Family Bank - Anyone Doing This?

Question

I just finished reading The Debt Millionaire by George Antone.  Decent book (although I would recommend The Value of Debt in Building Wealth by Thomas J. Anderson over this one - somewhat similar concepts).  The author introduces the idea of a Family Bank.  I’m sure there are many variations of this (assuming it’s a spin-off of the Infinite Banking / Bank on Yourself concepts), but wondering if anyone is employing this Family Bank concept.  If so, please provide some general details.

John Perrings · Answer

@Zachary Paschke posted some great info yesterday.I'll add some answers as well: 1) *High commissions* -- Technically speaking, commissions are not paid directly out of the transaction like real estate deals. They are separate sales/marketing contracts between the carrier and agent. There are, of course, costs to have life insurance and sales/marketing costs are some of those, but agent commissions don't directly affect your insurance agreement.I bring up the "technical" side because I think it's important to understand that it is NOT the agent commission that causes faster or slower cash value accumulation. It's the design of the policy, which is more about trade-offs.

Since this is life insurance and the cash value accumulation is controlled by IRS "MEC" rules, there is no getting around *some* period of "lag" time between how much you've paid in premiums and how much cash value you have.In the Infinite Banking world, we refer to this as the time and "startup costs" of creating your own "bank."Some agents on here will disagree with me on this, but the amount of lag time is a matter of tradeoffs, and those tradeoffs are very much based on the individual.Two ends of the spectrum:-- If you completely max-fund (sometimes called over-funding) upfront, up to the MEC limit, you have more cash value available sooner and the IRR on cash value is a little better. The tradeoff is that the initial death benefit is minimized as well as some other powerful benefits such as the disability rider.-- If you go with straight life insurance, you will get a higher initial death benefit and the disability rider is much stronger. But the cash value will take much longer to accumulate.There are very legitimate reasons to use either end of the spectrum and anything in between.

Now, practically speaking, an agent does get paid differently based on which side of the spectrum the policy design falls on. Straight whole life insurance (meaning the upfront death benefit is prioritized over speed of cash value accumulation) pays an agent more.

2) *Cost of insurance offsetting dividend rates* -- You may be getting the mechanics of a couple of products mixed up. Cost of insurance is usually broken out in UL-type policies. The returns of UL/IUL policies can be offset by the cost of insurance, most often when not properly funded and a down market year is experienced.Whole life products that have dividends also have a cost of insurance that is baked into the illustrations and the guaranteed returns of that product are NET of *all* costs. This is what Zachary was referring to when he said that more risk is transferred to the insurance carrier with whole life products. Dividends are in addition to the guaranteed returns. 3) *% of premiums available in cash value* -- There are two "break even" points with a whole life policy:-- The funding break even point - in the first few years, every $1 you put into the policy, your cash value grows by less than $1. Some time, around year 3, is where this corner is turned and every $1 you pay in premiums, more than $1 is added to the cash value of the policy for that year.-- The cash value break even point - Sometime around 3-8 years in a correctly structured whole life policy, you will break even with the total amount of cash value. Meaning you will have as much total cash value as total premiums paid.From that point forward, a whole life policy is guaranteed to have more cash value than what has been paid into it (assuming the policy funding stays under the MEC limit and not including loans)Policy loan % differs w/ carriers. I've seen it go as high as 98% of cash value. Policy loans are available as early as $500 in cash value.

Hope this is helpful.

Kevin Grove · Answer

Hey Mark,

I'm doing it. I opened my first IBC policy in 2014. This year I opened two more.

I haven't needed to take out a policy loan yet, but it is reassuring to know I have access to the money if I need it.

Having a death benefit is really important to me and my family.

I was really ambitious on my policies, which has forced me to live frugally in order to max out the premiums. That's been good for me to keep spending in check.

Las month I did a cash-out refi on my home. I opened a new IBC policy and dumped a large chunk into it. OneAmerica lets you pay 20 times the base premium as your first year's PUA premium. My cash value is 85% of the amount I paid and was available immediately!

If I have a cash crunch, I have several options to lower my premium. One option is to pay the minimum PUA ($10/month). I did this advantage of this a couple years back. It spared me from letting the policy lapse. I was fortunately able to go back and repay all the PUA premiums I had missed out on, so my premiums-paid are right in line with the illustration, though I'm behind a few years on the time-value of money.

With my OneAmerica policy, I have the option of not paying any more premiums after the third year, and the policy will still be self-sustaining indefinitely. Of course the returns would be much lower, so I wouldn't do that unless I had to. But it's just nice to know that the policies are extremely flexible and there is never a need to let it lapse and pay taxes on the gains.

One way that I did recently start using my policy is to escrow my income taxes*. The money that was previously withheld from my paycheck is now going to premium payments. I'll take out a policy loan to pay the quarterly taxes. It sounds counter-intuitive, but at 3.5% IRR, the policy yield outpaces the 5% interest if I hold the loan for 21 year loan and repay interest yearly (12 years at 4% IRR).

I haven't bought my rental properties yet, but my plan is to use my policies to escrow property taxes and hazard insurance premiums and allowances for repairs, vacancy, capex, etc. for my rental portfolio. See Cashflow Ninja Ep. 103 for more info on that strategy.

Hope that helps! I'm still learning this stuff. I recently joined the Wealth Without Wall Street Community, to interact with more folks who are using IBC.

* See An IBC Tax Strategy Part II, by Carlos Lara, in Lara Murphy Report, February 2017 and Part III, August 2017. Let me know if you want me to send you the PDF of those articles.

Mark S. · Answer

@Zachary Paschke, thanks for your responses.  Are the figures from the illustration above based on the 4% guaranteed dividend rate or the non-guaranteed 6% dividend rate?

At first glance, the numbers don’t look all that bad (except for the fact that the amount paid in vs cash value numbers don’t account for the time value of money).

Could the client, in this example, borrow all the cash value (minus one or two payments remaining in the cash value) in year 5 without any surrender-type charges?

Finally, if agents don’t earn much commission for structuring policies this way, with all due respect, why are you building a business around this?  I guess you could say you make up for it in volume, perhaps, but just wondering the agent’s incentive.

Zachary Paschke · Answer

@Mark S. the numbers I gave are based on a combination of the 4% guaranteed interest and the expected (non-guaranteed) dividend together. Keep in mind these are two separate things paid into the policy.

In all respect, I don’t see any lost time value of time in this. I never recommend people use their life insurance as an ‘investment’. It’s not one. It’s a hedge against your investments. (For example, what if I die, what if I live too long...) and a way to avoid taxation. The big benefit with this policy is the money will always continue to grow as long as you maintain the policy. If you borrow the money and reinvest it, you’re able to use the money twice. Almost everyone has savings of some sort, this is the ultimate savings account for the future. If the money is in the account, you make the full return, even if you borrow the money to use it, you’re still making a return. What other investment rewards you for using the capital in a different investment?

As long as you keep your loan and interest rates below the cash value, with the room the company requires you’ll be in no risk of surrendering the policy. The company doesn’t want you to. With the loan, you’re technically not touching any of the money in the policy, so there are no surrender charges. Charges would only be there if you completely canceled the policy.

I haven’t built my business around this concept, I do this stuff because it’s fun and rewarding. As I noted above, I got into this business because I got bad life insurance advice. Most of my money is earned writing term policies. They’re quick work and they pay nice. It’s why there’s not a lot of agents doing this kind of work. Term is a cash cow.

Here’s how it works: a policy like this has 2 main elements: 1) base policy the initial $100k policy with any riders  - this I earn full commission on  2) paid-up additions - I make a fraction of this. Every company has a charge% for paid up additions. This company’s PUA charge is like 6-8% (it is a fixed number, I just don’t remember the exact number off hand). That percentage of your PUA money goes to pay commissions and fees the rest goes right into coverage. I wish I made that whole 6%, but I don’t. I just make a fraction.

I do make a traditional commission on the base policy.

This kind of policy does take some specialty work - that’s why term is so popular  it’s much easier to sell, but a lot of my business comes from referral. Specialized work tends to lead to better referrals. That’s my main incentive.

Zachary Paschke · Answer

@Mark S.sorry I didn’t see your second post initially. Before I give you an example, there's a few things I'd like to point out. First, The goal is to put as much "paid-up additions" money into the account as possible. It has the lowest cost associated (agents make next to nothing on this, that why most won't recommend getting max value in the account). Second, all financial products have associated fees. Third, the biggest enemy against you simply dumping cash into your account is the federal government's regulations about how a policy can be funded. If you anticipate borrowing you need to confirm that you're not setting up a modified endowment contract. We won't get into the weeds on this one yet. My example is not a MEC. Fourth, the power of life insurance is in the tax-free status of the earnings. Dividends from life insurance are treated like no other income in the tax code. It is recognized as a return of premium, so therefore non-taxable. This is what the invest the difference guys miss every time. If the results are close, and one requires paying taxes while the other doesn't, what's the winner? Fifth, This is life insurance. The purpose of over funding a life insurance account is to see value in the death benefit. The math should make sense, but as cash value is one of your biggest concerns, it's the least of concerns for the insurance company. They're only watching that death benefit. Sixth, You talked about keeping up with the markets. You can use an IUL (Indexed Universal Life) policy to basically mimic the ups and downs of the market, but I recommend whole life. Your life insurance is meant to be a steady force. Whole Life puts the responsibility of keeping promises with the insurance company. All that said, guaranteed interest is guaranteed, dividends are not. Any numbers I give you are not a suggestion they would work for you and it is not a recommendation that you follow this plan. Every person is a real live individual and their goals deserve individual attention. Here's an example I ran an illustration for a 45 year old man, non-smoker, standard rate in the great state of KY. $100k base policy (to keep the start up expenses low). Cost just for that coverage is $1,965/ year. Keep in mind, this is all a game of zeros. This is a very entry level policy. If you wanted more money in the policy, we'd simply raise the policy amount. In this example I'm imagining that a client has a budget of just under $15k/ year for the policy for 10 years and they want to continue the base payment through year 19.

The first 7 years the premium is $14,630.00/ year. Each payment results in a guaranteed increase in cash value of $11,471.

The following 3 years premium of $13,765 / year (same guaranteed increase, except you're making both interest and dividend on top of what is being deposited).

Years 11-19 simply pay the $1,965 of the base policy.

Here are some estimated cash values based on the illustration (each number is the end of that year, so 1 represents the end of year one of the policy): 1: $11,5745: $69,31310: $158,392 (having spent $143,705 at this point)20: $257,226 (having spent $161,390 at this point and won't be paying into the policy any more)30: $364,36940: $487,26860: $717,03570: $842,081

Estimated death benefit:10: $467,63130: $542,40950: $684,87770: $885,450

This company will let you borrow most all of your cash value, they just want a payment or two left in the cash value in case you miss a payment. This assumes you keep up your interest payments. Any agent can illustrate loans against your policy.

This company charges 5% on loans (but the guaranteed interest is 4%, that means your dividend only has to make up 1% to cover the cost of the loan). They've been turning out around 6% dividends the past 14 years (keep in mind dividend payments are not all equal and the way companies calculate them they're not always dollar for dollar, this is why the illustrations are important). This is a non-recognition loan company, so they don't lower your dividend if you take a loan.

Hope that gives a little perspective.

Mark S. · Answer

@Mark Welp, @John Perrings, @Greg R.

Some common reasons I hear about why some people are not a fan of this are:

1.) High agent commissions up front means it takes even longer to build up cash value (even for max funded policies)

2.) Even though dividend rates can be reasonably higher than, say, savings accounts in this low interest rate environment and that they’re uncorrelated to the stock market, what about the cost of insurance offsetting these dividend rates?

3.) The fact that for every $1 you put into the policy, only a % of that (less than 100%) gets credited to your cash value (because you’re also paying for the commisssion, cost of insurance, etc.) and that you generally can only take a % (again, less than 100%) as a loan against the policy.

I understand the concept of money working in two places at the same time (because the loan is from the insurance company, not your cash value, which is only used as collateral and continues to receive compounding dividends) and that you’re using the loan proceeds (the insurance company’s money) to make other investments to generate a return (because now you’re earning money on the cash value that is always compounding and the ROI from the new investment), but I’m having trouble digesting some actual, real numbers where this makes sense.

Specifically:

1.) How much is paid into the policy in premiums?

2.) How much cash value is built up in the early years and available to take a loan against?

3.) What percentage of that cash value can you take as a loan?

4.) What is the interest rate on the loan versus the dividend crediting rate?  Maybe the spread matters less because of simple interest loan vs compounding dividend crediting.

5.) What does this look like over, say, 5-10 years?

I know it depends on the individual’s health, size of the policy, the insurance company, etc., but for the sake of illustration, let’s use some numbers from a “middle of the road,” actual client you’ve helped with this strategy and how that helped them accelerate their investments.

John Perrings · Answer

I have not read those books but just ordered the second one after reading your post. Thanks for posting.

I am an Authorized Infinite Banking Concept practitioner, if you have any questions about that. 👍🏻

Mark Welp · Answer

@Mark S.

I am a huge fan of infinite banking and flowing your cash flow through dividend paying whole life insurance.

Thanks!

Zachary Paschke · Answer

@Mark S. I’ve done this before. Most of my clients are high risk (meaning they often have complex medical conditions). When they realize how expensive their personal policies are and how limited the options can be sometimes, they’ll often buy policies for family members so the family member has something to borrow from as well as the safety an security of a permanent policy. When you realize how fragile your own life is people often buy for others. Divided earning whole life is a great thing to get for a child and can provide in many different ways. However, one of the biggest disservices is to simply buy a whole life policy meant to be paid off until age 100 (a financial planner had me do this for my daughter when she was born and the learning process after that’s isn’t the reason I got intonations the business).

Because of this I recommend that people pay these policies off early. The more cash you get in the policy the quicker, the more the policy works for you. I have several friends with low value children’s policies that they’ll owe on for the rest of their lives. They often try to get out of them. Good life insurance education for children is like good financial education, they have to see the benefits. You have to show them what building up the account can mean.

A few things to look for:

- dividend earning whole life

- a healthy guaranteed interest rate and healthy dividend. You want an interest rare around 4% and a historical  divided around 6%.

-Low interest rates if you plan on borrowing. Around 5-6% is reasonable. Each insurance company can tell you what the current borrowing interest rate is.

-This is highly debated, but I like non-recognition loans (meaning you get your full dividend even if you’ve borrowed from the policy).

-get cash into the policy as quickly as possible. The easiest way to do this for children is to pay the policy off in 20 years. With adults you can fine tune the wealth transfer a little more.

Here are some of the benefits:

-divided payments (pending the policy is set up and handled correctly) Are tax free growth

- loans (if set up/ handled correctly) are tax free money.

-loans don’t have to be paid back as long as there’s enough cash value to cover the principal or interest. People often use them either for or to supplement retirement.

- people often use these loans for holding cash used to invest. If you’re going to BRRR and need to use your own cash for the initial purchase you can meme money from the insurance company while you’re using the money to invest in a property (as long as it’s properly set up). It’s also popular with note investors because they understand the value in interest arbitrage).

- for my generation we’re worried about outliving our retirement. These policies are a great hedge against that kind of problem. Loans can be used to supplement or replace retirement income.

Hope that helps!

Thomas Rutkowski · Answer

@Mark S.

The Family Bank strategy is a little different from infinite banking and be your own banker. Their concept revolves around funding a business with a loan against an overfunded policy. The weakness that I see in it is funding the initial premium that gets it all started. The business essentially operates out of the credit line secured by the cash value. It also looks like the business will be carrying a tremendous amount of debt over time. Who would buy a business with that much debt? If the debt is forgiven, the owner is likely going to get a very big bill from the IRS.

infinite Banking and the subject of leveraging high cash value life insurance policies was beat to death on this thread...

https://www.biggerpockets.com/forums/519/topics/245380-paradigm-life-infinite-banking-whole-life-insurance?page=3

There are financial examples and a lot of tips on making sure the policy is designed right. If your cash value to premium ratio is not 85% +/-, the policy is not designed as efficiently as it could be (Death benefit too high).