Do you have satellite radio? If you do, you have heard the constant ads about BYOB. I am sick of hearing these ads, and as such, I thought it was time for a newsletter warning advisors about this platform.
Webinar Explaining the Flaws with BYOB
If you want to learn specifically why I don’t like BYOB (more detail than I can put in a one-page newsletter), you should sign up for the webinar.
What is BYOB?
BYOB (also known as the Infinite Banking Concept and Bank on Yourself) revolves around the idea of “creating your own bank” so you can “borrow from yourself” instead of a third party lender like a bank. Most people hate paying lenders and therefore, the idea of borrowing from yourself sounds interesting to many who first hear about it.
Is BYOB a scam? You tell me if the following bullet points give rise to calling a sales concept a scam:
-doesn’t use math that adds up
-doesn’t compare itself to other better wealth-building tools
-is sold by agents who don’t understand what they are selling
-incorrectly tells clients that a specific type of life policy must be used to make it work
Scam is probably too strong a word to use for the BYOB concept. Just saying it’s a concept that consumers are sold without understanding it, and if they did they wouldn’t use it should suffice.
What wrong with BYOB?
In short, BYOB is an A-S-S backwards sales concept that misses the point of using Cash Value Life insurance as a wealth-building tool. It makes no financial sense to fund a policy for seven years and then borrow from it in year eight to buy a car. It makes even less sense to borrow from a life insurance policy to pay off deductible home mortgage debt. The BYOB concept is the opposite of using other people’s money to grow wealth; and in an age with historically low lending rates, such a sales approach simply makes no sense.
It also makes little sense to use whole life insurance as the tool of choice with BYOB when an EIUL policy is clearly a better option (even if you use EUIL, BYOB still makes no mathematical sense).
Other People’s Money
If a lender would lend you money at 3% where you knew you had the reasonable likelihood of generating returns 6-8%, how much money would you borrow from the lender? The answer should be as much as they will give you.
When you use a lender’s money at a reasonable interest rate, it frees up your money to build elsewhere for retirement. Many insurance agents selling BYOB don’t understand this. If they did, they wouldn’t be selling the BYOB concept, they’d be offering Cash ValueLlife to build wealth for retirement (not to buy a car).
BYOB protects the client from rising interest rates?
BYOB agents tout that the concept is protecting clients by creating their own bank so they don’t have to rely on lenders.
What they fail to understand is that when you properly fund and use Cash Value Life for retirement purposes, you are also creating an emergency pool of money. The only difference is that you are not funding it with the intent to borrow from it in year eight to buy a car (which mathematically makes no sense). If an emergency comes along, the cash in the policy can be borrowed from. If no emergency, then the cash is allowed to grow tax-free for years and can be used in retirement (the ultimate goal of most clients).
I’ve talked with so many BYOB Kool-aid drinkers over the years I’ve lost count. I’ve never talked with one who compared the BYOB concept to other wealth-building tools to create retirement cash flow. Any sales concept that is sold in a vacuum (not comparing it to other alternatives) is a disingenuous sale.
I submit to all readers that if you have not compared BYOB to using other wealth-building tools for retirement, you should do so.
For any BYOB Kool-aid drinkers who think that they can put in front of me a fact pattern where BYOB is the best wealth-building tool for clients, I’ll take that challenge. E-mail me at email@example.com and if I’m wrong, next week’s newsletter will be telling readers I’m wrong.
Roccy DeFrancesco, JD
Founder, The Wealth Preservation Institute
144 Grand Blvd
Benton Harbor, MI 49022