Bank On Yourself is a popular financing strategy where you put your money into a whole life insurance policy instead of giving it to a bank.
You can borrow money against that policy whenever you need cash instead of getting a loan or selling one of your investments, so the method allows you to borrow money from yourself.
Banking on yourself is sometimes also called infinite banking or LEAP (Lifetime Economic Acceleration Process).
Check out this article to learn more about this method and whether it can work for you.
Key Takeaways
- Bank On Yourself uses whole life insurance as a personal borrowing tool.
- Ensure policies are structured for high cash value, not just death benefits.
- Paid-up additions and non-direct recognition loans optimize cash growth and dividends.
- Infinite banking is a financial strategy, not a retirement or income source.
Table of Contents
How Does Bank On Yourself Work?
When you bank on yourself, you opt for a high cash-value life insurance policy, the value of which grows over time. The policy has to be specifically designed for the Bank On Yourself method so that you can build a cash reserve that you can utilize later if needed.
Once your policy has matured and reached a relatively higher value, you can borrow money against the value of the cash in that policy.
It’s like borrowing money with the guarantee that you’ll repay the loan because you have this policy as collateral.
You can also negotiate flexible repayment terms and interest rates that suit your financial situation and schedule.
Essentially, with the BOY method, you become both the lender and the borrower, setting your own conditions for the loan and controlling your own financial future.
Things You Need to Know Before Choosing the Bank On Yourself Method
Here are the things you should pay attention to before deciding if the BOY method is the right choice for you.
Research a Trusted Insurance Company or Agent
If you decide on infinite banking, be prepared to buy a whole-life policy. The problem is that whole life insurance plans tend to have a terrible reputation, and a good policy can be hard to find.
Many people choose the wrong policy and cancel it before they pass away, even though they’re meant to be held for life. Some people, including many doctors, buy these policies only to regret the decision due to the high costs, massive commissions, and confusing sales practices.
However, this is usually because the agents who sold the policies chose ones that don’t work with infinite banking.
Some might even try to convince you to buy different insurance products, like universal life policies, which aren’t ideal for this strategy. Research the best and most trusted companies and sales agents before committing to a specific policy.
Make Sure the Policy Is Properly Structured
Few life insurance policies are structured for the Bank On Yourself method. Unfortunately, most permanent life insurance policies are set up in a way that provides the sales agent with maximum commission with little regard for your financing strategy.
Some policies also focus on maximizing the death benefit, which is the amount paid out in case of the insured’s death. However, this approach isn’t ideal for infinite banking since the point of banking on yourself is to have money when you need it, and not after your death.
Here are a few things you should look for in the policy’s terms and conditions to ensure it suits the Bank On Yourself strategy.
Paid-Up Additions
The fundamental goal of an IB/BOY/LEAP policy is not to maximize the death benefit for every dollar of premium paid.
Instead, you aim to get the most cash value for your premiums. One way to boost the policy’s returns is by putting as much cash into it as legally possible without turning it into a Modified Endowment Contract (MEC), which would remove the tax advantages.
To improve your policy’s return, it’s better to keep the “base policy” small and add more cash through “paid-up additions.”
Instead of asking how little you can pay for a specific death benefit, the focus should be on how much you can contribute to maximize cash growth. The more cash you have in the policy, the more it grows after covering the death benefit costs. This allows dividends to grow faster.
Another advantage is that paid-up additions have much lower commission fees than regular premiums (about 3-4% versus 50-110%), meaning more of your money works for you.
Although you’ll still see a negative return early on, using paid-up additions can help you break even in as little as 3-5 years, compared to the typical 10-15 years for other cash value policies.
When done correctly, this BOY approach can be an excellent alternative for physician personal loans without the hefty interest rates.
Non-Direct Recognition Loans
When it comes to loans, life insurance policies are generally divided into direct and non-direct recognition loans, which dictates how loans are managed against the policy.
For example, let’s assume you have a life insurance policy, and you’ve built up its cash value to $200,000. If you decide to borrow $50,000, you won’t have to pay any fees or taxes for the loan, just the regular interest rate that you’d usually pay.
Once you’ve taken out the $50,000 loan, your policy’s cash value becomes $150,000. This is where it matters whether you have a direct or non-direct recognition loan.
With a direct loan, the insurance company pays you dividends based on the remaining value of your policy, which means the dividends apply to the $150,000.
On the other hand, non-direct recognition loans pay you the full dividend amount of your policy regardless of whether or not you’ve taken a loan. This means your dividends are calculated for the full $200,000.
Opt for non-direct loans whenever possible since they involve fewer unnecessary risks and more financial security.
Finding companies that offer non-direct recognition loans might be challenging, as these plans benefit the insured more than the insurance company. However, to compensate for the loss, most companies offer lower dividend rates or remove some other benefits.
Skim through these removed benefits, and choose the non-direct option if they’re insignificant to you.
Wash Loans
After maximizing the paid-up additions and opting for a non-direct recognition loan, ask your insurance company if they offer “wash loans” (also called zero-interest net loans).
A wash loan is a way to balance your interest rate with your dividend rate so that you’re paying zero interest.
For example, let’s say your normal dividend rate is 5% while your loan’s interest rate is 9%. This means you’re still paying part of the interest rate with your own money instead of the policy’s cash value.
With a wash loan, your interest and dividend rates become the same, allowing you to offset both rates without paying extra.
For example, both could be set to 5%, so it’s as if you withdrew money from your bank account instead of taking a loan. In other words, you become your own banker, borrowing money from yourself without paying interest or fees.
You can then use that money to pay off debt or invest in other policies or ventures.
Infinite Banking Is Not A Source of Retirement Income
Always remember that the infinite banking concept is a personal finance method that lets you bypass banks and borrow money from yourself. It’s not a source of passive income for doctors or a retirement plan.
Think of it as a savings account or a personal bank with tax benefits. This means the high cash value of the insurance policy doesn’t get taxed, even when you take out a loan, which means more financial peace and stability for you.
Related: Mobile Home Park Investment – A Comprehensive Beginner’s Guide
Wrapping up
Banking on yourself can be a powerful financial strategy, but only if done correctly and accompanied by a solid whole-life policy.
If you need help setting up your policy or want to learn more about infinite banking, book an appointment with one of our experts today!
