50X Bank Interest Rates - Part 3 - Examples

Let me give you a few generic examples just so you get some kind of idea how this works.

40-year-old non-smoking male

Let's first look at a 40-year-old non-smoker in "normal health" such that insurers classify him as a "standard" risk.  (That is actually the second worst classification.  From best to worst, it typically goes preferred plus, preferred, standard, and sub-standard, which would be smokers and other very high risks.  Different companies use different names, but you get the idea.)

Let's assume he puts $5,000 per year into this specialized policy to maximize the growth of his cash (account) value.  That amount would buy him $388,469 in life insurance (aka "death benefit" - not a great name if you ask me because when is death really a benefit?).

Because part of his premium is actually going to cover the life insurance (his risk of dying in a given year), at first his cash value is less than he put it.  As the cash value grows with additional premiums and the "profits" returned by the insurance companies, the cash value does not exceed the premiums paid until year 10.  So it takes 10 years to "break even" if you were ever planning to completely take the money out instead of just taking a loan against it (which I do not recommend!).

After 25 years, at age 65, the cash value has grown to $450,634 and represents a 4.29% internal rate of return (IRR, which represents the average annual return) on the premiums paid.  After 35 years the IRR rises to 4.74%, and after 45 years the IRR rises to 4.85%.

It is important to realize that these numbers are not "guaranteed" as the "profit distributions" can vary over time.  Of course it is unlikely that interest rates will go down significantly from here, so there estimates are probably pretty safe right now.  BUT, there is also a minimum GUARANTEED return, which provides a much lower (but still positive) return over time.

(These numbers were from an example run with MassMutual as the insurer in May of 2014.  These numbers will vary with both insurance companies and the date of the quote as interest rates change.)

Rates of return for various examples:

After 30 years, in the example above, the IRR is about 4.5%

With another company, 35- year-old male, preferred plus rate, realized a 4.6% return after 30 years.

With that same second company, 35-year-old female, preferred plus rate, realized a 4.7% return after 30 years.

As you can see, younger, better health, and female gets you slightly better rates of return, especially in the short term, but over time, the gap narrows.  The reason for this is that the insurance company has to set aside more money up front for older, worse health, and males to compensate for the higher risk of dying.  If you don't actually die, over time, everyone gets about the same return on the insurance company's "profits."

Hopefully that makes sense.  This is a huge topic that I am not doing complete justice to.  If you have specific questions you want answered or clarified, please leave a comment and I will try and address all of those issues in a post (or several posts if necessary).

Next time, I will give you my preferred providers in the industry that you can contact to get a quote tailored to your specific circumstances.

50x Bank Interest Rates - Part 2 - How It Works

Make sure you have read about Savings vs. Investments and 50x Bank Interest Rates - Part 1 as these two posts provide the foundation for what I am about to discuss.

What's interesting about these whole life insurance accounts is that large corporations - and especially large BANKS - have billions of dollars in these policies.  Last I looked, Wells Fargo had as much in these policies (about $18 BILLION) as they had in all of their buildings and equipment.  Think they might know something you don't?

So why don't you know about them?  Well, the banks aren't going to tell you about them as they can't sell them.  Most financial advisers do not sell insurance, so they won't mention them either.  That leaves insurance agents, the vast majority of whom do not know about these specific techniques and - even if they do - they are not likely to promote them as they do not pay very well.  Oh yes, and the government dramatically restricts advertising of life insurance policies (e.g. insurers cannot advertise the policies as "alternative savings accounts").

How It Works

Insurance companies take the premiums they receive and invest them in bonds, loans, and maybe even stocks.  Unlike banks, they don't have nearly the overhead expenses in the form of branches, tellers, loan officers, etc.  This allows the mutual insurers to return most of their "profits" to the policyholders.

Whole life policies earn dividends, which would otherwise be profits but for mutual companies are treated as a return of a portion of your premiums.  As a result, these dividends are not taxable (this is how your returns compound tax deferred).

Normal policies earn returns in the 2-3% range over decades - not particularly good, but remember what savings accounts are paying right now?  BUT, you can cram additional money into the insurance policy (technically buying additional insurance) which also earns dividends and boosts your returns up to 4-5% right now (typically).  Unfortunately, the IRS puts a limit on how much additional funding you can put in before they say it is an investment and not insurance, and you would therefore lose your tax benefits, which we don't want to do!

I also promised you can get to your money at any time.  This is true, but a little tricky.  The way you get "your money" is actually by taking a loan from the insurance company.  Insurance companies are legally obligated to loan against your cash value (I will call this your "account value").  With the best companies, the interest rate varies, and is close to what you are earning in dividends - sometimes a little more, sometimes a little less.  So say you have $100,000 in cash value - you can take a loan at 5% from the insurance company while at the same time your $100,000 is still in the "account" earning 5%.  While it sounds weird, the net result is the same as taking your money out of the bank - the 5% you are earning offsets the 5% you have to pay on the loan.

Advantages

1.  Return - 4-5% is much better than other savings vehicles.  Remember to compare this to other savings vehicles and not investments - though if you do the math, the tax deferral and lack of fees does compare favorably to many investments.

2.  Grows tax deferred

3.  Access to your money (unlike 401ks, IRAs, etc) - again, not as easily as banks, though

4.  Protected from creditors (lawsuits, etc) in most states

5.  Death benefit - essentially a free "bonus" to a great savings vehicle

Disadvantages

1.  Setting up an account takes time - it takes 1-2 months usually, and involves medical history, medical exam, etc.

2.  Access to money is not as convenient (which can also be a plus if you tend to spend too much, as I have sometimes been wont to do)

3.  Long-term commitment - takes 5-10 years to break even on policy & get to point where policy can pay for itself

4.  You might be uninsurable due to poor health, etc, in which case you might need to take out a policy on a relative



Next time we will walk through an example to give you a better idea how this works.  In the meantime, if you have questions (which is likely after a very brief explanation from someone who is not particularly good at explanations), then please comment below.  Thanks!

50x Bank Interest Rates - Part 1

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.

This is an idea that has received a lot of play in alternative financial circles for a couple of reasons:

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!

Savings vs. Investments vs. Speculations - Definitions

Most people talk about savings and investments, but very few people (outside of the dark corners of economics & finance) actually stop to think about the differences.  Understanding the differences will be important for some of my upcoming posts on the subject.

If you spend less than you earn, most people would consider that savings.  It usually is, but not always.  If that difference is sitting in the bank, I would call it savings.  If you immediately put it into the stock market or bonds, then I would call it an investment (or even a speculation).

Savings

Savings is money you have set aside that you are not willing to lose.  Safety is your highest priority here, and you are willing to give up high returns in exchange (have you looked at what your bank account is paying lately?).  Typical places for savings would be bank accounts, CDs, mattresses, etc.

Investments

Investments are putting your money towards productive businesses with the expectation of higher returns than you get on your savings.  In exchange, you undertake some risk that you might lose some (or all) of your investment - hopefully just temporarily, but perhaps permanently.  Investing in stocks and bonds through a 401k, mutual funds, or even individual stocks where you are looking at longer-term business prospects would all be examples of investing.

Speculations

Speculations are generally riskier than investments in that you are usually taking more risk in order to get a quick or larger return.  Gambling is certainly an example of speculation, but not all speculations are gambling.  These are usually "hot stock picks" or short term guesses as to which way prices will move.  Speculations are typically short-term and not focused on the business itself, but just the price of the stock, option, etc.

When looking at your overall financial picture, it is important to understand which category above your various monies fall into.  Always start with savings, move on to investments from there if you want, and even dabble in speculations once you have plenty of savings and investments.  Many people should only ever have savings, and only a small percentage should ever be speculating (although many more cannot resist the temptation to dabble in speculations - ask me how I know!).  Even if you are very financially savvy and have all three, the majority should be in savings and investments.