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
The 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.
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.