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BYOB—or not
By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com
Doctors – I’m not inviting you to a “bring your own beverage” party. I’m warning you away from a get-rich scheme called “Be Your Own Banker.”
This idea has floated around the Internet and late-night television for a while now. One of the latest versions is touted on a website that I’m not going to name because I don’t want anyone getting sucked into what is essentially one step from being a scam.
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.
Paying Your Self
According to the people selling this concept, you are the big winner here because you’re paying interest to yourself, not the bank.
The BYOB salespeople are incredible marketers. This must be where political campaign managers ply their trade in between elections. They 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 fee-only 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 paid in the form of premiums. You aren’t paying it to yourself. You’re paying it to large life insurance companies—which, by the way, are an integral part of the financial system they blast.
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A Closer Look
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 in a total of $50,000, you would have $46,110 dollars in your account. Yes, this is less than you put in, as the fees and premiums add up to be more than the growth rate. You can borrow up to 90% of the net value, or $41,500.
You will 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 put it into a deductible 401(k) plan and invest the funds in a diversified portfolio. You’d even be better off to put it into a taxable account. Then if you needed a new car or water heater, you’d have cash and wouldn’t have to borrow from yourself or anyone else.
Assessment
After spending hours researching “being your own banker,” my staff and I understand what BYOB really means. It 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.
Conclusion
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Filed under: Funding Basics, Risk Management | Tagged: Be Your Own Banker?, financial scams, get-rich scheme, life insurance policy, rick kahler |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Rick,
Have you heard about the http://www.BITCOIN.com digital currency controversy?
Frank
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Frank
You may be correct about BitCoins:
http://www.nerdwallet.com/blog/investing/2013/where-to-buy-bitcoins-currency-bubble/
Any other thoughts?
Georgie
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BYOB Follow-up
It’s impossible for a financial columnist to please all of the readers all of the time. My recent column criticizing the Be Your Own Banker scheme drew the ire of several fans of whole life insurance. Two of them in particular, whose responses were published in the Rapid City Journal, disparaged my integrity, my professional qualifications, and my math skills.
Part of the problem is that these readers interpreted my warning about BYOB, which I called “one step from being a scam,” as an attack on whole life insurance in general. That was not the case.
Admittedly, I’m not a fan of whole life as an investment. The purpose of life insurance, in my view, is not to provide retirement income or cash value, but to replace income when someone dies. For most people, the best and cheapest way to do this is through term life insurance. Obviously, someone who sells insurance will have a different opinion.
The insurance agent who tried to show that my math didn’t add up accused me of misrepresenting a Modified Endowment Contract (MEC). He wrote that no insurance professional using what he called the “banking concept” would ever sell an MEC. He’s right about that.
An MEC is a classification under 1988 federal tax law that is intended to limit the use of life insurance policies as tax-advantaged investments. If the cumulative premium payments exceed certain amounts, the IRS defines a policy as an MEC. This means withdrawals from the cash value are taxed as ordinary income and subject to a penalty.
What the BYOB salespeople promote are “blended whole life” policies. These combine term and whole life in order to keep the policies from qualifying as MEC’s. The calculations presented in my article were actual numbers taken from a blended whole life policy sold by a BYOB promoter, so of course they didn’t add up when viewed through the lens of an MEC.
Is a blended whole life policy ever a worthwhile option? Like any insurance products, there are certain situations where they make perfect sense when they are represented honestly and transparently.
However, anyone considering such a policy needs to know two things. First, insurance agents are compensated by commissions on the products they sell. They have no fiduciary responsibility to act in the best interests of their customers.
Second, whole life insurance pays some of the highest commissions of any financial product on the planet. The typical commission ranges from 50% to 70% of the first year’s premium.
With commissions like this, it’s easy to see how insurance agents might feel challenged by any criticism of whole life insurance. As a fee-only financial planner, if I discover that a particular type of whole life insurance isn’t good for consumers, that’s simply useful information to pass on to my clients. The same discovery for a commissioned insurance agent, however, is a potential threat to that agent’s livelihood.
Even with these tempting commission rates, there are many legitimate life insurance professionals whose intent is to serve customers rather than exploit them. These honest agents do their best to sell products they believe will promote consumers’ financial well-being. Comparing whole life insurance sold by reputable agents to the schemes pushed by BYOB sellers is like comparing apples and rotten apples.
It’s too bad that more insurance professionals are not stepping up to protect their industry from the rotten applies engaged in this type of shady marketing. Numerous honest life insurance salespeople would agree that the BYOB spin is not only harmful to consumers. It is also hurting the life insurance industry as a whole.
Kahler MS CFP® ChFC CCIM
http://www.KahlerFinancial.com
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LI Commissions
Rick – I held an insurance license, all types with securities components, for about 15 years. And indeed, whole life insurance paid some of the highest commissions of any financial product on the planet.
Back in the day, the typical LI commission ranged from the first and/or second year annual premium. So, unless there is a very specific reason otherwise, “go term and invest the difference.”
Dr. David Edward Marcinko MBA
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WLI
Sure, whole life insurance never expires, so your heirs are guaranteed green when you go. And, the value will probably grow each year.
But you’ll pay thousands in premiums annually, and your returns will be decimated by high management fees.
Agree with Dr. Marcinko – Buy term and invest the difference.
Mickey
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Has Ted Nelson Figured Out Bitcoin Author Satoshi Nakamoto’s Identity?
Ted Nelson posted a video in which he claims to have uncovered the identity of Satoshi Nakamoto, the creator of Bitcoin.
Does it matter if he’s right? Perhaps not. But Ted Nelson offers a perspective on Bitcoin which we don’t get to see often. Questions about the future of digital exchanges are, in fact, best tackled by mathematical minds. Shinichi Mochizuki fits the description.
More importantly, however, if we are going to have workable exchange systems, we have a lot of thinking to do because such systems require a deep appreciation for – among a long list – human psychology, behavioral economics, security, and social structures.
Anyhoo, here is Ted’s video: http://www.youtube.com/watch?v=emDJTGTrEm0
Phil Baumann RN via Ann Miller RN MHA
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Winklevoss twins plan IPO for Bitcoins digital money
Phil – If you or our ME-P readers have been missing the Winklevoss twins, they’re back in the news again with a plan to offer shares to the public that would give investors exposure to the value of digital currency Bitcoins.
http://www.nbcnews.com/business/winklevoss-twins-plan-ipo-bitcoins-digital-money-6C10512260?ocid=msnhp&pos=6
Any thoughts?
Ann Miller RN MHA
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Going Mainstream?
‘Bitcoin is a currency’ – Federal judge says the virtual cash is real money.
http://www.nbcnews.com/technology/bitcoin-currency-federal-judge-says-virtual-cash-real-money-6C10874611
Kent
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The hottest investment in 2014: Bitcoin
The virtual currency is here to stay and can make you money.
http://money.msn.com/top-stocks/post–the-hottest-investment-in-2014-bitcoin
Here are 3 reasons it’s gaining fast.
James
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HOT
James – Bitcoin’s exchange rates are flying high.
http://www.eweek.com/cloud/slideshows/bitcoin-a-polarizing-specie-in-world-currency-markets-10-reasons-why.html?kc=EWKNLEDP12172013A&dni=95705098&rni=29507698
But, the digital currency has become exceedingly controversial over the past several years, getting a lot of attention from not only investors, but also regulators, lawmakers and law enforcement.
Any thoughts?
Howard
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Here we Go!
The price of bitcoin is plummeting by 50 percent or more since record highs in late November. Selling has been accelerating after reports that the People’s Bank of China (PBoC) has ordered third-party payment providers to stop using the virtual currency.
For example, the price of a bitcoin fell to below $600 after stabilizing near $800 for the last couple of weeks after a price slump from $1,200 in late November.
Is this the beginning of the end?
Sebastian
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Do you really know bitcoin?
[Here are 11 myths]
Sebastian – The simulated online currency was big news in 2013, and bad information sometimes mixed with the good.
http://money.msn.com/saving-money-tips/post–do-you-really-know-bitcoin-here-are-11-myths
So, here are some things you may have heard about bitcoin that aren’t true.
Kent
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