The basics of banking are pretty simple. We all get paid, buy things, and need a place to store and move money around while all of this is happening. We store our money in banks and they move it around even more, with the promise that we can get to it when we need it. From there, for a lot of people, banking becomes kind of abstract.
And with little need to go to a physical bank location these days, the idea of banking can become even more of an abstraction. You deposit money, you swipe a debit card, or just wave a magic key fob and you pay for things. You move money here and there from your phone or IPad to keep your life running smoothly. You can meet in real life with someone to talk about various loan options or actual cash that you want to deposit but that is becoming a thing of the past as well.
How Banks Make Money
So, you get access to your money in a checking or savings account. What is the bank doing with it in the meantime? IF banking is a process of moving money, is there a better way to structure it for your benefit?
We think the answer is a resounding, “YES!”
Because guess what? While the bank is, maybe offering you 1% interest on your checking or savings account, they are using a process called Fractional Reserve Banking. Say you take out a car loan. Maybe it’s offered at a 5% interest rate. You might think, well, the bank is clearing 4% between what they offer me on the savings account and what I’m paying on this loan. The bank giveth 1% and taketh away 5%, leaving a 4% difference.
There’s a little more to it than that. Banks pool their money in a general fund. You deposit funds within the bank and most of the time you draw out very little at once. Banks then lend against their funds and ours.
The thing is, with Fractional Reserve Banking, the bank actually has 400% more than we do, which is giving them something closer to a 4,000% return! That sounds insane, but it’s true. Here’s how it works: Fractional Reserve Banking simply allows the banks to leverage up to 10 times their lending base over their deposit base. Meaning for every $10,000 in deposits they can loan out $100,000. So, that 400% return is closer to 4,000% return.
A Better Way
We think cash value life insurance is a better way of banking. We call it Uncommon Banking. In some ways, the insurance company works the same way as a bank. They pool money into a general fund that would include the cash value on your life insurance policy. They use this money to lend to other corporations, municipalities, and institutions.
Here’s where insurance differs from banks. On a true whole life policy, the insurance company will guarantee a rate of interest right around 4%. See, you are winning already! On top of that, they will pay a dividend when business is good. So, 4% plus a dividend. Pretty nice so far, right?
The biggest difference is that the insurance companies on true whole life products will guarantee a rate of interest on the policy at typically 4%. With a cash value policy, you can borrow against that cash value as a policyholder. The loan rate is around 5-6% to borrow against the policy.
The magic happens right here – when you borrow against the policy, you are still earning interest on the full cash value amount!
The insurance companies are only lending you what you have accrued in cash-value, so they have no risk on the loan. When you repay that principal and interest on your loan from the insurance company, the principal of that payment is unlocked and is again available for you to lend against.
Explore Uncommon Banking in greater detail here. Using the cash value on a life insurance policy opens up a world of possibilities for you to leverage your money without being on the wrong side of those dueling interest rates you get with a checking account and that car loan.
Why not have your money work harder on your behalf? That’s what Uncommon Banking is all about.