For centuries, banks have been the obvious place for most people to store their money, but what many don’t know is that money can also be stored with life insurance companies.
In this article, we will take a bird’s eye view to understand how storing money at a bank differs from storing it with a life insurance company, and how it can lower your risks and improve your financial results.
This article is written as general education, and should not be considered as personal financial advice. If you would like personal guidance with life insurance, you can schedule a time to talk with one of our experts.
How Banks Safekeeps Your Money
Banks let you store money with them by offering services like checking accounts, saving accounts, and certificates of deposits(CDs).
For checking accounts, you get the advantage of instant liquidity, and are able to get a debit card to use the money in the account for short term expenses.
For savings accounts and CDs, you lock your money up for some time and don’t have instant liquidity, but will receive some small yield on a yearly basis.
Banks make money by lending out the money you deposit with them, and reward you for it by paying you a part of the money they earn.
How Life Insurers Safekeeps Your Money
Life insurance companies let you store money with them through permanent life insurance policies with a cash value, also known as whole, universal, or indexed life insurance.
The cash value in a permanent life insurance policy works differently than cash in a bank account, and has several advantages that the banks don’t have.
While the cash value doesn’t provide instant liquidity like the checking account, it does provide yearly growth that is much higher than CDs and savings accounts, and is liquid through both yearly dividends and loans.
Life insurers make money by taking in more money in premium than they pay out when someone dies, as well as putting the money in their accounts to work in conservative assets.
In the rest of this article we will go step by step through how life insurers differ from banks when it comes to keeping your money safe and growing.
How Life Insurers Reduce Inflation Risk
With inflation growing around the world in the aftermath of the pandemic, it has become virtually impossible to get a yield with a savings account or a CD that surpasses the inflation.
This means that for anyone keeping their long term savings at the bank, their money is losing value quicker than it is gaining value, and despite locking it up for many years, they will come out of it with less purchasing power than their money had when they put it in.
With cash value life insurance however, particularly the rates with whole life insurance, you can still get a higher yield than the current high inflation rate.
In practice, this means that life insurers are today one of the very few places where you can surpass inflation on your long term savings without taking on big risks, which makes it an essential asset to keep for the future.
How Life Insurers Reduce Volatility Risk
Some banks might offer alternatives to saving accounts and CDs as a way of allowing you to surpass inflation, with offerings such as mutual funds, ETFs, or stocks.
While these alternatives could save you in a good year, they could also wipe out your wealth in a market crash.
When you put money into a cash value life insurance policy bought through our digital platform, they always come with minimum guarantees, which guarantees that you will always make a minimum percentage each year, or never make a loss.
With whole life policies, you can get minimum guarantees as high as 4 %, while actual returns are around 6 % today.
With indexed universal life policies, you can get returns correlated to the stock market, while being completely protected from losses.
Most of us are used to seeing warning texts like “All your capital is at risk when investing here” - but with cash value life insurance, guarantees remove that risk.
This means that you can put your money to work, be competitively compensated for it, and not have to lose any sleep over worries about the financial markets or your investment decisions.
How Life Insurers Reduce Taxation Risk
When you put money with the bank in a savings account or a CD, your yields are considered taxable income by the IRS, and you have to decrease the already small earnings by paying taxes for them.
With cash value life insurance policies however, growth isn’t taxed - nor is liquidity you access through dividends and loans (if done in the right way).
The reason that legislators have given tax advantages to life insurance is that they realize that it has an important role to play in society, and want to incentivize people to use it.
This is because if people in society have life insurance, then if the unthinkable happened and a major breadwinner of the household were to die, the family would be protected financially, and would not end up burdening society.
Whenever you are paying taxes in a savings or investment vehicle, it similarly to inflation adds a pressure for you to make extra returns to make up for the money you lose paying taxes.
Chasing this extra return almost always implies taking additional risk, which makes you more likely to lose the invested money due to bad luck.
Because of this fact, taxation in the saving and investing world is a risk - and with life insurance, unlike with banks, you don’t have to suffer this risk.
How Life Insurers Reduce Litigation Risk
Regardless of the choices that you make in life, having more money will always make you more vulnerable to the risk of being sued.
Whether you can afford good lawyers or not, sometimes you might lose a legal process, and in those cases, the person or entity that sued you can come after your personal assets.
This is an especially big risk for business owners, who in some instances might be required to use their personal assets to settle liabilities for their companies.
If you have money in a bank account, it can be seized through litigation, but if you have it in a cash value life insurance policy, the people suing you will not be able to touch it.
The reason for this is similar to the reason for the tax advantages - legislators have allowed this security to maintain the important function of life insurance in society.
While you can use the money inside a life insurance policy during your life, the final purpose of the policy is to benefit the beneficiaries when the insured person dies, and because of this, the money cannot be touched by people suing the policy owner.
While the risk of being sued is not a fun risk to consider, it is a very real one, especially in countries like the United States, and because of this risk, it is important that you protect your money - which can be done with a life insurer, but not with a bank.
How Life Insurers Reduce Counterparty Risk
Whether you are storing your money with a bank or with a life insurer, you want to make sure that they will stay in business and remain financially stable, so that they can pay back your money in the future.
At the end of the day, this will depend upon how the safekeeper of your money can handle financial stress, especially as it relates to major economic downfalls like recessions, wars, pandemics, and other crises.
As we went over briefly in the start of this article, banks make money by issuing loans, while life insurance companies make money by providing life insurance which pays in case someone dies.
For banks to continue making money, they need their borrowers to follow through on paying back the loan and the interest.
For life insurers to continue making money, they need to be relatively accurate in how they predict at what age a certain group of people will die, on average.
As it turns out, lending money is in general more risky than providing life insurance, as many borrowers tend to experience difficulties in paying back loans during an economic downturn.
While it is common for people to experience difficulties paying back loans in a recession, they don’t tend to start dying to a much larger degree (not even during the pandemic).
The predictability of the life insurance business is much more dependable than the business of banks, which is why most big life insurance companies today have been able to steadily deliver on their promises since the 1800s.
In fact, during the great depression in the 1930s, the majority of banks had to close down their business, leaving depositors and savers without access to their money, while only a small minority of the life insurance companies had to go out of business.
This reflects the fact that on average, life insurance companies are more secure and conservative than banks, and are more likely to remain profitable and stable even through hard times.
But What About FDIC Insurance?
After the disastrous effect on the banking industry during the 1930s, the United States government started the Federal Deposit Insurance Corporation (FDIC), which helps to protect people against bank defaults.
With FDIC, depositors are now guaranteed that the money they deposit with their bank will be covered in the event of a default, up to $250,000.
This means that if your bank were to go out of business, you will get your money back through the FDIC insurance your bank has.
While this is a great protection for consumers, it is limited to $250,000, and beyond that, you are still facing the general risk of banking, and might lose that money in case the bank goes under.
The reason that there is no FDIC insurance for life insurance companies is that there is much less of a need for it than with banks.
As has been proved time and time again, life insurers can perform dependably through major market crashes and crises, and so they don’t need the protection of a federal insurance to ensure that their clients' money are kept safe.
Banks, on the other hand, have continuously failed several times since the 1930s, and only between 2008 and 2012 465 banks had to go out of business in the United States.
Many factors that preempted the crisis of 2008 are still present today - one example of this is recent changes in the fractional reserve banking system, which you can learn more about in this instagram post we made.
So, for anyone who wants to become a millionaire, or at least have savings of more than $250,000, FDIC insurance does not protect you from the risk of the banking sector at large.
The Liquidity Advantage of Banks For Short-Term Expenses
While putting your money with a bank holds quite a few risks, as we have learnt about in this article, it does also come with one major advantage - instant liquidity for short-term expenses.
With money in a checking account, you can access and use it instantly around the world, with a debit card or wire transfer, which makes life more convenient for you.
When you have money with a life insurance company, it is not as liquid or instantly accessible as it is with a checking account at a bank.
This makes banks a good guardian for money that you intend to use within the near future, such as the next month.
The Liquidity Advantage Of Life Insurers For Investments
While banks are good for instant liquidity, that does not mean that the money you have locked up within the cash value of a permanent life insurance policy is not liquid.
To access the money in the cash value you can take out your yearly dividends and/or take out a low interest loan using the cash value as a security.
While this money can be used for your lifestyle, and is commonly structured to provide for example retirement income, it is extra attractive when used to fund investments.
This is because if you take out a loan with your cash value as security, and use that money to fund an investment that can make you a higher return than the interest rate, you will be able to earn money in two places at the same time.
As you use your loaned money to invest, you will profit with the difference between the interest rate you are paying and the return you are making.
While you are making these profits, the part of the cash value that was used as a security for the loan is still left with the life insurer, and will continue to grow there on a compounded basis.
This makes life insurance an excellent backbone of your whole financial portfolio, as you can improve your investment results by first parking your money in a secure cash value policy and then using a loan secured by that policy to fund other investments.
Most people think of banks as secure guardians of money, and don’t really consider that life insurance companies can do the same job even better.
In this article, we have learnt more about the how it is less risky to store money with life insurance companies, and the advantages they have over banks with factors like:
- Lower Inflation Risk
- Lower Volatility and Market Risk
- Lower Taxation Risk
- Lower Litigation Risk
- Lower Counterparty Risk
There is however one function where banks outperform life insurers, which is to provide you with instant liquidity.
Cash value life insurance policies, on the other hand, aren’t illiquid, and present very attractive opportunities for funding investments in a way where you can have your money growing at two places at the same time.
While putting money into cash value life insurance used to be a complicated process, it no longer is, with White Swan’s digital platform and experienced industry experts.