Whole life banking is a cash flow process using a uniquely designed whole life insurance policy’s cash value as a personal banking system, enabling you literally to become your own banker. You borrow against the cash value tax-free for personal or business expenses while your cash value money continues to grow tax-free. Whole life banking is not about whole life insurance. It is about using a whole life insurance policy to implement the cash flow process of banking to your own advantage. Whole life insurance is a product. Banking is a cash flow process.
PRODUCT COMPARISONS -
Term life insurance (temporary) vs dividend-paying whole life insurance (permanent)
The difference between term life insurance and dividend-paying whole life insurance can be compared to the difference between renting a home and purchasing a home while also building equity. Just as renting a home for a specified period, term life insurance provides coverage for a specific period (e.g., 10, 20, or 30 years). If you pass away during this term, the policy pays out the death benefit to your beneficiaries. If you outlive the term, the coverage ends. It is typically more affordable than whole life insurance, much like renting a home often costs less upfront than buying one. Just as renters do not build equity in the property they live in, term life insurance does not accumulate any of what’s called cash value (equity). Once the term is over, you walk away with no accumulation of money to show for the premiums you’ve paid. Renting and term insurance both serve specific needs: affordability and flexibility in the short term, but without long-term financial benefits.
Whole life insurance provides coverage for your entire life, as long as premiums are paid. It guarantees a death benefit no matter when you pass away. Imagine that purchasing the death benefit of a cash value whole life insurance policy, although intangible, is like purchasing a house. Just as you would build equity making payments for your house, you build cash value making payments for the death benefit of your whole life insurance policy. The premiums are higher in the early years when your risk of dying is lower, compared to term insurance, similar to how buying a home involves higher upfront costs. But as you get older, your premiums remain the same even as your risk of dying increases. The portion of your premiums going toward building cash value or, equity, grows tax-free. Your cash value can be accessed tax-free during your lifetime via loans against it or withdrawals from it.
HOW MOST PEOPLE VIEW AND USE A WHOLE LIFE INSURANCE POLICY:
Whenever most people purchase a whole life insurance policy, they purchase it solely for death benefit coverage. They want to pay the least amount in premiums while receiving the most death benefit possible. They purchase the policy with no intention of using it as a means to accumulate as much money as possible in a tax-free way, so the life insurance agent from whom they purchase it designs it to minimize the cash value and maximize the death benefit. Although they do accumulate some cash value over their lifetime, it’s minimal compared to a policy designed solely for accumulating cash value as much as is legally possible while proportionately minimizing the death benefit.
HOW ADVANCED FINANCIAL STRATEGISTS VIEW AND USE A WHOLE LIFE INSURANCE POLICY AS A TAX-FREE SAVINGS VEHICLE:
Advanced financial strategists purchase a whole life insurance policy solely for tax-free cash value accumulation. They want to pay as much as they can in premiums to maximize their cash value while receiving a proportionately lower death benefit. They purchase the policy with the primary intention of using it as a means to accumulate as much money as possible in a tax-free way, so the life insurance agent from whom they purchase it designs it to maximize the cash value accumulation and minimize the death benefit. They use their policy as a place to store their money instead of a traditional bank savings account. Therefore, they view their premiums as “deposits” since they will have access to use all the money paid in premiums. The cash value grows at a guaranteed, tax-free rate of 3%-6%, receiving dividends from the insurance company’s profits. The companies providing these policies are mutually owned by their policyholders and several of them have paid dividends to their policyholders consistently every year for over 100 years.
HOW THE CASH FLOW PROCESS OF BANKING IS IMPLEMENTED USING A DIVIDEND-PAYING WHOLE LIFE INSURANCE POLICY AS THE PLATFORM:
Loans Against Cash Value:
One of the ways a life insurance company offering dividend-paying whole life insurance policies invests its funds is through policy loans to policyholders. Instead of buying bonds, for example, the company will loan you money and charge you an interest rate similar to the interest rate it would have otherwise earned from buying a bond and earning interest that way. To the insurance company, a policy loan to a policyholder is an asset. Therefore, your whole life policy contractually guarantees you the ability to take out loans at predetermined interest rates, so no credit check is necessary. You won’t be asked the reason for the loan, for your income, or even when or if you will repay your loan because the cash value of your policy is the collateral for it, which the insurance company itself is guaranteeing. The insurance company doesn’t care if you don’t repay your loan. If you don’t repay it, the life insurance company will simply deduct your outstanding loan balance from your death benefit prior to indemnifying your beneficiaries. (Policy loans are not taxable income)
The insurance company uses your cash value, which it itself is guaranteeing, as collateral for the loan and charges you a low, predetermined interest rate such as 4%-5% (usually prime rate plus 1%-2%) because they aren't incurring any risk. Your cash value continues to grow uninterrupted at 3%-6%, even when you have an outstanding loan, because it is just a representation of the amount the insurance company guarantees to pay the policyholder, payable from the company's general account, the same account from which the money is lent. Although you are borrowing from the insurance company and not “from yourself” or “from your policy,” as a policyholder you are part owner of the mutually owned company and its financial assets. Your loan interest repayments are benefitting the cash value of other policyholders of the company while they have outstanding loans, just as their repayments are benefitting the cash value of your own policy while you have an outstanding loan. By the time you repay your loan, your cash value will have grown substantially, enabling you to borrow increasingly larger amounts at the end of every repayment schedule, the time period of which you determine.
To become your own banker, choose to repay your loan at a higher interest rate such as 6%-10%, mimicking a scenario where you took out a loan from your conventional bank which took on risk by lending you money. The extra interest purchases small bits of additional death benefit coverage, which further compounds your cash value accumulation. You are being your own banker by recapturing the interest you would have otherwise paid a banker. Bankers profit from receiving more money in interest from borrowers than they pay in interest to depositors. As part owner of the mutually owned company as a policyholder, you are in effect your own lender, guaranteeing yourself low interest rate loans while repaying them at a higher interest rate, profiting from the spread. The lower, required interest rate the insurance company attaches to the loan represents what you as your own banker owe yourself as a depositor while the higher interest rate you charge yourself as a borrower represents your earned profit. This process mirrors the cash flow structure of conventional banking but allows you to retain full control and financial benefit.
