Want to make 50x what you make in your bank savings account?
There are a number of gimmick-y names used to refer to the same idea: Infinite Banking, Income for Life, Bank on Yourself, Personal Banking, Becoming Your Own Banker, etc. They are all essentially the same idea: substantially increase the amount you earn on your "savings" while getting your money out of the traditional banking system.1. Interest rates on savings accounts average less than 0.1% last I checked
2. After Cyprus and then Greece, a number of people are nervous having their money in traditional banks.
So why all of these different names for the same concept? Well, the names are generally trademarked, so if you want to talk about the concept you have to use a different name. But the REAL reason for the different names, is that if you described it using the most traditional terms, most people would be turned off!
The underlying tool these concepts use is participating whole life insurance. Now you know why they use a different name for it - most mainstream financial types treat whole life insurance like the plague! Let's look at the two components individually:
1. Whole life insurance
Whole life insurance is more like a savings account than insurance. Whole life insurance is "permanent," so your life is covered as long as you continue paying the premiums and cannot be cancelled. Additionally, you build "cash value" in your account, which is essentially your reward for not dying ("congrats on not dying this year - here's your bonus!"). Over long periods of time, if the account is structured correctly, you can grow your account up to 5% annually, tax deferred. Not going to light the world on fire, but it sure beats 0.1%!
Compare that to "term insurance," where you pay a relatively small amount to have your life insured for a limited period of time (or "term"). At the end of the term you have nothing left over if you are still alive (like true insurance). After that, you can usually continue to buy insurance on an annual basis, but at MUCH higher rates.
2. Participating
Participating refers to the type of insurance company: one that is owned by the policy owners, aka a "mutual company." This is different than the companies that are owned by shareholders. With shareholder-owned companies, any profits go back to the shareholders, whereas with mutual insurance companies the policy owners get to keep any "profits," effectively increasing the policy holder's returns.
How these accounts are different
The most common mistake I see when evaluating whole life insurance in general comparing these "savings" rates to those you would get in investments (like the stock market). It's like comparing apples & oranges - they are just too different! It is a much better comparison to compare these accounts to savings accounts at banks.
Some of the criticisms I have seen of whole life insurance are that your money is tied up for a long time and the returns are only 2-3% annually on average. Structured properly, these accounts allow access to your money at any time with significantly higher returns than that. To understand why will take another post....stay tuned!
Some of the criticisms I have seen of whole life insurance are that your money is tied up for a long time and the returns are only 2-3% annually on average. Structured properly, these accounts allow access to your money at any time with significantly higher returns than that. To understand why will take another post....stay tuned!
