Family Banking Concept, anyone heard of it?

rjingaJune 11, 2008

I did a search here and did not see any similiar thread. I heard once from a State Farm insurance agent that I had about Family Banking.

I'm not knowledgeable of this but I"m going to be finding out more soon, to see if it's a viable option for handling my ongoing finances.

The very basic concept is that you use your liquid assets and possibly other assets and become a bank for yourself and/or your family. Acting just like a traditional banking/lending institution or even a credit card company for that matter. YOU are the bank for yourself.

so in essence you can charge "yourself" interest on the money that you loan yourself, or your family.

This guy referred to an author on this topic but I cannot remember who it was (I'm trying to find out).

Anyone know of this, have info etc?

I'm also checking with my accountant to see from a tax point of view, how this might work for us.

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joyfulguy

When a bank tells me that they're gonna give me a great deal ...

... empower me ...

... or give me some other wonderful benefit ...

... I translate that as, "Ya better read the fine print - carefully".

Sometimes one does get a useful benefit from a bank.

Sometimes.

Learn to manage your money effectively - a great hobby (that pays well).

ole joyful ... 41 years shareholder of a bank

    Bookmark   June 11, 2008 at 7:05PM
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dave_donhoff

Hi Rjinga,

You have either stumbled across one of two schools of personal financial wealth development & management;

Infinite Banking
Graham Nash

Missed Fortune
Douglas Andrew

You can Google either/both for a great body of work, and comments.

Nash's methods are built on the idea of "self-banking" around a core collateral basis built from special equity advantages of cash-value "whole life insurance." There are pros and cons to this.

Andrew's methods are built similarly, but on the more flexible basis of cash-value "universal life insurance contracts."

Nash's methods are more restrictive, and (in my opinion) not as safe for prudent and financially mature folks.

Andrew's methods are better (again, in my opinion,) but still are only REALLY beneficial for those who have the maturity, dicipline & character to set out a longterm plan and stick with it.

BOTH leverage the uniquely advantaged loopholes that make the cash-value equity of maximum-funded life insurance contracts... which scares away people who don't look past the surface, and freak out about how expensive life insurance is.

In reality, properly done, either strategy will significantly outperform (primarily due to the tax advantages) alternative 'equally-protected-from-loss" strategies that are not tax-sheltered by the laws that give cash-value insurance policies their advantages.

BECAUSE OF THE COMPLEXITY of these strategies;
A) I would not recommend trying to master them on your own,
B) I would STRONGLY recommend vetting any potential advisor from a character basis above all else,
C) DO NOT be "sold" on the strategy.... if you ever decide to proceed, do so ONLY on your determining that the Advisor is trustworthy of ongoingly reviewing, managing, and guiding you over the years into the future.

These are NOT "set up & forget about them" strategies.

Luck!
Dave Donhoff
Leverage Planner

    Bookmark   June 11, 2008 at 7:05PM
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thompsoncapital_gmail_com

Just wanted to make a quick correction and clarification:

The book referred to up above is called "Becoming Your Own Banker: The Infinite Banking Concept" and its by Nelson Nash. Minor detail.

I do agree with some of the points above. It is very essential to work with an advisor that is well versed in this concept, and that has a reputation. These are not set it and forget it strategies as you will want guidance along the way. That being said, the concept is very particular in that it can be very powerful and useful, but it requires a large amount of dedication. If not used correctly it can be somewhat harmful.

I am personally and advocate of the infinite banking concept, and prefer the use of whole life insurance. I respect Douglas Andrew but I believe he has it incredibly wrong here. To create a family banking system in a policy that has increased cost every year will largely deplete the values in the golden years. These policies look great in the first years as the policy has less internal costs (the cost of insurance), but the reality is that the universal policy is simply a term product coupled with an investment vehicle. The term is cheap in the early years of the policy but is impossible to afford in the later years. Whole life will largely out play this type of policy as the costs are fixed. The UL becomes less efficient every year, while the whole life become more efficient every year.

Just a couple of quick points as this is what I teach my clients.

Here is a link that might be useful: Infinite Banking Concept

    Bookmark   August 3, 2010 at 2:48AM
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cryptandrus

Just remember... insurance companies make a profit off of selling this product. I had a Whole Life policy for many years and decided to cash it in. There are many better options out there.

Have you considered joining a credit union? I've used one for my main bank for many years, and am extremely satisfied with the service and low cost.

===

Here is some information from the "Credit Union National Association" website:

Credit unions are financial institutions formed by an organized group of people with a common bond. Members of credit unions pool their assets to provide loans and other financial services to each other.

Credit unions differ from other banks in several ways:

Credit Unions are:
Not-for-profit cooperatives
 Owned by members
 Operated by mostly volunteer boards
Other Financial Institutions are:
ÂÂ Owned by outside stockholders
 Controlled by paid boards

These factors allow credit unions to pay dividends to their members (not shareholders) and offer them lower loan rates, higher savings rates and fewer service fees.

The National Credit Union Administration (NCUA) is the federal agency that charters and supervises federal credit unions. They also insure savings in federal and most state-chartered credit unions across the country through the National Credit Union Share Insurance Fund (NCUSIF), a federal fund backed by the full faith and credit of the United States government.

The CUNA website includes information about the history of credit unions, where to locate credit unions near you, and how you might be eligible to join.

    Bookmark   August 17, 2010 at 9:38AM
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maifleur01

I wish my credit union did all the things that I see posted for credit unions. Mazuma has always charged more for loans and paid less dividends and interest than most of the other financial institutions. I have not checked currently but when we purchased our last vehicle we received 0 interest from the car loan company where Mazuma would give 1/2% reduction on their 6.5% regular car loans.

I keep an account, actually 2, one share, one checking, for my mad money.

The percentage on whole life is not as great as it was at one time so now it is not a good investment but I could kick myself because I had a policy at 6% that I let lapse into paid up term insurance. The last time I saw a report I have life insurance until 2043.

    Bookmark   August 18, 2010 at 9:00PM
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dave_donhoff

Hi Jake,

You are correct about these strategies requiring regular review & maintenance... however you've been taught wrong about Universal strategies. I want to address a mistake and misconception you have (and have no doubt been taught) about using a Universal Life contract instead of a Whole Life contract for a family banking strategy.

I realize up front that in doing so I may get too technical for almost everyone else reading this... but here goes;

In Universal Life design, you can choose either a level face (aka "option A," the absolute death benefit stays level, regardless of cash accumulation,) or an increasing face (aka "option B," the initially determined death benefit rides on TOP of any cash accumulation values.)

When you pay a premium for life insurance, your premium is determined by how much of the INSURANCE COMPANY'S CASH is at risk to them of being paid out if you die. If you use a LEVEL face design (which is best for the family banking concept,) then the amount of the insurance company's funds "at risk" (the amount needed to be paid out at death) is reduced by the amount of additional cash accumulation.

EXAMPLE:
Assume you buy a $1 Million face (death benefit,) using a Level Benefit design.
Assume this costs $300/year based on the insured's age, health, etc. for the first year.
Assume the owner intends to transfer $250,000 of his retirement savings into this new account.
(We'll ignore tax efficiency strategies for this lesson, as they are important, but irrelevant to the financial principles we're talking about here.)

In his first year (as stated above,) his term premium is $300 which pays for the insurance company's risks (based on his age, health, etc.) of having to pay out $1,000,000 should he die the next day.

$300 cost on $1MM is (divide the cost by the payout)... $0.0003 premium cost per dollar of benefit.

In his SECOND year, however, two things have changed;
A) he is one year older... so let's assume his premium increased to $0.00035,
B) he has an accumulation of $250,000 in his account.

Because his death benefit is LEVEL at $1MM, the insurance company's cash-at-risk is only $750,000 (since his accumulated cash value is inclusive in the death benefit payout.)

THEREFORE, the annual cost is;
$0.00035 premium
x $750,000 benefit cash at risk to the insurance company
==========
$262.50 / year

That's a 12.5% DROP in premium costs in the very 1st year...
EVEN THOUGH the insured has grown OLDER by a year!

At an average 7.2% rate of return (*VERY* realistic for Indexed strategies) the account doubles every 10 years.

Therefore, in 10 years the insured will be older, and thus the premium on their remaining term coverage will be higher... perhaps 10% or even 15% higher... but only on the amount of dollars at risk to the insurance company.

In those same 10 years, the original $250,000 will have grown in a compounded fashion to $500,000... thereby dropping IN HALF the cash risks to the insurance company.

Let's do the math;
$0.000403 premium (.00035 at a 15% increase,)
x $500,000 benefit cash at risk to the insurance company
==========
$201.25 / year

As you can see, a Level Benefit design for a Universal Life contract drops in actual coverage premium year after year, making the policy more and more efficient (better growth for the owner.)

Further... assuming you are a "whole life" guy... if you compare actual mortality costs of whole versus universal, there is no comparison... whole is dramatically more expensive, dollar-for-dollar.

WHOLE Life has its place... it is excellent for people who are actually using it for reasons of life insurance DEATH BENEFITS.

In contrast, for people who don't need or care about death benefits per se, UNIVERSAL Life (particularly the market indexed account growth type) is far superior. It gives much better rates of return than Whole Life, at much lower costs.

Cheers,
Dave Donhoff
Leverage Planner

    Bookmark   August 18, 2010 at 9:06PM
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PRO
hjgj

Obviously Dave is an insurance salesperson. Only insurance salespeople sell whole-life / universal life, they are horrible products. Insurance salespeople are not licensed to sell investments, therefore they sell this crap to get around it (it's so-called investments wrapped up in an insurance policy). The premium rates are on average 20x more expensive than Term Life. Here's the worst part (besides the fact that you can invest your own money and get better returns in basic mutual funds) - when you die the insurance company keeps that "cash value" and you only get the face value of the policy, hence, why I call it a horrible product. What's the point of "investing" inside the policy if they keep your money upon death??? No point! Get Term Life, lock in a policy for 15-20 yrs (so there is no premium increase), and invest the rest that WOULD have been your premium yourself so that your family can keep the money if something happens. This applies to Family Banking. Again, if an insurance agent is the one selling you this, BEWARE! It's basically whole life insurance in another form.

    Bookmark   February 11, 2015 at 11:07AM
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