What is Bank On Yourself®?

Bank on Yourself®  is the brain child of Pam Yellen and is a wealth building and financing strategy that focuses on the use of policy loans on a participating whole life insurance policy. The central premise is not unique to Pam, and her propriety behind Bank on Yourself® is ground in her approach to disseminating a selling system to agents who want to enroll in her certified advisor program.

But does it work? We get a fair number of questions on this subject, and I've brought it up in the past. Today we'll focus specifically on Pam's system and discuss where it's correct and where it's incorrect.

First the Pitch

Bank On YourselfThe premise behind Bank on Yourself is that if you use cash values in a participating whole life policy to finance major purchases, you'll avoid finance charges incurred by borrowing money from a bank, and you can use the whole life policy to continue to become more wealthy.

In fact, team Pam has trademarked a unique catch phrase around this: Spend and Grow Wealthy®

Does it work? Well to answer this, we first have to address the underlying forces that Pam points to in her book.

Nothing New

Pam doesn't win any points for originating ideas. Bank on Yourself® is based on the same principles championed by Bob Castiglione's Lifetime Economic Acceleration Process® (LEAP), and R. Nelson Nash's Infinite Banking Concept.

The idea is simply this:

When one takes a policy loan on a policy, the money doesn't move, it stays put in the policy. The insurance company issues the loan to you and pledges your cash surrender value as collateral. Because the money doesn't move, it continues to earn the guaranteed interest rate stipulated in the contract, and it still earns dividends (sometimes less on direct recognition policies).

Now, Pam takes it a step further and suggests that if you do this, you'll earn every dollar in interest back. And this is a source for some trouble.

Concept vs. Reality

How can Pam claim that one might be able to reclaim every dollar in interest? The concept follows an extension of something mutual life insurers have told us for years.

Pam suggests that since mutual companies are owned by the policy owner, and since dividends are paid back to those policy holder, the interest paid by the insured is simply returned to him or her via the policy's dividend.

While there is nothing incorrect about this statement (i.e. conceptually it's absolutely true that the insurance company could, in theory, return all of the interest paid to the policy holder through a dividend) in practice the insurance company isn't going to return all of the interest collected through a policy loan.

Pam was actually called out on this by Alan Roth and she later told him he perhaps was taking her statements too literally–she also followed her communications to him with threats of a lawsuit.

The Problems with Spend and Growth Wealthy®

Most of use realize how crazy it sounds on its face. The insurance company will pay me to spend my money? No they won't.

Insurance companies in practice do not pay more in dividends than they collect in interest from policy loans. In fact, non-direct recognition companies (which Pam specifically calls out at the way to go on her book) have less ability to specifically account for interest collected on a policy loan than direct recognition companies.

It's absolutely true that insurance companies recognize policy loans as income producing assets, and that income is included in the overall dividend payout. It's even true that there are laws that dictate how much income must be paid in dividends to participating policies. But policy loans are not a losing business proposition to insurance companies. Pam is walking a thin line where she cannot be conceptually wrong, but she is incorrect with respect to how it works in practice.

Other Claims, Design and Commissions

While Pam's overly rosy depiction of policy loans is a bit of a set back, her discussion of commissions on policies is actually pretty accurate. Because policies designed under her model make heavy use of paid-up additions it's true that the old fees and commissions scare certain financial gurus talk about is grossly overblown. Does Bank on Yourself specifically make use of policy blending? We've never been able to get confirmation that they support it as an official design feature. But we commend her for publicly placing the spot light on the importance of paid-up additions.

So, Great Idea or Waste of Time?

Pam way overstates the beneficial relationship between policy loans and dividends, but she's not alone in this. Nelson Nash has also done it for years. Even LEAP® has been cryptic on how this all plays out. She also over hypes the benefits of non-direct recognition by categorically declaring it a key feature, again she's not alone in this. Still, there are certain aspects about this that are worth a look.

For example, it's still a high yielding savings plan relative to the exposed risk. Pam tries to attach the stock market a tad too much. This is not a replacement idea for investing in the stock market. Participating whole life is not going to beat the long term assumed yield on equities. It's a bond alternative play not a stock alternative play.

She advocates heavy use of paid-up additions, which is the right direction for whole life insurance as an asset class.

So, while Pam is a tad out of touch with reality some of the times, her overstatements of benefits are less egregious than the downplay you'll see from some of the financial gurus who rail against permanent life insurance. Bank on Yourself® isn't the absolute solution, but it's a step in the right direction.

9 Responses to “What is Bank On Yourself®?”

  1. John Bennett says:

    Your article is, as with all these critiques, not completely factual itself, so let me see if I can help you, without muddying the waters more.

    1. Roth’s article compares buying a car through a policy to NOT buying a car at all. Yellen’s concept compares financing through traditional means to financing through your life insurance policy. Are they the same thing? You give him way too much credit. He’s a Wall Street shill. What did you expect him to say?

    Furthermore, Roth himself said in his article that the illustrations showed he had more money when borrowing from the policy to buy a car and paying it back the way Yellen describes in her book, than when he didn’t use the policy to buy a car.

    She probably can’t sue him because she is a public figure. You may end up finding out more about that yourself in the not-too-distant future.

    2. I attended a training session where I saw a spreadsheet showing two $30,000 loans being taken from a non-direct recognition insurance policy, and each being paid back over four years, at the interest rate the insurance company charges. The policyowner recovered all of the interest he paid plus an additional $267.

    I would challenge you to produce evidence that a non-direct recognition insurance company “isn’t going to return all of the interest collected through a policy loan”.

    3. Some direct-recogniton companies go to extremes to discourage their policyholders from taking loans, for example, my policy with a direct recognition company sends me documents (yes, several) to sign signifying that I acknowledge that my dividends may be reduced if I take a policy loan. Not the case with non-direct recognition. They just ask how much I want to borrow, and continue to pay me the same dividend.

    I hope this helps clarify some of your misconceptions about this type of strategy. You should take heed of your last statement, that her “overstatements” of benefits are less egregious than some of the financial gurus (Roth) who rail against her. I hope you’ll take this with the best of intentions.

    • Brandon Roberts says:

      Hi John,

      So let me see if I get this straight. First your contention with Alan Roth is that he compares action vs. inaction vis-a-vis purchasing a car but your point is simply that you cannot make that comparison because the whole point of Bank on Yourself is to compare the impact of borrowing through “traditional” means vs. borrowing from a policy.

      But then you state, you have seen spreadsheets showing loans of $30,000 where the borrower made back all of his or her interest plus $267. And despite telling me this, you don’t suddenly see a problem with your first contention outlined above.

      The suggestion from Pam and friends is that I pay back more than the company charges me. And, correct me if I’m wrong, the suggestion is to make that additional payment in the form of a paid up addition, not just a simple pay down in principal.

      It should not shock anybody that if I take money out of my left pocket and stick in in my right, I’ll have more money in my right pocket. There’s no magic taking place here, and I could accomplish the same thing if I simply took the money out of a bank account, assumed a rate of interest on a loan, assumed a higher rate of interest over that loan, and put money back into the bank account at that higher assumed repayment based on the higher interest rate (i.e. I don’t have more money in there because the insurance company gave me anything, I have more money in there because I put it in there).

      The CEO of Lafayette Life himself admitted to Alan Roth (allegedly) that he (Alan) was correct.

      Now, if you have hard evidence, why not bring it out here? We’ll even take just a policy illustration that shows us that the insurance company paid more dividends to the insured by virtue of taking a policy loan. Answer this question, if NDR pays the same dividend no matter what, how is the insurance company paying more dividends back to the policy holder who takes a loan? Again, simply paying back more than you owe in the form of additional paid-up additions isn’t magic, and saving more money will always net you more money. You aren’t netting anything magical because you took out the loan.

      Taking the loan does not make you better off. Saving more money is making you better off. Just be honest with people, they’ll appreciate it.

      Now, we’re not saying the idea is wholly a bad one. The use of a life insurance policy reduces economic loss that would be incurred from simply taking out a loan. But stop with the overly rosy depiction. These products don’t need to be over-hyped, they’ll stand just fine on their own merits.

      • John Bennett says:

        Thanks for your response. I didn’t write your critique, you did. I think the burden of proof should fall on you, don’t you? Prove that my statement about the additional returns are false. Use real numbers and lets see your illustrations. You wrote the review, now back it up.

        Even you must be suspicious about Roth’s comment from the CEO of Lafayette Life.

        And your comment about being able to do this with a bank account simply by paying yourself the additional interest is interesting. Is that what people do? Do you do that? Do you know anyone who does that?

        And, as a further correction, LEAP is not the same as Bank on Yourself. I have two LEAP policies from 1996 and neither has a Paid Up Additions Rider. LEAP is about the “velocity of money” theory.

        Your “truth” isn’t helping. What are you trying to prove? That you know more about this than anyone else? If so, write a book. I’d be happy to buy the first copy.

        • Brandon Roberts says:

          John we’re not going to play the “I asked you first game.” You come to our venue and claim we made a mistake, now prove you’re right.

          This is the same thing we’ve criticized Bank on Yourself for doing. Making claims that could be conceptually correct, but have never been proven by any hard evidence. You failed to explain how NDR pays higher dividends if it’s paying the same amount regardless.

  2. Justin says:

    Great discussion taking place. As a third party looking in I think BOTH of you should use examples and numbers to back up your arguments.
    Correct me if I am wrong but don’t ndr companies like Layfayette charge a variable loan and ndr companies like ONL have a fixed rate on their loans to prevent funds from being arbitrated?
    Lately this blog has been a bit stale, this post was a much needed refreshment.

    • Brantley Whitley says:

      Justin–Thanks for the feedback.

      As for your question regarding loan provisions in relation to NDR and DR companies, the two things are unrelated.

      Brandon and I use real numbers every day in our practice to help clients make educated decisions about what company/product they should use. We have no problem sharing openly with our readers and will take your suggestion in to consideration.

  3. Jeff Hexter says:

    I agree with Justin about wanting examples, and numbers.

    I disagree with Just about the blog being stale lately… I’m learning something new with every post I read and podcast I listen to. I’m better able to understand this stuff and discuss it with others (and with my friend who are insurance agents).

    And it makes me laugh. I know… weird.

    • Brantley Whitley says:

      Hey Jeff,

      Thanks for supporting us! Glad you feel that we offer something new for to learn on a regular basis as I can assure you that we put a great deal of time and energy into everything we publish.

      As for examples and numbers, we may consider doing a side-by-side comparison, thanks for the suggestion.

  4. KarenBeale says:

    Thanks for sharing this precious knowledge, it extends my knowledge about banking thanks again

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