Be Your Own Bank: Cash Flow Banking Is Attractive, But Rarely Convenient

Whether through student loans, personal loans, mortgages, credit card Where car loans, the amount of interest that many of us pay for financing is significant. In 2021, the average consumer had a debt of $96,371, increasing by more than $3,000 from 2020, according to credit bureau Experian. Paying interest in exchange for financing is a reality for most of us, but with rising interest rate as the Fed attempts to rein in sky-high inflation, borrowing money becomes even less affordable.

Cash Flow Banking, also known as “Infinite Banking”, is designed to bypass this conventional path to institutional debt, alleviating your reliance on banks and reduce the amount of interest you pay. The concept is simple: when you need money, you borrow from yourself – or rather your own insurance policy.

It sounds good ? Although cash banking may have broad appeal, it is generally an impractical strategy for anyone but the very wealthy. It is a long-term game that requires significant expenditure early in life in order to reap the benefits later. Read on to learn more about what cash flow banking is, how it works, and whether it’s a scam.

What is Cash Banking?

In the 1980s, an insurance agent named Nelson Nash developed a financial strategy that reduced customers’ reliance on high-interest loans from traditional banking institutions. In his book Becoming Your Own Banker, Nash encouraged readers to take a life insurance policy and borrow as needed. His strategy became known as the cash flow banking method.

Again, the concept is simple. First, you secure a low interest loan with a mutual. Then, when you need money, you tap into your accumulated funds. Instead of paying a high interest rate to a lender, you take advantage of your policy’s low interest rate and pay yourself back – and whoever ultimately inherits the proceeds from your life insurance policy.

What type of life insurance policy do you need for the cash bank?

There is a lot of types of life insurance, but two of the best known are whole life and term. Most people have term life insurance, which is cheaper and covers you for a certain period of time.

Whole life insurance is significantly more expensive. According to PolicyGenius, the average term life insurance premium costs between $21 and $152 per month. Whole life insurance covers you for your entire life, so you don’t have to worry about how long your policy lasts. In return, you pay higher premiums: The average whole life insurance premium costs between $481 and $571 per month.

The cash flow banking strategy relies on whole life insurance because you can borrow against this type of policy.

How does cash banking actually work?

The first step is to buy whole life insurance. Then you’ll have to wait some time – like decades – for your font to increase in value. Ultimately, when you need a loan, you can borrow against your policy instead of a loan secured by a traditional lender. Although you are technically borrowing against your own policy, the money you borrow comes from a general fund within your life insurance company. Each time you take out a policy loan, your whole life insurance policy serves as collateral.

Keep in mind that it can take years to build up enough cash value to borrow funds. If you’re hoping to take out a large loan, it can take decades. As such, cash flow toward a down payment for a home won’t work for everyone. You’ll get the most out of it decades later, if you’re able to keep up with the high monthly premiums.

How to Choose a Whole Life Insurance Policy

A whole life insurance policy is the foundation of cash flow banking – and setting up your policy correctly is essential. First, you’ll want to buy a policy that offers dividends, which are payouts of the insurance company’s profits to its policyholders. Dividends may be distributed annually, but are not guaranteed. Ideally, you can end up paying your premiums, or at least a portion of them, with the dividends you earn each year.

Another important factor is paid-up supplementary insurance. Paid-Up Additions are optional coverage “boosters” that can increase the cash value of your life insurance policy and earn you larger dividends (and interest). Paid-up additional insurance is typically purchased with dividend income rather than a higher premium.

Are there tax incentives for the cash flow banking method?

A little ago. With a whole life insurance policy, the death benefit is paid tax-free to the heirs of your estate. And dividends from a life insurance policy are also tax-free, meaning there’s no tax on loans or withdrawals made from your policy or on appreciations in its value. .

OK, but is the cash bank a scam?

No. It’s an esoteric, though valid, strategy that requires an amount of resources, investment, and patience beyond the reach of most people.

Benefits of Cash Flow Banking

Here are some reasons why cash flow could be beneficial:

  • Low interest rates: Insurance companies generally charge lower interest rates than traditional lenders and credit card providers.
  • Dividends cannot decrease after borrowing: Most banks and financial institutions use “direct recognition” when they pay interest on your savings; that is, they only pay interest on the cash in your account. When you withdraw $10,000 from a $30,000 account, for example, you will only earn interest on the remaining $20,000. However, some insurance companies will pay you the same dividend, even if you have borrowed against your policy. In this case, you will continue to earn dividends on the full $30,000.
  • Quick access to cash: Since you’ll be borrowing funds from your own insurance policy, you can quickly get cash when you need it – no need to approve and process a claim.
  • Fiscal advantages: Funds from life insurance policies are tax exempt.
  • Flexible loan terms: If you are unable to repay the loan, the loan balance and interest are deducted from your policy – a much better alternative to defaulting on a conventional loan.

Disadvantages of cash flow banking

Cash flow banking can be an effective strategy for some, but for most of us, it’s not a practical way to manage our money or finance major purchases. Here are some disadvantages of the method:

  • Dividends are not guaranteed: Although mutual participations tend to be quite reliable, they are not guaranteed. If dividend payouts are part of your cash flow banking strategy, that’s a risk.
  • Premiums are expensive: Whole life insurance premiums are much more expensive than term life insurance. And if you miss just one payment, you risk losing your policy. For this reason alone, cash banking can be risky for anyone not fully confident that they can comfortably pay long-term premiums.
  • Funds for a life insurance policy take time to build up. Before borrowing, you will need to grow your policy. It could take decades. And if you need a loan before accumulating the value, it could upset your whole strategy.

Is Cash Flow Banking right for me?

Cash banking can be a difficult exercise for most of us. But if you can afford high premiums and understand the risks involved, it can provide flexible liquidity – interest free. That said, if you can’t afford a whole life insurance policy, term life insurance is a profitable investment that can provide you and your family with financial protection.

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