Bank on Yourself
Insuring future wealth
By Steven Martinovich
If the recession has spawned any positive benefits it's that personal fiscal sanity is back in vogue. More people are paying down debt, saving money and differentiating between what they need versus what they want. And yet as people are beginning to question their credit-fuelled consumerist lifestyle, some are wondering whether we should also be questioning our old assumptions about how to build wealth for long-term fiscal stability. With a stock market likely to move sideways for years to come, uncertainty over the real estate market and ground-level interest rates, is there a better way to improve your financial situation.
Pamela Yellen would argue in the affirmative and her preferred vehicle of choice is the often derided whole life insurance policy – or rather a very specific kind of whole life insurance policy. Yellen builds her case in Bank on Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future. According to Yellen pursuing a vehicle based on this type of insurance guarantees predictable growth regardless of what the stock market does, no matter how poorly real estate performs and avoids dealing with banks either savings or loans.
The basics of the Bank on Yourself (BoY) plan – as it has been dubbed – are fairly simple to understand. Utilizing a specific type of whole life insurance policy offered by a few insurance companies in North America, a person would take out that policy and then begin funnel their money through it. Rather than borrow money from a bank for purchases, a policy holder would borrow against their policy. As it is a very specific sort of policy, the money isn't borrowed against the accumulated gain in the policy, but the insurance company's general funds – meaning that you'll still be earning maximum dividends. As you pay back the money, you're in effect paying yourself back with interest. The money you would have paid a bank to finance a loan is instead going back into your own pocket.
It's not a new idea despite the enthusiasm that Yellen injects into Bank on Yourself but it is surprisingly little known. Utilizing life insurance to build wealth – even in the very specific way that Yellen mandates – has long been practiced by people more interested in reliable growth than chasing the latest fade. The difference is that the BoY plan seems to build it that much more quickly thanks to the rider that she insists must be a part of the plan and at the end of the day if you don't pay back your loans it merely means that your beneficiaries are out of the money you borrowed against your policy. Despite that, Bank on Yourself does falter on some measures.
As Bank on Yourself often reads like a book-length pitch for Yellen's web site and the network of BoY advisors across North America, she's often short on specifics. Only a handful of insurance companies even provide the type of policy required and she names none of them – though she does throw the reader a bone and broadly hints at the identity of one of them. She also fails to mention which tax policies need to remain favourable in order for the program to remain as reliable as it apparently has historically been. All that means is that thanks to granular specifics, a reader might be able to put into place their own BoY program but without the aid of a BoY advisor they won't be aware of all the possible tax implications, avoidable inefficiencies and other potential issues.
The BoY program also runs counter to the notion that no one should put all their financial eggs into one vehicle basket. Yellen's enthusiasm for BoY often reads as if all other vehicles should be abandoned because they fail to provide the returns and apparent safety that her preferred vehicle has. Yellen repeatedly points out that one of the companies providing the type of policy required for BoY has consistently provided dividends for over a century. All well and good but the recent financial crisis also claimed Lehman Brothers, an investment firm that stood tall over a century and a half before declaring Chapter 11 in September 2008. Granted, Yellen is correct that insurance companies work under far more regulation than any investment firm ever has, but for those wary of corporate malfeasance, relying on one vehicle alone isn't an option.
That aside, Bank on Yourself should be explored as another potential pillar in someone's wealth-building portfolio. Whether 401(k)s, mutual funds, traditional bank products, and real estate, among other vehicles, are remnants of another age is up to the reader to determine with the assistance of a qualified financial advisor. And despite the fact that Yellen somewhat undermines her own efforts with excessive boosterism, the BoY program deserves serious consideration by anyone who has come out of the recession more concerned about building a solid financial future than using credit to buy this year's toys.
Steven Martinovich is the founder and editor of Enter Stage Right.
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