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The Pitfalls of the “Be Your Own Banker” Idea

The Pitfalls of the “Be Your Own Banker” Idea

September 07, 2023

Thank goodness National Life Insurance Awareness Month is here

Some insurance sales folks peddle a concept called Be Your Own Banker (BYOB). Don’t fall for it.

This idea has floated around the Internet and late-night television for a while now. One of the latest versions, touted on a website called, shows what very bad advice it is.

The Idea Behind Be Your Own Banker

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 people selling this concept, you are the big winner here because you're paying interest to yourself, not the bank. Note that, in a whole life policy, part of your premium goes to purchase insurance protection, another part to the cash account, also known as the investment account.

The BYOB salespeople are incredible marketers. The sales reps blast our financial system, banks and bankers, mutual fund managers and financial advisors. They profess to care about the customers they call clients.

The half-truths and misstatements from these sellers are enough to elevate the blood pressure of any honest 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 from the premiums you pay. You aren't paying the money to yourself. You pay it to large life insurance companies – which, by the way, are an integral part of the financial system these promoters blast.

Run the Numbers

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 $50,000 total, you have $46,110 in your cash account. Yes, this is less than you put in, because of the fees and the part of your premium that buys insurance protection. You can borrow up to 90% of the net value, or $41,500.

You 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.

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

BYOB by Another Name

Maybe BYOB stands for Bring Your Own Bottle – of pain reliever. You'll need it for the headache of trying to understand this slick advertising scheme. It makes no sense for anyone except those selling the life insurance policy.


Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any insurance products or security. To determine which product(s) or investment(s) may be appropriate for you, consult your financial professional prior to purchasing or investing.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.

Investing involves risks including possible loss of principal.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by RSW Publishing.

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