My broker showed me how I could create a “bank” using my life insurance. I listened, but still don’t really get it. Any clarity would help.
Answers | 2
If you put money into the bank called permanent life insurance, there is an extra component that does not come with a real bank account. With life insurance, there is a death benefit. That said, let's not talk about the death benefit any more because it is not elemental to the cash accrual thing. You pay your premium and your plan develops cash over time. Easy enough to understand.
Now, let's add some things. There can be two interest rates in your life insurance plan; one is a guaranteed rate (single digit, around 3%). You will never earn less than that. Then, there is the current rate, which could be in the single digits but is usually higher than the guaranteed rate. At the actual bank, you have one rate - and right now it is frighteningly low. The life insurance guaranteed rate is about 3% which, while it beats the real bank, isn't screamingly high. However, the current rate on one of my plans is 9+% which is pretty good. So, if I go to a real bank I get less. Right now, if I go to my life insurance, I get more.
One more! If I take 10K out of the cash accrued at an actual bank, the compounding will then apply to the remainder, which is now 10K less so my earnings will take a hit. If I take 10K out of my life insurance, it actually does not come out of my account, it comes out of the life insurance company's account (it is technically a loan), leaving my account to compound on the same premium that was there before I borrowed the 10K. Nice!
There is more, but you are beginning to see how this "bank" can be a better bank than a real bank.