Why do we use banks? For most people, a bank account is used to store savings, as a source for loans, and ideally as a vehicle for growing assets.
While traditional banks certainly serve these functions to a degree, a privatized banking system is a valid alternative for financial needs.
Privatized banking is a method for individuals to become their own banker by using a whole life insurance policy as their primary instrument for saving, borrowing, and investing.
This system can serve all of the functions of a traditional bank, and when designed properly can do so more effectively than a traditional bank.
A Secure Storehouse for Cash
Keeping physical custody of salaries, business proceeds, and other income is incredibly impractical, which is why many people open bank accounts as soon as they enter the workforce.
Are banks really that secure, though? What many people don't realize is that banks are not required to keep much money on hand.
Through a system called fractional reserve banking, banks are able to loan out or invest a large portion of their deposits – and the depositors have no say-so in the matter. Look no further than the last financial crisis to see the disastrous potential that this presents.
Life insurance companies, on the other hand, are subject to very strict liquidity and reserve requirements, which are enforced by state insurance commissioners.
Insurers are required to keep a large amount of cash on hand in order to satisfy claims-paying needs.
Investments by insurers are allowed, but the investments must be in very conservative instruments such as high-quality bonds. This makes life insurance company failures very rare.
In addition to premium payments required to keep a life insurance policy active, policyholders can contribute excess cash to their policy.
The money grows in ways discussed later in this article, while the policyholder has peace of mind in knowing that their "deposits" are being guarded by an institution of great financial stability.
A Source of Financing
Have you been to a bank for auto, home, or business financing lately? The amount of paperwork required is astronomical.
If you are fortunate enough to be approved after jumping through the bank's hoops, the bank will then take an interest in your property in the form of a lien. They'll also set the repayment terms, which, if deviated from, could result in the bank repossessing your property.
Policy loans from a life insurance policy are a different story. Once a policy's cash value has reached a significant level, it can be borrowed from – just like a bank.
These loans do not go through an underwriting process; you simply call the insurance company, complete a simple loan request form, and wait a few days for the money to arrive.
The insurance company is not interested in what you use the money for, and they will not have a lien on the loan's collateral.
There is also no such thing as default on a policy loan. You repay the loan on your own time, and any unpaid loan amount at your death is simply deducted from the death benefit.
Taking a loan of your own terms is a no-brainer when compared with a traditional bank loan.
A Way to Grow your Assets
Bank savings accounts earn interest, but bank interest rates in the current environment are downright anemic. A whole life insurance policy optimized for privatized banking can grow your money in a couple of different ways, and almost certainly at a higher rate than can a bank account.
Every whole life policy's cash value earns interest at a stated rate that is set by the insurance company. Policy interest rates are usually significantly higher than bank account rates, and they are also subject to a minimum guaranteed rate that is contractually guaranteed.
For those seeking additional growth or income, participating life insurance policies are a compelling option.
These policies are issued by mutual insurance companies, and as the name suggests, they allow the policy owner to participate in the insurance company's earnings in the form of dividends. These dividends can be credited to the policy's cash value or paid out in cash to the owner.
Many people are sitting on the sidelines when it comes to earnings, by keeping their "safe" assets in bank accounts and low-yielding CDs. Others are so starved for yield that they are taking on unnecessary risk in the capital markets in hopes of a return.
Safety and growth don't have to be mutually exclusive, and a privatized banking system can be a valid way to have the best of both worlds.
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