The Bank Replacement Strategy: Unlocking Hidden Wealth with Life Insurance

People tend to think of life insurance as a way to provide financial security to their families after they pass on. It is for this reason that life insurance is often considered the foundation of a solid financial plan — even more so if your income or net worth is high.

But what if it could also be used to achieve financial freedom and build wealth? Someone who has accomplished this is Will Duffy.

As the creator and founder of The Duffy Method: How Money Really Works, Will has developed a proven roadmap for helping high-net-worth individuals, family offices, and businesses achieve their financial goals. As a tax-saving and wealth-building advisor, Will has also taught his clients the same contrarian strategies that made him a millionaire at 33. When he was an enrolled agent, Will can create customized, innovative financial plans or work with the clients’ current team of CPAs, advisors, or attorneys because of his specialized excellence as a Chartered Financial Consultant (ChFC), Retirement Income Certified Professional (RICP), and Enrolled Agent (EA).

Our focus in this blog post is on the Bank Replacement Strategy, a unique approach to taking advantage of life insurance’s tax advantages and cash value growth.

https://lifestyleinvestor.com/will-duffy/

Life Insurance 101

Let’s take a quick look at the basics of life insurance before we move on.

A life insurance policy is a contract between you and your insurance provider. Insurance companies pay your beneficiaries a tax-free lump sum when you die as a result of regular payments called premiums.

In some policies, you can access the cash value during your lifetime, which can be used for down payments on houses or college tuition. Just be aware that you will reduce the death benefit and cash surrender value of the policy by accessing the cash value. In the event of a terminal illness, you can also accelerate your death benefit.

Moreover, there are several types of life insurance policies. However, term life and whole life are the two most common. It is important to consider your needs when choosing. There is even the possibility of combining products.

In term life insurance, a death benefit is provided for a specified duration, generally between 10 and 20 years. Many people start out with this kind of insurance because it is straightforward to understand. It is possible to convert certain short-term policies to long-term policies in the future. In case your life changes and you need additional protection, this benefit will be useful.

Long-term protection is a benefit of whole life insurance, universal life insurance, and variable universal life insurance. In fact, whole life insurance provides permanent protection. You can grow your policy’s cash value with some policies, and some offer more guarantees than others.

High Net Worth Individuals Should Consider Purchasing Life Insurance

As with a house, car, or any other asset, it makes sense to insure your income if you earn a high salary. In spite of this, life insurance can be used for the following purposes even if you will have enough to cover your family’s financial obligations.

• Invest with confidence. You can protect your money from stock market fluctuations with certain permanent life insurance policies that are linked to cash value accounts. Cash value returns can be more predictable than traditional investment accounts, although they are typically lower.
• A way to avoid the estate tax. In 2024, the personal federal estate tax exemption amount will increase to $13.61 million. Unless otherwise excluded, only the amount over $13.61 million of an estate is subject to the federal estate tax after death. The combined exemption for a married couple is $27.22 million. As such, this could be a major setback for your family. It is possible to protect your loved ones’ wealth by purchasing life insurance with a death benefit equal to or greater than the anticipated tax burden.
• Protecting your business. In the event that you share business ownership with a partner, you may want to consider life insurance as a means of protecting your finances. A life insurance death benefit can be used by one partner to buy out the other’s share. In this case, we are talking about a buy-sell agreement.

“There’s obviously something that the banks and the large institutions and the wealthy individuals and wealthy families, there’s something that they know, which is why they put such a significant amount of wealth into life insurance policies that have a cash value,” explains Will.

What is the Bank Replacement Strategy?

Although familiar strategies exist to achieve financial independence, including infinite banking or banking on yourself, Will believes they have shortcomings. As a result, he developed the Bank Replacement Strategy, which addresses these limitations and offers a unique approach.

Using the Bank Replacement Strategy, you will replace traditional bank accounts with life insurance policies to store and access liquid cash. Although it functions like a bank account, it goes beyond that. This type of life insurance provides guaranteed returns, tax-free growth, and loans against the cash value. As a result, you can:

• Earn higher returns. In contrast to banks’ meager interest rates, life insurance policies within this strategy offer guaranteed returns typically ranging from 3% to 4%, with dividends providing an additional potential return.
• Enjoy tax-free growth. A policy’s gains, such as interest and dividends, are tax-free, unlike bank accounts where interest income is taxed.
• Access cash through loans. Your policy’s cash value can be accessed without triggering a taxable event, providing liquidity for investments and emergencies.

“To simplify it, it is an alternative to a bank account because a bank account does not excite that many people,” adds Will. You will get the same protections, insurance, liquidity, access, etc., as a bank account, but it will have better benefits, and higher returns. 

The Key to this Strategy is Avoiding “Lost Opportunity Cost” 

A major disadvantage of many life insurance policies is that they restrict access to funds for years, making it difficult for investors to invest. A unique feature of the Bank Replacement Strategy, however, is the use of specially designed policies with one-day riders that give you access to 90% of your contributions the next day.

As a result, this strategy can help you:

• Fund investments. In order to make down payments or investments, you can borrow against the cash value of the policy, and then pay it back using its guaranteed return.
• Diversify your portfolio. Along with other investments, you can add a tax-advantaged asset with guaranteed growth.
• Build long-term wealth. Over time, the cash value of the policy compounds tax-free, creating a significant amount of wealth.

“That’s really the secret sauce to this strategy,” says Will. Someone could, for instance, fund a life insurance policy with $100,000 and then have access to $90,000 the next day. If they want to invest, they can either wait until they’re ready to invest or utilize an investment opportunity that may come up soon, he adds.

Key Considerations of Bank Replacement Strategy

As effective as this can be in building and protecting your wealth, Will also emphasizes the need to be careful. “You really have to know exactly what you’re doing,” he warns

As such, before you decide to make any financial commitment, you should consider the following. 

• It is not a substitute for investments. The purpose of this strategy is to complement your existing investment portfolio, not to replace it. You can store your liquid cash in this account and use it as an alternative to a bank account.
• Focus on long-term growth. The goal of this strategy is to build wealth over the long term. Over time, the benefits of this investment are truly reflected in the cash value that grows and compoundes tax-free.
• Direct recognition vs. non-direct recognition. The value of the policy is significantly impacted by this technical detail. For maximizing returns, it is crucial to choose the right structure. As a general rule, direct recognition life insurance pays dividends only on the remaining value after taking out a policy loan; non-direct means dividends paid on the entire value after taking out a policy loan.
• Choosing the right policy. It is important to note that not all life insurance policies are the same. This strategy requires a policy designed specifically for it with features like guaranteed returns, dividend potential, and one-day rider options.

Conclusion

For individuals seeking to leverage the unique benefits of life insurance and grow their wealth, the Bank Replacement Strategy offers a compelling alternative. This strategy can help you achieve financial freedom by aligning with your financial goals and exploring potential limitations.

You should also keep in mind that the Bank Replacement Strategy is not a “get rich quick” scheme, but a powerful tool for building wealth with tax advantages. A qualified financial professional may be able to help you with this strategy if you’re looking for diversification in your portfolio and a way to unlock hidden potential.