life insurance

Should you keep your cash in a bank or get a life insurance?

When you think of money, you think of banks. It’s one of those associations that gets ingrained into your mind as you grow up. For food you go to a grocery store, for mail you go to a post office, for anything dealing with money you go to a bank. It’s just what you do. Probably the only time you’ve ever thought putting your money in a bank was a bad thing was when you first watched Mary Poppins, and wanted little Michael Banks to be able to spend his tuppence on feeding the birds instead of giving it to the crotchety old bank manager to deposit.

So when you think about saving money, your first instinct is to put it in a bank. And that’s okay. Storing your money in a bank isn’t a bad option. But it’s not necessarily the best option. For one thing, there are a number of issues around bank accounts that many people aren’t aware of; for another, there are several ways that a whole life insurance policy can be a better place to store your cash.

The first thing to understand about a bank account is that the account itself is also the bank’s asset. That means that they get more of the benefit of having that value on their balance sheet than you do. This may not seem like a big deal–after all, it’s still your money and you can access it any time you want–but it becomes a lot more important when you consider the concept of collateral.

life insurance

Collateral, as you probably know, is the term for assets that you can use to secure a loan or investment. The value of the collateral assets tells your lender or broker that you’re good for the money you want to borrow. The thing is, people typically don’t use their bank accounts as collateral. Most people just withdraw their money instead. But many people do borrow against their life insurance policies, since borrowing doesn’t decrease the policies’ cash value–and withdrawing money does. We’ll talk more about how that works in a later lie, but for now, note that using a life insurance policy as collateral makes much more sense than using a bank account, not least because the policy is your asset, not the insurance company’s asset.

Now what about safety?

The other big argument in favor of storing money in banks is that it’s completely safe. Consumer deposits are insured up to $250,000 by the FDIC, banks seem to have great security (you almost never hear about one getting robbed anymore), and the banking industry has gone to great lengths to gain and hold the public’s trust. Even if a savings account isn’t a great asset, at least it’s safe, right?

So far, yes. But the crash of 2008 and the subsequent bank bailouts have severely shaken that trust in banking. In that crash, only stockholders lost their money, not account holders or clients. But those stockholders lost a lot of money. The banks that managed their investments required billions of dollars from the government just to stay solvent.

And that’s just in the US. Look at the banking failures in Europe. In mid-2015, Greece’s banks were essentially frozen for several weeks, allowing the Greek people to withdraw only rationed amounts of money each day–no matter how much they had deposited. At the time of this writing, that country’s financial crisis still hasn’t been completely solved.

These circumstances may mean little or nothing for your personal deposits right now, but some experts aren’t so sure your money will be safe in the case of another crash. Ellen Brown, author of Web of Debt and The Public Bank Solution, noted in late 2014 that the amount of federal money available to insure consumer deposits is only a fraction of the money all consumers have deposited: $46 billion in the FDIC reserve vs. $4.5 trillion in aggregated deposits. The FDIC is a good counter to a bank occasionally being robbed… but if all the banks collapse at once, their reserve won’t come close to covering the amounts deposited.

Not only that, but the same banks holding that $4.5 trillion in deposits are also responsible for over $280 trillion in derivatives (securities dependent on the value of underlying assets like bonds, stocks, commodities, and interest rates). Brown points out that under 2005’s bankruptcy reform act, banks are responsible for derivatives before client deposits. In other words, if another crash happened, insolvent banks could legally take those deposits–your hard-earned money-to cover their derivative losses. Brown and others have called this potentiality a “bail-in,” since the money that keeps banks from insolvency will come from their biggest creditors: depositors like you and me.

How likely is this to happen? Depending on who you ask, it could be anywhere from a slim chance to inevitable. We don’t know for sure, and this isn’t a financial forecasting book. But what we do know is that if banks are being revealed as much more vulnerable than we’ve traditionally thought, it might be worth storing your money elsewhere. And since the 2008 crash was closely tied to the stock and real estate markets, while life insurance has no ties to those markets, a whole life policy might actually turn out to be much safer than a bank account.

Finally, even if a bank doesn’t end up taking your money, you still could lose it from your bank account. Under civil asset forfeiture laws, federal, state, and local governments can view and track the money in your bank account, and so can the IRS. If any of those bodies suspect you may be engaged in illegal activity, they can freeze your accounts and seize your money without any proof or evidence that you’ve committed a crime, or even accusing you of anything. In fact, the burden of proof will be on you to show that you were completely above board, and even if you do prove your innocence, you may not get your money back.

One of the more public examples of civil forfeiture happened in 2012. Early that year, three brothers named Hirsch had the bank accounts for their Long Island, NY, distribution company frozen and $447,000 confiscated by the federal government, without ever being accused of a crime or presented with evidence of wrongdoing. They did eventually get the money back, but only after three years, tens of thousands in legal fees (which they didn’t get back), and ultimately the threat of bad publicity for the soon-to-be new US Attorney General, Loretta Lynch, whose office was prosecuting the case. Hundreds of others haven’t been so lucky, and have given up on ever getting their money back.

The chances you will be subject to civil asset forfeiture is pretty small. But the bigger issue here isn’t how many people have to deal with that–it’s whether anyone, government or otherwise, has the power to oversee, and potentially take, your money. If that money is in a bank account, sadly, those authorities do have that power.

If it’s in an insurance policy, they usually don’t. The growth on your cash value in your whole life insurance policy doesn’t get reported to the IRS. Your cash value doesn’t need to be included on asset reports or FAFSA student aid applications. Borrowing against your policy’s cash value doesn’t need a credit check or even go on your credit report. The money in your life insurance policy is totally protected from creditors in many states and partially protected in others, on = top of being a private account in general. So if the privacy of your money is important to you, a whole life policy might be a better option for you than a bank account.

Okay, we realize that this lie is kind of a downer. And we’re not trying to scare you into (or out of) anything. But because the bank vs. policy argument is one of the first ones people usually encounter, we decided to hit it hard near the front of the book and get it out of the way. To soften the blow a bit, here’s a more fun note on banks: did you know they buy insurance policies themselves? Yep, you read that right. Banks often use their profits and/or operating capital (much of which comes from investments they make with your deposited money) to buy insurance policies to fund their employee benefits, or sometimes to increase their liquidity. If the banks themselves are buying policies with your money, doesn’t it make sense to consider using that money on a policy for yourself instead?

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