bottom-line numbers and results could be if you added Bank On Yourself to your financial plan, request a free Analysis here, if you haven’t already done so.)

The review ends by saying that “loans, when necessary, should be taken out separately from your portfolio.”

This ignores a basic, but often overlooked principle of economics:

You finance everything you buy! That’s because you either pay interest to use someone else’s money or you give up the interest or investment income you could have earned, had you kept your money invested instead.

The Bank On Yourself concept can beat financing, leasing and even paying cash for things, for the reasons described above.

One final comment on this review:  It refers to whole life insurance as a “portfolio,” which implies it’s an investment.  It is not and is not subject to the ups and downs of traditional investments.  Dividend-paying whole life insurance is an asset that has increased in value every single year for more than 150 years, including during the Great Depression.

The Bank On Yourself method gives you a financial foundation that can help you weather tough times, access to capital when you need it on your terms, it allows you use your money and still have it working for you, AND it lets you grow a nest-egg you can predict and count on.

Financial Foundation

The Bank On Yourself method gives you a financial foundation that can help you weather tough times

That is what most of my book is about.  I wonder why none of this was even mentioned in this review?

So, is Bank On Yourself “too good to be true”?  I hope you’ll decide for yourself with the facts at hand.

Note to Bank On Yourself Blog readers: The AAII says that it stresses “hands-on participation in your financial future through education and understanding,” and that, “our reporting is unbiased and we are not beholden to anyone.”

Coincidentally, an article appeared in the Wall Street Journal 1 this week that noted that AAII surveys its members each week and that “some investors have looked to the AAII survey as a compelling contrarian signal.  An ebullient reading often is a clue that the market is due for a fall.”  Translation:  AAII members tend to move with the herd and buy and sell at the wrong times.

Why am I not surprised?  And, given this revelation, I realize we should be concerned if and when AAII endorses Bank On Yourself.

We want to hear from you! And the best comments will win prizes…

Did the AAII review of my book twist things, commit sins of omission, and take facts out of context… or was it fair and unbiased?  Speak your mind in the comments box below.  We’ll pick three of the most interesting, insightful and/or humorous comments and award the posters their choice of a $25 dining gift certificate or a personally autographed copy of my “too good to be true” best-selling book. (To qualify, you must post your comment in the comment box below by Monday, January 24.)

Check out the most interesting, insightful and humorous responses we received.

1. “Dow’s Doubters Say Market Is on Borrowed Time,” by Jonathan Cheng, January 17, 2011, wsj.com

Comments

  1. I noticed all the hype over dividend. In Insurance, a dividend is an overpayment of premiums. Your post on January 31st, 2009, “What the experts don’t know about Bank on Yourself policies, part 2″ shows a dividend of $140,588 on a policy with a face amount of $250,000… meaning someone over paid their premiums by ~ $140k. Yet the Cash Value is ~$128k.
    So the person over pays, yet their CV is less than the overpayment.
    Calculate the actual cost of insurance and overall a terrible “investment”.
    Better off putting all that extra money in tax free U.S. Treasury notes.

    • There’s no comparison between treasury notes and Bank On Yourself. Bank On Yourself has at least a dozen advantages and guarantees that treasury notes do not.

      The thing that insurance companies do so well – that others should model – is that they consistently under-promise and over-deliver. For that reason, I have no problem with overpaying premiums. I also love the fact that the dividend grows exponentially meaning the growth curve steepens every year I hold the policy.

  2. kurt herman says:

    You never indicate that the insurance company is probably a mutual company and
    could convert to a stock company.IF THIS HAPPENS how is your policy affected?
    I have yet to see a hypothetical example showing numbers etc.why do you not
    show this anywhere.Thanks

    • Kurt, one of the first policies I bought was from a mutual insurance company that converted to a stock company in the 90’s. I STILL receive dividends in the policy (that’s typical), plus I received stock in the company now worth almost $50,000, and which ALSO pays dividends.

      So I’m not complaining!

      But the companies preferred by the Bank On Yourself Authorized Advisors have achieved much of their growth from folks using this concept. And being a mutual company is part of that. They know they’d be shooting themselves in the foot if they converted to a stock company.

  3. Today it has become obvious that there is no free lunch. People want a free lunch but there really is no free lunch. I will just take it at face value that you can do all that you say BOY can do. MY question is where does the money come from that makes all this possible? You say “… BOY concepts have riders incorporated into them that significantly increase the growth of the cash value.” You say “the value grows expodentially.”

    Exactly how do you invest this money so that you can so readily pay it out as you describe? It sounds so good that the policy is written with this rider or that rider that so nicely benefits me so much greater than other ordinary whole life ins. Fine! The real answer to everyone’s question is to explain how it is that you have found the holy graile to investment return and can therefore do what no one else can do!!! If I buy one of your policies and it does all these wonderful things that no other policies can do, then you are making more money on my money than the other guy can make on my money! What are you doing?? Otherwise you are going to need a bailout or you will default somewhere down the line.

  4. I’m in the process of getting a BOY policy and have come across one roadblock that reflects how conservative these insurance companies are. Two things I’ve learned:

    1. The policies work well only if you have a standard or premium rating. I’ve been rated with a Smoker B rating and with that level your cash value doesn’t match your premiums for about 15 years. Not good.

    2. Why am I rated Smoker B? Because of my incredibly incidental cannabis use. I even pointed out that I didn’t smoke it, but typically ate or vaporized it at a frequency of once every couple of months or so. Yet they barley approved me for a policy.

    I’m very disappointed as my cannabis use is nowhere near as much a health risk as tobacco smoking or even moderate alcohol use, which apparently isn’t seen as a problem.

    This is one huge roadblock for people like me trying to get a BOY policy.

    • Moderate alcohol-users live longer. However, tobacco smokers receive a huge rate-up. Cannabis (unfiltered) results in greater tar and carcinogen inhalation, aside from the political issue of illegality (federal law). These policies generally exclude benefits for death by illegal activity, so it’s a problem.

  5. Sounds great if you are insurable. This is a major problem for so many Baby Boomers who are arriving at a point in life where the chronic medical conditions have caught up with them (i.e. cardiovascular, diabetes, rheumotid arthritis, etc.) What if you have chronic or acute medical conditions that most insuers won’t touch? Sounds like this is dead in the water except for the relative few who have been totally free of any medical problems.

  6. WHERES ,..DAVE RAMSEY ,..Nowadays,..SUZE DID YOU RUN HIM ,..AWAY

  7. Paul Puckett says:

    I may have missed it, but what was the annual premium amount paid on the BOY policy used as an example? The one that began with $605,000 in death benefit. Thanks

  8. I started a policy in May of 2011 at $18,000 per year. When renewal time came this year, $15,000 was all I could afford. Yesterday I checked my account values online and could not believe the amount of $$$ I could borrow was $24,000–in just over one year. I plan to use some of it to pay off a credit card. I will be the one to determine how much my monthly payment will be, how much the interest rate will be and how long the repayment period will be—not some financial institution. Nor will I be under the threat of repossession if I miss a payment or two or three. Because I can do these things, I WILL NOT have to eat beans–are you listening, Dave Ramsey?–to do it.

  9. I listened to this over the radio on my way to work yesterday and I was curious if this is a life insurance policy?

    • Hi, Miriah.

      Yes, it is dividend paying whole life insurance, but not the kind most financial advisors and experts talk about. You can learn exactly what Bank On Yourself is here.

      Designed properly, it can give you peace-of-mind, guaranteed growth, safety, and more flexibility than any investment or savings program we’ve ever found. Compare them for yourself.

      Hope this helps!

      • Hello Pamela,
        I have 3 policies and they work just like you and your book say they do. I am very pleased with the benefits I’ve seen!

        I have an unusual question though, resulting from a unique situation. I’m 53. Since I started the policies several years ago, my beneficiary situation has changed (from divorce, a death, no children, a newly well-off sibling, etc). In other words, although these policies are designed to minimize the death benefit, it’s still substantial, and I no longer have an obvious beneficiary.

        Is there a way for me to take advantage of the death benefit while I’m still living? Access the funds in some way or at least minimize them further so I have nothing to leave? It would make a tremendous difference to my retirement if I could access the death benefit in some way (without getting a terminal illness first). If not, I’ll name friends and charities as beneficiaries. But it seems to me that this is an asset and maybe there’s a way for me to benefit from it now.

        Thank you so much!

        • You’re right – this is an unusal question… and an excellent one!

          You’ve probably noticed that your death benefit has increased since you started the policies – that’s how dividend-paying whole life insurance policies work, especially when they have the rider added that boosts the growth of your cash value.

          However, once you start taking income from the policy in retirement, that pattern will eventually start to reverse and the death benefit will decrease.

          If you knew what day you were going to die, you could probably draw all the policy values down to zero. But since you don’t know, I wouldn’t attempt to do this.

          You are still young and even though you may not see another significant relationship in your future, you may well end up being pleasantly surprised.

          And, unless that comes to pass, you can definitely name one or more deserving charities as your beneficiary.

          In the meantime, it’s very important that you contact your advisor and seek advice about changing your beneficiary.

  10. I just want to know if at 72 I’m too old to try this? I put my money in Mutual Funds 15 years ago & have lost much of it twice. I get a monthly income from the funds (Fidelity & Putnam), but every time they sell it I know they take a fee. My financial planner says he doesn’t take any, but I’m sure he does, or how else would he get his money! I also have a CD in the bank, which draws nothing in interest! How much would I have to have in it, to put it in Bank on Yourself? I have a couple autoimmune diseases, also. Would those affect my chances of getting into this? I don’t smoke or drink alcohol, but am a little overweight for my height. My doctor says I have no heart disease that she can detect, but I am very nervous. Would appreciate a short reply. Thanks!

  11. buyers beware says:

    Anyone trying to sell anything there is always pros and cons. Anyone not telling both sides of the pros and cons our hiding something. Book writers are selling their books, insurance co. are selling a policy. Remember after you retire it is very hard to recover loss money and many people have loss their whole life saving or found out too late the hidden facts because of being fraud or scammed by companies get rich off of their money. So, if you only hear all pros and NO CONS BEWARE. Everything in life has pros and cons. No cons – you are probably being taken for a free ride and won’t know until years later what the real truth is. Called read the fine print and everything you buy has small print. Know the legal terms before investing your money. A L W AY S

    • I do talk about the downsides of this concept:

      1. It’s not a magic pill – it requires patience and discipline (which rules out many people right there). Your cash value won’t equal your premium in the early years.

      2. If you borrow too much from your policy and don’t pay the loans back or at least the interest due on them, your policy could lapse with tax consequences.

      3. There will be times when you’ll feel “left out” when other assets are skyrocketing… until the crash that inevitably follows, at which time you’ll thank your lucky stars for Bank On Yourself.

      Saying that life insurance companies that are much more strictly regulated then banks and other financial institutions (and that have paid dividends every single year for more than 100 years) is out to con you is, well… if you’re looking for an excuse, that’s as good as any other.

      • Pamela,

        Do you also mention that:

        1) Dividends are not guaranteed – they may (and probably will) fluctuate over time and this could dramatically influence the growth of the policy)

        2) Demutualization, while not a serious risk for all mutual companies, is still a risk to consider. Companies, like MetLife, who did demutualize, do pay dividends but, let’s be frank, it’s not as stellar as some of the mutuals. And, it’s been trending downward since 1990.

        3) If you take a loan from the policy, the guarantees on policies may suddenly evaporate until the loan is repaid.

        4) If you use term blending to achieve those high CVs, you’re foregoing the strong guarantees of a base-only policy. That doesn’t make the policy bad, but I think you should tell people this upfront.

        5) PUARs can be awkward and inflexible if this is the primary method of creating excess cash in the policy, and every mutual company has its drawbacks and fine print concerning premium loads on PUAR premiums and how they can be made, as well as catch-up provisions if you need to skip a payment or temporarily reduce payments. Again, this is something I think needs to be stressed more. Life happens, people miss PUAR payments. They should know how this affects them over the short and long-term beforehand.

        6) It is possible to lose money in the policy if you do not repay the loans and the interest charged exceeds the crediting rate. Hopefully this isn’t too much of a problem, if you’re educating clients on repayment of loans, but it can happen if you decide you need to “float” the loan for a year or two without making payments.

        7) There is a *potential* risk of the “tragedy of the commons” developing within a company if there are enough policyholders taking out loans at once, and there isn’t really a great solution to this since too much cash in the GIA means lower performance for the policy. Too little means lowered liquidity. It’s basically the life insurance version of a “run on the bank.”

        8) To expand on your point #1, it can easily take 7 years for the CV to equal the DB. So, if a person who is about to retire takes out a BOY policy, they may or may not be able to make *full* use of it for many years. That’s a very serious issue if the person does need money for income or expenses, or even emergencies. I know you mention this, but I don’t think it’s emphasized strongly enough.

        I don’t necessarily disagree with some of the benefits you’ve come up with, but I also think you understate or minimize some of the risks. There’s risk in every financial product.

Trackbacks

  1. [...] This post was mentioned on Twitter by Pamela Yellen, Pamela Yellen. Pamela Yellen said: The gloves are off! Do you think AAII is twisting things and taking them out of context… or being fair and unbiased? http://fb.me/Ns1ZpT3V [...]

  2. [...] It’s as if VISA or MasterCard were to declare, “Hey, we made a lot of money this year; let’s share our profits with cardholders.” Keep dreaming Note to Readers: The subject of insurance policy loans is often misunderstood by both financial advisors and consumers alike. I encourage you to learn the facts about policy loans and dividend-paying whole life in this lively and informative blog post I wrote. [...]

Speak Your Mind

*