What type of life insurance policy is required for cash flow banking?

What type of life insurance policy is required for cash flow banking?

Sound good? While cash flow banking may have broad appeal, it’s usually an impractical strategy for anyone except the wealthiest. It’s a long-term play that requires significant expenditures early on in life in order to reap the benefits later on. Read on to learn more about what cash flow banking is, how it works — and whether it’s a scam.

What is cash flow banking?

In the 1980s, an insurance agent named Nelson Nash developed a financial strategy that reduced clients’ reliance on high-interest loans from traditional banking institutions. In his book Becoming Your Own Banker, Nash encouraged readers to take out a life insurance policy and borrow from it when needed. His strategy became known as the cash flow banking method.

Again, the concept is simple. First, you secure a low-interest loan from a mutual insurance company. Then, when you need money, you draw on your accrued funds. Instead of paying a high interest rate to a lender, you take advantage of your policy’s low interest rate and repay yourself — and whoever ultimately inherits the proceeds of your life insurance policy.

There are plenty of kinds of life insurance , but two of the most well-known are whole life and term. Most people have term life insurance, which is cheaper and covers you over a certain period of time.

Whole life insurance is significantly more expensive. According to PolicyGenius, the average term life insurance premium costs between $20 and 30 per month or between $240 and $360 per year. Whole life insurance covers you for the entirety of your life — so you don’t have to worry about outliving your policy. As a tradeoff, you pay higher premiums: The average whole life insurance premium costs between $55 and $136 per month or $660 and $1,632 per year.

The cash flow banking strategy is built upon whole life insurance — because you can borrow against that type of policy.

How does cash flow banking work?

The first step is to purchase a whole life insurance policy . Next, you’ll have to wait a while — like decades — for your policy to increase in value. Ultimately, when you need a loan, you can borrow against your policy instead of a loan secured from a traditional lender. Although you are technically borrowing against your own policy, the money you borrow comes from a general fund within your life insurance company. Whenever you take out a policy loan, your whole life insurance policy serves as collateral.

Keep in mind, it can take years to build up a significant enough cash value to borrow funds. If you’re hoping to take out a large loan, it may take decades. As such, cash flow banking toward a down payment for a house won’t work for everyone. You’ll gain the most value from it decades down the road — if you’re able to keep up with the high monthly premiums.

Considerations when choosing a whole life insurance policy

A whole life insurance policy is the bedrock of cash flow banking — and setting up your policy correctly is key. First, you’ll want to shop for a policy that offers dividends, which are payouts from the insurance company’s earnings to its policyholders. Dividends may be distributed annually — but they’re not guaranteed. Ideally, you can end up paying your premiums, or at least a portion of them, with the dividends you earn each year.

Another important factor is paid-up additional insurance. Paid-up additions are optional coverage “boosters” payday loans in Memphis TN that can increase your life insurance policy’s cash value — and earn you greater dividends (and interest). Paid-up additional insurance is typically purchased with dividend earnings rather than a higher premium.

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