Simplify, Streamline & Save

Be Your Own Bank By The Numbers

Being you own bank by using a life insurance policy seems to be growing in popularity with the rise of Tik Tok and Facebook advertising. Does it actually make sense though? Let’s take the emotions out of it and look at just the pure numbers.

Life insurance agents are going to hate this. Keep in mind, they are life insurance agents and are paid to convince you this is a great strategy. Also, take note of a few things when you see these videos on social media. Aks yourself, do these people making these videos have any experience what-so ever? Do they have the ability to advise you on literally any other type of strategy? Who is really gaining from this transaction?

Let's Dive Right In

Client Profile

Age: 30

Not Married, No Kids

Not a homeowner, but would like to be

Annual Income: $80,000

Employer offers a 401(k) plan, with Roth option. 3% match.

We will assume good health and non-smoker. This is the only way the IUL can even come close. 

Option 1 - The "Traditional" Way

Client Invests 3% ($2,400/year) into 401(k) Roth. Employer matches $2,400 into Traditional Side. $4,800 total in retirement account. 

Client invests another 5% ($4,000) outside of the retirement account into a brokerage account. 70% in SPY ETF and 30% into AGG ETF. Quarterly rebalance. 

Option 2 - Be Your Own Bank (IUL)

Client foregoes the retirement account because they are in good health and want to “Be Their Own Bank.”

Client takes $6,400 per year and buys an IUL policy for the cash value. Min death benefit, max cash value type set-up. 

How Do These Play Out?

After 10 Years

Client has contributed $2,400 per year into their retirement account. Employer added another $2,400 for a total of $4,800 per year. $24,000 total contribution from Client. 

Client has $77,696 just in their 401(k) plan.

Client also contributed $4,000 ($40,000 total) into a brokerage account. 

Client has $64,682 in the non-retirement account.

Total Account Combined Values = $142,378

Client has contributed $6,400/year so $64,000 total. Using the assumed interest rates…

Client has $70,383 of cash value. A net gain of $6,383

After 35 Years

Client has contributed $2,400 per year into their retirement account. Employer added another $2,400 for a total of $4,800 per year. $84,000 total contribution from Client. 

Client has $862,922 just in their 401(k) plan.

Client also contributed $4,000 ($140,000 total) into a brokerage account. 

Client has $718,598 in the non-retirement account.

Total Account Combined Values = $1,581,520

Client has contributed $6,400/year so $244,000 total. Using the assumed interest rates…

Client has $670,264 of cash value. A net gain of $426,264

But, But The Insurance Agent Told Me It's All About Taxes












The Agent

What about them? See life insurance is “Tax-Free” for income because you aren’t taking actual income. You are taking a “loan” against the cash value. Guess what! You can do the exact same thing with almost any type of account. 

The IUL illustration shows an income starting at age 66 of $53,104/year. Some of it is a return of premium, some is a loan. 

However, in the traditional way of doing things, Client A will have $431,461 in Roth (aka income tax free) and $431,461 in Traditional (aka still needs to be taxed) assets. Client also has $718,598 in non-retirement accounts that need to be taxed but at long-term capital gains (most likely 15%).  So let’s see how much taxes really matter when the difference in account values is almost $1.1 million.

Client could easily buy an annuity with the Traditional IRA money. Right now at age 66 they could easily expect a 5.75% withdraw rate. That equals $24,809/year. Client could also easily do the traditional 4% withdraw rate for the other investments that would result in $17,258 tax-free from the Roth portion AND another $28,743 per year from the non-retirement accounts. $70,810 per year in total.

But those pesky taxes that insurance agent told you about… Yup you will pay probably 25% in the 401(k) Traditional bucket. This equals $6,202. You will pay long-term capital gains on the non-retirement money (15%). That equals $4,311.

So under these illustrations, Client gets $53,104/yr from their own bank. OR $60,296/yr AFTER TAXES from the "normal" route.

By why is this? It all has to do with compound interest. That “Be Your Own Bank” policy gets absolutely chewed up in the early years by the cost of insurance. Remember, it’s really a life insurance policy first and foremost. The cost of insurance in those early years far outpaces the benefits most people will every realize. 

Other things to consider…

What if this client wants to buy a house in year 4? When they go to “their own bank” they will be unhappy to find out their policy is still upside down. Meaning it has less cash value than contributions. 

The IUL illustration was run with a preferred rating, what happens if maybe the client is a little overweight, uses tobacco or partakes in smoking something else? Their rating will go up, resulting in a higher cost of insurance. That cost will chew into any gains even more.

Doesn’t that non-retirement account get taxed each year? Maybe, maybe not. ETFs aren’t taxed until you sell them for either a gain or in some cases you get credit if you sell them for a loss. It would be pretty tough to say one way or another if and how much taxes may be on a year-to-year basis. 

If we want to go down that road, we could also ask of the life insurance agent about the cap rates of the policy. It’s all fun and games to show an illustration with “current rates” and assume those rates will continue in the future. The reality there is a guaranteed minimum rate that the insurance company can drop down to. The illustration we ran in this scenario the current cap rate is 9.5% but the insurance company can go all the way down to 3%. They sometimes do. 

IUL Policies Aren't all Bad...

They are just oversold by insurance agents playing financial advisor “dress up.” 

Permanent Life Insurance can be great for estate planning
IULs can be great for CERTAIN individuals for income planning