The Ultimate Private Family Banking Guide

Have you ever dreamed of financial freedom? What would life be like if you didn’t have strict loan holders hanging over your head? What if we told you it was possible and within your reach? How, you may ask? Let us introduce you to private family banking.

Of course – sometimes taking out a loan is crucial to fulfilling our dreams. Sadly, insufficient knowledge, poor financial management, or high interest rates on installments can lead to a never-ending debt cycle. Because of this, many people find it hard to build wealth that will last for more than one generation.

Fortunately, establishing a family bank gives you your desired freedom. It lets you be your own banker and gives you a steady flow of cash, which doesn’t hurt your liquidity. Not only is it a fantastic financial strategy, but it is also a guarantee of a better life for future generations.

We will explain thoroughly what private family banking (PFB) is and how to implement this notion in your life.

Hopefully, this article will help you become independent in managing personal finance, allowing you to own your own lifestyle.

Table of Contents

    Infinite Banking Concept

    Before we go into details of private family banking, we would like you to become familiar with its origin—the infinite banking concept. Generally, the idea is to strategically use your whole life insurance policies from a mutual insurance company as a personal endless banking system. It is equal to becoming your own bank!

    Video snapshot of be your own bank and Darius Britt

    Get a Whole Life Insurance From A Mutual Company

    The first thing you might have noticed is the whole life insurance – without it, there’s no infinite banking. You will get a whole-life policy from a mutual life insurance company.

    Why this particular type of firm?

    Mutual life insurance companies will be paying dividends, which can be used for premium payments.

    Whole Life Insurance Vs. Other Life Insurance Policies

    There are many permanent life insurance policies, and it is important to understand why we base infinite banking (and later, a private family bank) around a whole life policy.

    A Whole life policy checks all the boxes:

    1. Premiums remain the same throughout
    2. Cash value grows at a guaranteed rate
    3. The death benefit is guaranteed as long as you pay premiums.

    With these three characteristics, whole life is the only one that we can use, especially for the guaranteed cash value and fixed premium rates. Other permanent policies have flexible premiums and involve risky investments that can reduce your cash value, which isn’t something we want.

    Term life insurance has no savings component, making it unsuitable to begin with. Term life insurance is great because the premiums are low and the death benefits are guaranteed, but it is not a good choice if you want your own family bank.

    How Does Infinite Banking Work?

    Infinite banking allows you to borrow money in the same way that a traditional bank does without relying on a third party. You will be both a creditor and a lender.

    Instead of borrowing from a bank, you borrow money against yourself. This way, you control your own cash flow while still letting your whole life insurance policy earn dividends, which are also money. In other words, you build wealth while borrowing and repaying the money held in the cash value of your permanent life insurance policy.

    The goal of infinite banking is to duplicate the process as much as possible to build the value of your own bank.

    Infinite Banking Involves:

    1. Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
    2. Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy
    3. Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.

    By borrowing for yourself, repaying, and so on—simply by being your own bank—you earn financial freedom and control over your money.

    Implementing this banking strategy into your life gives you much better control over your finances and helps you build wealth using the life insurance policy.

    Infinite Banking Vs. Private Family Banking

    We will explain a particular type of infinite banking concept: private family banking. The general idea is similar to the one mentioned earlier but considers family wealth rather than an individual’s.

    Let’s explore the family banking system and setting up a family bank in more detail and see how you can incorporate it into your own lifestyle.

    What Is Private Family Banking?

    Of course, you will not be starting a literal bank. The phrase ‘private bank’ refers to the similarity of the methods used by traditional banks and by private family banks.

    Unlike the profit strategies banks use, the family banking concept ensures safety from overpaid fees and loans. It gives you control over your own money and the freedom to manage it however you want to. Therefore, it’s impossible to end up in the debt cycle that numerous people fall into because of the high interest rates on loans in traditional banks.

    The concept of private family banking uses the idea of borrowing money from your whole life insurance policy and repaying it while still earning dividends.

    In other words, borrowing money from yourself will not diminish your liquidity. On the other hand, the life insurance company lets you, the policy owner, borrow the entire cash value of your policy while still increasing the interest and dividends.

    Why is this the case?

    They base it on your death benefit, and if you do not repay the money, it will be deducted from your policy’s cash savings component.

    What Are The Advantages of Private Family Banking?

    Private family banking has more benefits than easy loans and debt protection. Setting up a private family bank has many benefits we are eager to share:

    1. Inheritance Of Wealth
    2. The Duality Of Your Savings
    3. Freedom Of The Loan
    4. Tax-Free Wealth
    5. Guarantee And Protection

    Inheritance of Wealth

    The name ‘family bank’ hints that it has something to do with our multi-generational wealth-building process. That is correct.

    As mentioned before, this banking strategy uses whole life insurance as the capital of our funds. Still, it is based on the death benefit, which future generations will inherit and use to get richer.

    The goal isn’t just for you to understand how a private family bank works, but to teach children these concepts so that they can carry on the tradition. The Rockefeller family is the best example of how a private family bank can be used to build wealth over generations.

    You can also add your family members’ whole life insurance policies into the trust, achieving a much larger financial source for your investments and a faster-growing wealth. But it is not working only as your savings account – it is so much more when it comes to benefits.

    The Duality Of Your Savings

    We’ve already talked about how to borrow and pay back your own money without going into debt. It is possible because the insurance company takes money from their general fund, leaving your cash value intact. These assets only gain value due to growing interests and dividends.

    On that account, you can take a policy loan to fulfill your dreams and, at the same time, build wealth. It is like having a cake and eating it too!

    Traditional savings accounts work entirely differently. When you borrow money from the bank, it is deducted from the starting capital. Therefore, less cash value (diminished by the amount of the withdrawn money) can earn interest.

    More specifically, you lose your compound interest and have to start from the beginning. But there is no deduction from the capital when you borrow from your whole life insurance policy. The amount of money before the policy loans still earns the same interest.

    Taking a loan from all those profit-driven companies causes you to lose money despite the fact that you made the desired investment. The reason is all those high-interest rates on loans, fees, etc. But when you have your own bank and take a loan against your policy, you must return only the money you borrowed without paying interest.

    Remember, we said that no money is being deducted from your cash value when taking the loan. So all the money you will be repaying goes straight to your savings, increasing the previously mentioned cash value of your death benefit.

    Making more and more investments will drive increasing compound interest, and with every premium payment, it will grow consecutively. The debt will not endanger you because the only person you owe money to is, in fact, you.

    charts representing saving vs borrowing against life insurance which illustrates how private family banking works
    Image Source

    Freedom Of The Loan

    Paying the installments punctually is a serious bane for lots of borrowers. A strict plan imposed by the bank is the number one reason for ending up in debt with multiple loans. You borrow money to pay off the first one, the second, and so on. When you become your own bank, you will not have to be afraid of that happening. After all, you are your own bank!

    A whole life insurance policy is your key to debt-free and stress-free policy loans with your own repayment plan.

    You are responsible for arranging the loan repayment plan and can adapt it to your requirements and budget without worrying about the money to repay subsequent installments. It is easy like that—you pay off when you get a chance.

    Furthermore, life insurance companies will not serve you with a court order for repayment. No matter how big the policy loan is, the insurance agents wait for you to pay it off, and in case of failure to fulfill the obligation, they just deduct the money from your death benefit’s cash value.

    Tax-Free Wealth

    As you may already know, inheritance from the next generation’s death benefit is tax-free. Let’s add a tax-free policy loan (as explained earlier, you do not have to pay taxes on interest and dividends) to that tax haven, and we have never-ending financial capital. But these are not the only benefits of the private family banking concept.

    Policy loans can not only be used to make investments and get cash, but they can also be used to fund retirement. Of course, the death benefit, in the end, will be diminished by the amount of the withdrawn money, but you will be receiving a tax-free retirement, and in the event of your death, the remaining funds will be given as a payout to your family members.

    As a result of these enormous tax benefits, private family banking is one of the best ways to build wealth for you and future generations with minimum tax implications.

    Guarantee And Protection

    Planning for real estate, buying stocks, or putting money into risky businesses always comes with the chance of losing money. 

    Yes, you can double your assets much faster than with a family banking strategy, but you can lose it all in the blink of an eye. Your wealth depends on the fluctuations in the market, so you can never feel stable when it comes to liquidity.

    Life insurance policies ensure that you will always earn interest on your death benefit’s cash value, maybe slower than risky investing but giving you much-needed stability. And secure savings equal a secure life.

    Another advantage of a family bank is protection. Since these are your life insurance policies, they cannot be used to cover your debts. The policy cash value cannot be attached to a statutorily defined dollar amount by any creditor or bankruptcy trustee in the event of bankruptcy or unpaid debt installments. It is justified by bankruptcy and creditor attachment laws, binding in most states.

    Sometimes, the whole cash value of your whole life insurance is exempt from the attachment. This means that no money can be taken from the trust.

    privatized banking shows through an example
    Image source

    How to Start Your Own Private Family Bank?

    Proper knowledge and setup are essential for your private family bank to succeed. It may seem like too much to consider, analyze, and review, but it is crucial to do that so you will not find yourself in a difficult situation.

    The private family banking system is not about finding the whole life insurance policy but designing the one to work with the family banking system.

    Check the two reasons why it is almost impossible to learn about this type of policy from your insurance company.

    1. Most insurance companies simply do not provide their clients with this policy.
    2. Death benefit commission – Numerous agents get their commission from a whole life insurance death benefit provision. Therefore, it is improbable they would suggest life insurance policies that decrease their commissions by 50% and even up to 70%.

    As a next step towards building wealth, we have to answer a few valid questions:

    • Are you contributing to a 401(k) or IRA each month?
    • Do you have an emergency fund in a savings account or CD?

    If you answered yes to any of these questions, we’d argue that your Private Family Bank can prove a better destination for that money. It can be safer and more productive as premium dollars go into your banking policy rather than qualified plans or a bank account.

    Suppose your employer gives you an immediate dollar-for-dollar match for your contributions to your 401(k). In that case, you should probably keep funding it to the extent that your contributions are matched. Still, anything above that amount could be rerouted into premium dollars for your private family bank.

    Redirecting all of the money into one account will give you more control over your spending and cash flow than having several funding trusts with just a portion of your money.

    You will get an idea of where your money is going and how to multiply it with no risk and build multi-generational wealth. Unlike traditional financial institutions, which are profit-driven, your family bank will be profitable only to you and your family.

    What should I avoid in private banking?

    It is not all sunshine and rainbows. There are a few risks that you need to look out for.

    Usually, policy contracts designed for private family banking have lower starting death benefits but a much greater predisposition to accumulate wealth. One way to speed up the process is to stack paid-up additions on top of a whole life insurance policy.

    However, you must be careful how fast you maximize your cash value. Overfunding can only go up to a specific limit, or the IRS perceives the policy not as a whole life policy but rather as a ‘modified endowment contract.’

    Due to the new and different nature of the policy, previously mentioned tax benefits are lost.

    Get a Life Insurance Policy and Become Your Own Banker

    With private family banking, you and your family can get out of debt and become financially independent. The first step towards increasing your family’s wealth is to get whole-life insurance that will be the foundation for your banking system.

    We hope we helped you understand the concept of the family bank and gain a new perspective on how to control your own finances by being your own banker.

    If you continue to use bank services, you will never have full control over your money.

    Remember, the same way banks benefit from their fees, and interest rates on loans – you can too. Become your own banker! Build wealth by mimicking the banking process of loaning and repaying.