Family Bank part 1

When Americans were asked what provides them the biggest sense of meaning in life, the vast majority, 69% put family first, well above career, money, spirituality, friends, and hobbies.  Unfortunately at the bottom of the list was learning.

For those looking to take responsibility for their lives and provide the most for their families, continuously learning is key.  We all have blind-spots and are exposed to only so much information that following the typical advice will likely lead to typical results.  I suspect that as it relates to your family, only achieving average results is not what you ultimately want.

I recently met with a 40-year-old couple who had two kids under age 5. They were already saving for their kids’ education and were contributing regularly to a 529 plan. While they like the tax benefits of 529s, they don’t like the restrictions. For instance, the money can only be used for education expenses and the savings are vulnerable to stock market volatility. They’d also heard from friends with college-age children that 529 assets may be counted against them in their financial aid assessment.


I congratulated them on being responsible savers, but wanted them to be aware of two important things:

  1. The more you save for college, the less you potentially have for retirement (and vice versa). My video has more about the true cost of education throughout one’s lifetime.
  2. There are other ways to recapture the cost of education and to save and finance college (and retirement). By controlling the financing of education and maximizing the dollars that continue to grow for long periods of time, your wealth can grow uninterrupted and free from tax and fees. More on that in a minute.

Become your own family banker

When I mentioned a family bank to the couple, I could see from their faces they were skeptical. They didn’t believe that a whole life insurance policy could also be used like a flexible line of credit—and provide them with a death benefit, too.  The reality is that your need for financing is significant and how you use your money is just as important as where you invest the money.

But, it’s true. When constructed correctly, the policy enables you to become your own banker in order to finance some (or all) aspects of your life. Think about what a bank does. It takes your deposit, gives you less than 1% interest on that money and then lends it out to other people for 4% or more. Why shouldn’t you recapture all that extra interest?

If you’re a disciplined saver, a family bank allows you to take over the financing of your important life goals—on your terms–while also protecting your family. How? By using a unique cash value life insurance policy issued by a mutual insurance company. The emphasis is on building cash value efficiently and tax-free, although the death benefit is also great.

NOTE: Not all insurance companies are “mutual.”  With a mutual insurer, policy holders are partial owners of the company, and thus are eligible to receive dividends.

Given the guarantees within a whole life policy, your money can grow uninterrupted tax-free. There’s also a big death benefit, and you can access up to 95% of your cash–no questions asked—by obtaining a loan from your life insurance company. There’s no annoying paperwork; they can’t say no; and the policy doesn’t show up on your credit score. Even better, the cash value of the policy isn’t counted for financial aid purposes—very important when it’s time for the kids to apply to college.

When people die with whole life policies in place, the death benefit can be used to replenish the family bank and will remain in force for generations—just like it does for the Rockefellers. For more, see the book What Would the Rockefellers Do?


When to start a family bank.

You can start a family bank at any age, but I recommend doing so sooner rather than later. Since it’s technically a life insurance policy, you need to qualify first, based on your health and lifestyle. You can be denied for health risks, so it’s important to secure the policy when you are healthy.  If you’re not ready to start a family bank immediately, that’s okay. You can secure a guaranteed convertible term policy that allows you to convert to a whole life policy with no additional health screenings.


Why don’t more people use family banks?

Most typical life insurance policies are not designed to facilitate self-banking. Since the focus is on cash value more than on death benefit, the commissions are lower for those who sell them. For the same reasons, Wall Street firms and mainstream banks would prefer to do the banking and investing for you.

Also, you DO need to be disciplined about how much you withdraw and replace from the account—and you need to be diligent about paying principal and interest and be an the “honest banker.” Later in life, you can decide not to pay back the loans as the death benefit will pay off the loan and the rest will go tax-free to your beneficiaries.  For more, see book: Becoming Your Own Banker


Challenges of a family bank via cash value life

I’ve found the hardest part is building and capitalizing your “bank” to get started. Unlike drawing from your checking, savings or money market accounts, you can’t access ALL of the money in your cash value life insurance policy from Day One.

It takes a few years of funding to seed the account. But before you know it, the policy will start growing and functioning like a traditional bank, since each dollar you contribute will show up in cash value. Wouldn’t a few years of waiting be worth a lifetime of benefit? You need to think long-term and act short-term.

For a family bank to work, we only use whole life insurance policies from highly rated mutual insurance companies. Some people may prefer universal life policies, but those policies do not guarantee cash value and costs can rise significantly in the later stages of the policy. We prefer to use a more stable policy in which more of the risk is shifted to the insurance company.


Do you need a medical exam to get started?

As mentioned earlier, you need to show you are in good health. Some insurers will require a medical exam and blood work depending on age and desired death benefit. You will also need to show proof of income and assets.


Will other types of policies work?

Yes, you can use both whole life or universal life policies to create a family bank. Just know that universal life policies have fewer guarantees and higher risk of inflation as the policy ages. Term policies, which likely won’t be used during your lifetime, don’t have cash-value build up, so they can’t be used for a family bank.



In my next post, I’ll discuss ways in which a family bank can help your business. If you or someone close to you is interested in having more control over the way they save for and finance major life milestones, please don’t hesitate to reach out. I’m happy to help.