Bank on Yourself® is the creation of Pam Yellen and is a process of using whole life insurance as a means to finance major purchases. The claims made by Bank on Yourself® suggest that following the program will unlock hidden wealth secrets employed by savvy investors and business people.
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.
What Does it Mean to Bank on Yourself?
The system uses dividend-paying whole life insurance and loans from these life insurance policies to finance major purchases. This includes things like:
- Buying a car
- Going on vacation
- Paying for a home renovation
- Buying a house
- Paying for college
This is not an exhaustive list.
The Bank on Yourself® system is part whole life insurance quirk and part habit-forming process. The system exploits the fact that whole life cash value continues to grow, earning interest and dividends even when you take a loan out against it.
The system also requires that you follow a behavior pattern that results in your putting more money back into the policy than you took out to “finance” your purchase.
Putting more money back into your policy than you took out takes form as a pseudo interest payment you make “to yourself.”
For example, let's say that you wanted to finance a home renovation that will cost $20,000. You take a $20,000 loan from your whole life policy and you set an interest rate on the loan that is something higher than the loan interest charged on the loan from the insurance company. This additional interest is paid back to your cash value through the paid-up additions rider.
Two things happen when you do this:
First, the cash value in your life policy continues to grow per the normal mechanism of whole life insurance. Second, your additional payment of cash into your policy creates a cash value balance that is larger than originally assumed had you not taking the loan because you put more money into the policy.
So Bank on Yourself® plays a subtle mind trick in order to establish a behavior pattern conducive to long-term saving. If you're going to “splurge” on some major purchase, you are also going to commit an additional savings paradigm as a sort of quid pro quo.
It's sort of like committing to saving a dollar for every time you go out and buy a latté.
Is It Too Good to Be True?
The Bank on Yourself® system doesn't so much unleash a secretive world of limitless wealth potential, but instead introduces a new behavior and capitalizes on an age-old feature of whole life insurance. In fact, you could use the whole life feature and skip the other facets of the program to realize a net benefit.
Conversely, you could adopt the fake interest payment policy and skip the whole life insurance and…most likely…realize a net benefit.
So at its core, this is all Bank on Yourself® does. Taken to this level and practiced diligently, the system will help a great many people accumulate more wealth than they likely otherwise would.
There are times when Bank on Yourself® practitioners and the company itself try to stretch reality and claim the system employs magic you'd otherwise never find. At one time, the company–or its parent company the Howard-Yellen Limited Partnership–trademarked the term Spend and Grow Wealthy™. The company wasn't always super clear about how exactly one achieved more money in their “Bank on Yourself Account” and liked to make obscure references to unsubstantiated stories about famous business tycoons supposedly using the system to reach their stratospheric success.
The sizzle that accompanies many Bank on Yourself® presentations often oversold the concept and had a bad tendency to flat out mislead potential buyers on how whole life insurance dividends worked in relationship to loan interest paid to an insurance company.
That said, the system works in much the same way self-help systems work. It resonates with some people; not with others. Following it will absolutely create behaviors that assist in building more wealth over time. Whether you need to adopt those behaviors is where the possible controversy lies.
What is an example of a Bank on Yourself® Whole Life Policy?
Bank on Yourself® has done a remarkable job highlighting the fact that whole life insurance is a versatile product that requires careful attention to the buyer's specific needs. The company marketed hard on the notion that few insurance agents truly know how to use whole life insurance in the context of Bank on Yourself®. In truth, they simply meant a blended whole life policy that maximized cash value.
A Bank on Yourself® whole life policy is one that maximizes the paid-up additions feature of a whole life policy and produces as much cash as possible as quickly as possible. Here's the ledger example of such a policy:
This policy has a $20,000 annual premium. For a lot of whole life policies, the cash value after the first year would be zero. But this policy has $15,709 in cash value. Within the first 10 policy years, the policy has more cash value than the sum of the premiums paid, and the gap between premiums paid and cash value continues to grow each and every year after that.
The policy owner could take a loan against this policy as early as the first policy year if he/she wanted.
The important takeaway from this example is simply there is not a specific Bank on Yourself® whole life policy. Instead, there is a design protocol that makes a policy better for the program. That design protocol is one that enhances the cash value of the whole life policy. Doing this gives the policy owner greater capacity to use the life insurance contract to finance major purchases.
Bank on Yourelf® Pros and Cons
Bank on Yourself® does establish a disciplined approach to spending money with a commitment to save additional money after making a major purchase. The system also puts the spotlight on a key feature of whole life insurance that can more efficiently deploy your dollars when it comes to maximizing money saved/accumulated over your lifetime.
In other words, the program is a track to run on and most people find greater success in accomplishing most goals when they have a systematic path to follow.
The program doesn't really create additional dollars out of thin air as it sometimes suggests. It also requires you to buy whole life insurance to execute properly. This can be a major problem for individuals whose health precludes them from such a purchase.
It's also a system sometimes half-heartedly followed by life insurance agents who wish to espouse it only to the point where they sell a policy. There's a considerable commitment an agent must make to the program if he/she truly wants to help people “Bank on Themselves,” and not all agents are willing to undertake such a responsibility.