There is a way to become your own bank and build your wealth in the process. It’s called Bank on Yourself, or B.O.Y., and it’s explained by business consultant Pamela Yellen by telling the story of Katie and Paul. Katie and Paul were put onto B.O.Y. by a friend, Rob Martinez while commerating over loss of value in the their 401k retirement accounts. Rob explained that they could borrow from themselves instead of the bank and reap the benefits instead of paying their wealth to others. The ultimate goal of B.O.Y. is to get back the cost of one’s entire lifestyle. That is, to invest in yourself and in the process, recover all the expenditures you make. It is based on using a whole-life insurance contract that pays dividends and includes a paid-up additions rider (PUAR) (which enjoys the tax benefits of a life insurance policy). You pay a premium each year that is divided into two parts. A portion goes to your traditional life insurance coverage, and a portion goes into the PUAR. The PUAR also buys a death benefit but includes other benefits. One benefit is that each year you pay into the PUAR buys a small amount of additional life insurance that you will never pay another premium for. Because each year the insurance company collects enough premium to cover much of the cost of the death benefit of the policy, it has little risk for that portion of the death benefit. Consequently, the insurance company can grow the PUAR cash value faster than other types of investments can grow. The cash value can be borrowed against. When you want to make a major purchase, you borrow from your PUAR cash value, then pay back the loan to yourself, with interest, just like paying any lender. You get back the full cost of your purchase, plus the interest, and your PUAR cash value grows even more. If you also leave your dividends in the plan, they buy more cash value in the PUAR, driving the cash value up even more quickly.
There is a limit to how much one can pay into the PUAR over the base policy. If the limit is exceeded, the policy becomes a modified endowment contract and loses the tax benefits of a life insurance policy. The B.O.Y. plan is taxed like a Roth IRA; you pay taxes before you make contributions to the plan. Consequently, when you pull money out, it is tax-free.
Not many insurance companies issue policies that provide for B.O.Y. Only companies that issue policies that are dividend-paying, whole life insurance that incorporate a flexible PUAR are used for the B.O.Y. plan. In addition, the company has to be what is known as a non-direct recognition company, and it has to have a long history of financial strength to protect your money. A non-direct recognition company is a company that does not differentiate between whether you are borrowing your money from the plan or someone else is. This is important. Using a non-direct recognition company means that even when you have borrowed money from your plan, you continue to receive the same dividends each year. Again, these can be left in the plan to grow cash value (again, even if you have borrowed from it!).
In a B.O.Y. plan, you can pay yourself back whenever possible. If financial times become difficult, all you have to do for sure is pay any interest due on loans by the end of the policy year. If you take a loan on your 401k, this flexibility is not available.
Currently, tax law allows withdrawal from a B.O.Y. for retirement income without oweing any taxes. Also, this retirement income does not count for alternative minimum tax purposes and does not decrease social security earnings.
There are initial costs associated with beginning a B.O.Y. compared to, say, a savings account where you borrow from yourself and pay yourself back plus interest. Early on, the savings account will build value more quickly. However, later the B.O.Y. plan gains value because money you borrow from the plan does not reduce the dividends that are paid (building more value through reinvestment in the plan) while you are using and repaying the loan. The eight most common ways used to find money to began a B.O.Y. are: restructure debt; reduce funding to the 401k; raid the 401k; tap savings; rethink a tax refund; make lifestyle changes; convert existing life insurance policy; and use home equity.
There are well-known financial gurus such as Suze Orman and Dave Ramsey, seen on TV, that advise folks to buy term life insurance rather than whole-life because its cheaper and there’s a only a small chance you’ll recover a benefit from them. However, the benefits of whole life insurance policies with a PUAR apparently are unknown to them. One can receive a free B.O.Y. analysis by going to the following Web site: www.BankOnYourselfFreeAnalysis.com. The site also provides a summary of the B.O.Y. process.
Pamela Yellen holds a psychology degree from the University of San Francisco and has worked as a consultant to thousands of financial advisors. She has been featured in USA Today and Fortune Small Business and spoken to audiences throughout the US, Canada, Asia, and Europe. She co-authored Zero-Resistance Selling and authored the best-seller Psycho-Cybernetics.