Does Your Retirement Plan Do This?
One very useful form of life insurance that we help many of our clients with is cash-value, dividend-paying whole life insurance. We teach a unique strategy known as “Bank On Yourself” which promotes using a specific type of whole life policy, structured in a special way, to achieve many of our clients’ short-term and long-term financial goals.
You can learn more about this special strategy here, but we will summarize some of the unique benefits of Bank On Yourself below, by comparing this concept to several other popular financial strategies and retirement planning vehicles.
Bank On Yourself Vs. the 401k
The most popular method of saving for retirement in America today is the 401k plan. However, the 401k comes with some significant drawbacks, especially when compared to a Bank On Yourself plan.
Here are a few ways in which these two types of plans differ:
- Control of Your Money
Accessing your money in a 401k plan if you need it before retirement age can be tricky. While you can borrow from your 401k, the amount is subject to a number of limitations including the amount you can borrow, and potential penalties and taxes if you don’t pay it back in a timely manner. You will also lose any growth you would have earned on those funds while your loan is outstanding. On the other hand, a properly structured Bank On Yourself policy allows you to borrow the majority of your cash value whenever you want, for whatever purpose you need or desire. And, furthermore, with certain types of policies issued by certain companies, your growth within the plan continues to grow at the same rate, even while your loan is outstanding – a feature that no other savings or retirement vehicle offers. You can also set up your own repayment schedule to pay back your policy loans at your convenience and budget level. Bottom line: When it comes to control of your money, Bank On Yourself gives you a lot more flexibility than a 401k plan.
- Retirement Income
When you are ready to retire, you will want to start taking an income stream from your retirement savings. With a 401k, again, you are subject to a number of restrictions. For example, if you take money out of your 401k before your defined retirement age, you may be subject to penalties – and you are required to take distributions at age 70 1/2. With Bank On Yourself, you can take an income stream from your policy whenever you want, with no penalties or minimum withdrawal requirements.
- Growth Potential
While some may see the growth potential of a 401k plan as substantially better than that of a whole life policy, in fact, this may or may not be the case – you won’t know until it’s too late! Most 401k plans are wholly invested in the market, and as we all know, investing in the stock market involves volatility and risk. While you may have some great years of growth in your 401k, ultimately, you have no way to accurately predict how much money you will really have in your plan when retirement arrives. However, Bank On Yourself plans provide a predictable record of growth, as well as guaranteed elements. Along with an annual dividend (not guaranteed), you will also receive a guaranteed annual increase in your policy each year. The compounding of these two elements can be quite substantial, especially over a long period of time. However, the peace of mind that comes from knowing ahead of time the minimum guaranteed value of your retirement plan cannot be overestimated.
Bank On Yourself Vs. Buying Term & Investing the Difference
Okay, this is a big “talking point” that you hear from a lot of people, including financial experts. However, do you really know anyone who has ever actually bought term insurance, and faithfully invested the “difference” they could have put into a whole life insurance policy over the long term? With very, very few exceptions, people just don’t seem to follow this often-spouted financial advice.
But just in case you are considering implementing this strategy, here are a couple of ways that it differs from Bank On Yourself:
Term insurance is basically “renting” life insurance. Like with renting a home, when you are done with your term, you don’t have any equity to show for it. Furthermore, most term policies never pay out, as most likely you will outlive the term of your policy – which is why term costs are typically quite cheap. They can certainly be a useful financial tool for short-term protection needs, but they are not really a long-term financial asset. On the other hand, Bank On Yourself policies offer a guaranteed cash value, and a properly structured plan includes specific riders that can help to significantly increase the equity in your policy in the early years.
- Inflation Protection
Most term insurance policies have a level death benefit, but when you factor in inflation, this can cut into your potential return on the policy if you do happen to pass away during the term. For example, if you bought a 20-year term policy with a $250,000 death benefit, and inflation averaged 4% over the next 20 years, your policy would lose 56% of its value – and that is if it even paid out at all (as mentioned above, most term policies never do)… However, with a dividend-paying whole life policy that is structured the “Bank On Yourself way,” your death benefit can actually increase over time, protecting your legacy from the ravages of inflation.
Bank On Yourself Vs. A Savings Account
Lastly, you may be wondering, if you want flexibility and control over your money, why not just save money in a savings account, borrow from it for purchases, and pay it back with interest?
While this is a step above what most people do, Bank On Yourself can still provide some significant advantages over a simple savings account. Here are just a few of the differences between the two options:
- Interest Rates
While most savings accounts pay a variable (and usually very low) interest rate, Bank On Yourself policies offer a guaranteed annual cash value increase. You may also receive an annual dividend on top of the guarantee (dividends are not guaranteed, but we only recommend Bank On Yourself plans with companies that have paid a dividend for at least 100 years – which is a pretty good track record). Because dividends are calculated based on the death benefit of the policy, they are not reduced when you take a policy loan – or when you take retirement income – pretty neat, huh?
With a savings account, any interest earnings you receive are taxable – usually both at the federal and state levels. However, with a B.O.Y. policy, you are able to access your growth tax-free, under current tax law – assuming you work with a qualified Bank On Yourself Advisor who can help you make sure you utilize the right combination of dividend withdrawals and loans to help you avoid a taxable event.
- Immediate Access
Yes, it’s true – this is one area where a savings account may have a short-term advantage over a Bank On Yourself policy. With a savings account, you could immediately turn around and pull out 100% of the money you just put in. However, a Bank On Yourself policy does have some up-front costs (after all, you are paying for a life insurance benefit), and it it can take a few years for the growth to catch up with your contributions. It can also take a few days to process a policy loan, whereas you can obviously take money out of your bank right away (although there may be a longer delay if withdrawing a large amount at once). However, the trade off is that you will typically receive much higher earnings on a Bank On Yourself policy, as well as the advantages mentioned above – so in our opinion, it is worth the wait – especially for long-term needs such as retirement and large purchases like cars and college costs. (To learn more about these differences and more, visit BankOnYourself.com.)
Obviously Bank On Yourself is quite a unique strategy, which utilizes a very unique and often misunderstood financial vehicle. However, we believe there is no other strategy or vehicle that provides as many benefits as Bank On Yourself, which is why we think of this concept as the “core strategy” that we teach our clients.
If you are interested in learning how Bank On Yourself could help you achieve your short and long-term financial goals, please contact us today to request a free Bank On Yourself Analysis.
Dividends are not guaranteed. Tax laws are subject to change, and state laws may vary. You should always consult with a qualified tax attorney in your state if you are concerned with tax consequences of a whole life policy. Before purchasing such a policy, make sure you are working with a Certified Bank On Yourself Advisor, who has been trained in the proper design and usage of these types of policies. Otherwise you could lose any or all of the benefits mentioned above.