The Ultimate Rainy Day Fund
Most Americans tend to keep a savings account or what we refer to as an “Emergency” or “Rainy Day” Fund and if you are like the typical American, chances are you keep that savings at your local bank. For any financial plan, it’s the bare essential so we don’t really give it much thought.
But WHAT IF this little to zero "growth" savings account is creating a cash drag on your overall portfolio? WHAT IF the opportunity cost of letting money sit idle while it waits to be used is costing you thousands in unpaid interest during your lifetime? Depending on the size of your emergency savings account, the opportunity cost could reach into the tens of thousands or more over your lifetime, possibly into the hundreds of thousands of opportunity cost if you are in your 20's and 30's!
While it’s a solid strategy to have backup funds parked at your local bank in case your car breaks down, the plumbing in your house goes berserk, or unexpected dental bill comes due, you should be thinking long-term and seeking to optimize this ignored asset for every extra dollar you can safely squeeze out of it.
Did you know all the major banks turn to life insurance companies for safe, liquid, and tax-deferred growth on permanent life insurance policies that can be structured to accumulate cash value from day 1? Banks don't park their reserves in CD's or Mutual Funds! Why should you?
Chances are you probably aren't aware that similar type of cash value life insurance contracts that banks utilize are also available to individuals as well. Oddly enough, in the day of the internet and information everywhere at your fingertips, the best kept secret in financial planning is hiding in plain site!
Over the life of these contracts, the growth can be substantially greater than what your local bank will pay in interest. Considering that banks are paying close to 0%, earning a tax-deferred and potentially tax-free 4-5% seems like finding a pot of gold at the end of the rainbow!
So if this is so, why don’t most people think about life insurance policies for their emergency “rainy day” funds? Quite simply, the average person has no idea that life insurance can also be an additional source of long-term savings. The typical advisor and financial guru (Dave Ramsey and Suze Orman) recommend you buy term insurance only which has no cash value benefit. While term policies do provide valuable temporary coverage, it’s easy to overlook all the major benefits of permanent cash value life insurance when set up utilizing The Infinite Banking Concept pioneered by Nelson Nash.
Here are a couple keys if you are looking to maximize your safe money account.
First, the type of cash value life insurance policy being referred to here is not your parents or grandparents life insurance policy that was bought for the maximization of death benefit at the lowest possible cost. That's the old fashion way of buying life insurance and although it's called LIFE insurance but it's all about the DEATH benefit. That's not primary goal of the Infinite Banking strategy I'm writing about here..
I refer to this updated life insurance savings strategy as a the Infinite Banking Concept but you might also learn about this strategy by the name Bank On Yourself (Disclosure: I'm an authorized practitioner for both organizations). A few popular financial newsletters have even started endorsing the strategy in the past 3 years. Most notably the Palm Beach Newsletter has been referring to it as the 770 Account or 702j Account.
Regardless of the name, the strategy is the same and the structure of it is simple. Instead of a maximum death benefit/minimum premium policy design for our clients, we structure a Minimum Death Benefit/Maximum Cash Value policy to turbo-charge the internal cash values of the contract immediately.
Second, in order to turbo-charge the cash value buildup within this policy, you must have the inclusion of “Paid Up Additions Rider”, or PUA rider for short. For an advisor, this rider can reduce the commission on the policy by 60-80%. But for the client, it means the cash value will be 60-80% greater because the money that would otherwise pay a commission is now sitting available as cash value for you. Imagine that... a financial strategy engineered to put your interest ahead of the advisor.
If you’ve never heard of this type of strategy, don’t be surprised. It’s probably one of the best financial secrets there is and what’s really interesting is that banks park up to 25% of their Tier 1 assets into similar life insurance policies called Bank-Owned Life Insurance policies, or BOLI.
Since banks are putting their safe money Cash Value Life Insurance contracts, I think it’s time you consider it for your Rainy Day fund, too.
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