You may have heard of the privatized banking concept, which is the method of using a whole life insurance policy as a vehicle for saving, investing, and borrowing.
While many people have found the benefits of privatized banking useful, it can be a complicated system, and it requires real commitment and discipline in order to execute correctly.
How can you tell if this system is right for you? If any of the following characteristics describe you, then your situation may benefit from the privatized banking concept.
Safety and Growth are Both Important to You
In the current low-yield/high-volatility environment, it may seem as though investors have to choose between safety and growth.
Stock markets are hitting all-time highs, but no one knows when the next market correction will happen. Bank deposits and bonds can provide some safety, but the rates offered are at historic lows.
If you need a greater return than a bank product can provide, but don't have the risk appetite for higher-yielding investments, then a privatized banking system might be worth a look.
It can provide the safety and guarantees of an incredibly stable financial institution, while also providing returns higher than those offered by most bank products and many bonds.
The cash value of a whole life insurance policy grows at a competitive fixed interest rate, which is anchored by a contractually guaranteed floor rate.
Those with a tolerance for risk may find privatized banking with variable life insurance appealing. Instead of growing at a fixed rate, the cash value depends on the value of underlying sub accounts, which function like mutual funds. There is greater potential for growth, but losing money is possible, too.
You Need a Flexible Solution for Borrowing or Cash-Flow Needs
If you anticipate large purchases in your future, setting up a privatized banking system now could be a solution for financing those expenditures. Once a life insurance policy's cash value grows to a certain level, it can be borrowed against for any reason.
Unlike traditional loans, which require a complicated underwriting process and the possibility for the bank to repossess your property in the event of default, life insurance policy loans are simple and risk-free.
To take a policy loan, you simply contact the insurance company and request the money. You repay the loan on your own schedule, and in the event that the loan is unpaid at your death, the remaining balance will simply be deducted from the policy's death benefit.
There's technically no way to default, and the insurance company will never take an interest in your property.
Loved Ones or Organizations are Financially Reliant on You
A death benefit is the most common reason for buying a life insurance policy. This amount, sometimes referred to as a face amount, is selected at issue and is paid in full to the policy's beneficiary if the insured dies while the policy is in effect.
Perhaps you have a family that relies on you for income, a large outstanding mortgage balance, or a business that can't function without you.
Whatever the financial needs of the people or organizations that you would leave behind, the death benefit of a whole life insurance policy used for privatized banking would likely be able to provide.
You Already Have a Whole Life Insurance Policy
Obviously, those who own existing whole life insurance policies are prime candidates for privatized banking.
If you purchased such a policy for the death benefit, as most people do, you can still optimize the policy for privatized banking.
You'll want to find out what how much you can contribute to the policy without adverse tax consequences, and start sending in excess cash in order to turn that insurance policy into your own private bank.
You Need to Minimize Taxes in Retirement and After Death
For various reasons, many people need to keep their taxable income to a minimum while in retirement. If this describes you, then privatized banking may be a solution.
Mutual insurance companies issue participating life policies, which, as the name suggests, allow the policyholder to participate in the insurer's profits in the form of dividends.
As long as the amount of dividends received doesn't exceed the amount of premiums paid, dividend income is tax-free. This can be incredibly beneficial if you need a tax-free retirement income stream in retirement.
Life insurance is also one of the few assets that can transfer to heirs completely tax-free after your death. In addition to reducing the taxable amount of your estate, the tax-free death benefit also bypasses the delay, cost, and publicity of probate.
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