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BYOB? Don’t Join This Party.

PainRelieverBYOB–or not.

Sorry, I’m not inviting you to a “bring your own beverage” party. I’m warning you away from a get-rich scheme called “Be Your Own Banker.”

This idea has floated around the Internet and late-night television for a while now. One of the latest versions is touted on a website that I’m not going to name because I don’t want anyone getting sucked into what is essentially one step from being a scam.

Once you drill down past the initial layers of ambiguity, the basic concept seems simple enough. You buy a large whole-life insurance policy. After you pay into it for several years, it will accumulate a cash value. Then, any time you make a major purchase like a new car, you can borrow against your insurance policy instead of going to a bank.

According to the “become the bank” people selling this concept, you are the big winner here because you’re paying interest to yourself, not the bank.

The BYOB salespeople are incredible marketers. This must be where political campaign managers ply their trade in between elections. They blast our financial system, banks and bankers, mutual fund managers, and financial advisors. They profess to care about the customers they call “clients.”

Problems with Becoming Your Own Banker

The half-truths and misstatements from these sellers are enough to elevate the blood pressure of any fee-only financial planner. They use terms like “depositing cash into a life insurance policy” and “having control of your own banking system.”

Amid all this unbelievable double-talk, they forget to mention one little detail. All that money that you “invest” in your whole life insurance policy is paid in the form of premiums. You aren’t paying it to yourself. You’re paying it to large life insurance companies—which, by the way, are an integral part of the financial system they blast.

Let’s look at some actual numbers. You pay $12,500 a year in premiums for a $125,000 whole life insurance policy. In four years, after paying in a total of $50,000, you would have $46,110 dollars in your account. Yes, this is less than you put in, as the fees and premiums add up to be more than the growth rate. You can borrow up to 90% of the net value, or $41,500.

You will pay the company 5% for borrowing your own money. Supposedly, the interest is paid to yourself and adds to the cash value of the policy. But a deeper look shows that the interest you pay yourself must be over and above the interest paid to the company, which is just another name for “premium.” The insurance company charges you interest regardless of the “interest” you pay yourself.

What happens if you don’t pay back the loan? The interest keeps compounding, adding to the amount of the loan and eating up the cash value of the policy. This could eventually leave you facing some nasty tax consequences, potentially including having to pay income taxes on phantom income.

A better way to “Be Your Own Banker”

Instead of paying that $12,500 a year in premiums, you could put it into a deductible 401(k) plan and invest the funds in a diversified portfolio. You’d even be better off to put it into a taxable account. Then if you needed a new car or water heater, you’d have cash and wouldn’t have to borrow from yourself or anyone else.

After spending hours researching “being your own banker,” my staff and I understand what BYOB really means. It stands for “Bring Your Own Bottle”—of pain reliever. You’ll need it for the headache of trying to understand that this is a slick advertising scheme. It makes no sense for anyone except those selling the life insurance policy.

Learn more about our Insurance Planning services.

Related Reading:

State Taxes Add to Cost of Life Insurance Annuities

Childhood Whole Life Insurance a Thin Security Blanket

Outliving Your Need for Life Insurance

Insurance Industry Should Protect Itself from BYOB Schemers

Don’t Be a Victim Twice: Protect Your Interests in Insurance Claims

Insurance Planning

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5 Responses to BYOB? Don’t Join This Party.

  1. Jude Boudreaux April 8, 2013 at 9:32 am #

    Excellent stuff as always Rick! This and the ‘infinite banking system’ have long been ways to sell expensive whole life with high commissions. Hope more people can read your work here.

  2. Tom Wargin April 8, 2013 at 9:53 am #

    Great article, Rick! Being an older planner, I remember this “sales tactic” in the 70’s and 80’s when interest rates were extremely high and credit cards and bank loans less available. Some “good cons” never go away!

  3. Jonas September 18, 2013 at 12:24 am #

    You write an interesting article. However, I am confused on the following paragraph. Can you help me better understand this paragraph please:

    You will pay the company 5% for borrowing your own money. Supposedly, the interest is paid to yourself and adds to the cash value of the policy. But a deeper look shows that the interest you pay yourself must be over and above the interest paid to the company, which is just another name for “premium.” The insurance company charges you interest regardless of the “interest” you pay yourself.

    thank you- Jonas

    • Rick Kahler September 18, 2013 at 1:32 pm #

      What they spin as paying interest to yourself is really the annual amount you are allowed to contribute to the policy as premium. For example, we looked at a policy recently where the annual premium was $125,000. The agent sold the policy to the client by spinning it that you could borrow the funds out (and pay the company 5%) and then charge yourself any amount of interest you want on the loan, subject to a ‘cap’ of $125,000 a year.

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  1. Insurance Industry Should Protect Itself From BYOB Schemers | Conscious Finance - May 13, 2013

    […] financial columnist to please all of the readers all of the time. My recent column criticizing the Be Your Own Banker scheme drew the ire of several fans of whole life insurance. Two of them in particular, in a letter […]