Outside Economics

Private Banking and Insurance

Posted by Wendell Brock on Wed, May 07, 2014

Most people have never thought that they could become their own “private bank” or that acting as your own personal lender was an option; but with the private banking concept, you are able to make this a possibility and have the opportunity for more financial freedom. This concept borrows the term “private banking” from the banking industry simply because of the similarities of creating a pool of money that you privately control that can be loaned out as needed. Having this money available allows you to remove the traditional bank from the equation and essentially you become your own personal bank.

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There are many benefits to setting up your own private bank. Private banking has over 200 years of history. It is successful in part, because it has endured over a dozen recessions and the great depression.

A private bank is protected from investment losses as well as from taxes. It grows tax-free, you can use it tax-free and you can retire on the funds tax-free. Because your own private bank is set up through a whole life insurance policy, the IRS considers the dividends earned a return of the policyholder’s premium, thus allowing the dividend to remain a tax-free benefit of the policy.

The cash build up may be taxable if used and then the policy is canceled; any gains above the premium deposits would then be taxable as long term capital gains.

Typically there are no limitations on how much you can put in, or when you have to take it out. The policies on the whole demonstrate a consistent growth between 3.5 to 7.0 percent. While volatility abounds everywhere, this remains the most consistent, predictable place for growth. It’s your money, use it when and how you want to. 

As was mentioned above, the primary vehicle by which an individual can participate in this concept of private banking is through the use of a whole life insurance policy, which acts as the individual’s lending vehicle. The whole life insurance policy becomes your bank. Whenever you need to make a large purchase, you borrow money out of the policy like you would a bank. However unlike traditional financing, you are earning the interest, rather than the bank.

For those who would argue to simply save up the money in a savings account, this notion of earning interest is the crucial detail that gives private banking a huge advantage. When you take the money out of savings, you don't make anything on the money you pulled out. The bank stops paying interest when the money leaves the account. When you take a loan from your own private bank, you still earn interest and dividends on the money as if you never took out the loan. 

Another one of the great benefits of having a private bank through life insurance is the level of additional asset protection that it provides its clients and their beneficiaries. This type of policy set-up has protected the assets of many people from frivolous law suits, bankruptcy or other creditor problems that may arise in our litigious society. In short, the values of life insurance – both the cash value and the death benefit – are protected from creditors under specific conditions. It’s important to note that the level of protection varies in every state so it warrants your further research on this subject.

In a nutshell, with these contracts, you build up tax-free capital for all of your own borrowing and financial needs; and, as a nice bonus, your family (or estate) can receive a substantial built in tax-free inheritance (death benefit), should you die; and you could receive a large, tax-free retirement income, should you live. In part, it all depends on how well you decide to fund, or over-fund, your own bank.

It is very important to understand and to appreciate that these unique policies are not the typical whole life policies sold by many life insurance agents. Instead, these policies are individually created for each person's own financial circumstances. These policies are specifically designed only by mutual life companies – not stock life insurance companies. There are only about a few dozen or less of these companies left in the United States.

As always, it is in your best interest to consult a trusted financial adviser before setting up your own private banking policy. Be aware of their credentials and make sure they know the ins and outs of creating such an individualized policy for you. This concept may not be for everyone, so be sure to study it out and decide if it is right for you.

Topics: tax free, Private Bank, Whole Life Insurance


Wendell W. Brock, MBA, ChFC

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