Why do some of the largest banks own more than DOUBLE the value of life insurance cash value than real estate assets? What is it that banks see that others, including Dave Ramsey, don’t?
In this episode, Chris Miles shares why banks store a large percentage of their assets in permanent cash value life insurance. Tune in to find out their secret!
Book Recommendation: “Pirates of Manhattan” by Barry James Dyke
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Why Do Banks Own More Life Insurance Than Real Estate
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I want to take a different spin. We’ve talked about infinite banking on this show before but in this episode, I want to talk about life insurance as an asset. I don’t just mean after you die. I mean, an asset while you are alive. We’ve talked about the fact you can double dip. You can get your investment money to pay you twice when you use this kind of tool. You can also use it as a tax-free supercharged savings account.
This is something that’s like a Roth IRA but it doesn’t have all the dumb limits and all the income limitations. You can use it as a way to be able to store your money and make better returns than point nothing percent in the bank. Funny enough, that’s my topic today because although the banks pay you diddly, the banks put billions of dollars of their assets and cash into it.
You got it. Life insurance. I don’t mean term insurance. They’re not just buying that. They’re buying something with real liquid cash that’s available. That’s cash value and tax-free savings account inside of life insurance, specifically permanent life insurance like whole life insurance. That is what they buy. Yes, some of them will buy universal-life and things like that but I want you to figure out why the banks are using this so you know why you should be using this too.
My friend, Hutch, did a video on this but you can go to FDIC.gov and look up all these banks’ assets. When you look this up, you can see where the banks are holding their money. I didn’t realize life insurance was a part of this until I read the book Pirates of Manhattan. It’s a great book by Barry Dyke. I recommend it to anybody who wants to read and get more into this. Why banks have been buying life insurance for decades?
If you read one of my previous episodes a few months back with Eddie Wilson, who is a very successful entrepreneur, his grandfather was a bank owner and a bank president. He said the same thing. He taught Eddie about why it was so important to have life insurance as an asset. The banks have been doing this for many years. What you’ll see is, especially as we move closer to recessionary times or times when the markets make sense, they put more of their assets inside of life insurance.
I remember during the last Great Recession, there were banks like Wells Fargo putting 22% of their assets into life insurance. Why would they do this? Why would they want to put their money into something that could be a waste of money? I’m not even saying that they do it the best way possible because when we set up our policies for you, and yes, we do it internally here as a team, the thing is when we do it, we do it with the max ROI possible. They don’t always do it this way.
Most of the time, the banks are doing this for a few key reasons. 1) They’re buying key person life insurance on their executives, those that are in their company like presidents, vice presidents, C-level executives, and people like that. They’re putting these policies on their middle managers. They’re buying these assets. They’re not just buying it because they want to have protection for their employees but they’re doing this because they know it’s an asset they can hold and use it as a store of money.
With the same things we talk about here about getting that arbitrage, meaning you can take that money, be able to get a higher return off of that money than what you borrow it for when you try to borrow it from the insurance company, the great thing is you can get a better return. Banks do this because, believe it or not, banks have what’s called fractional reserve banking. It means that if banks loan out more than what they have in deposits, savings, and CDs from you guys, the reason they could do that is because they’re legally allowed to loan out at least 6 to 10 times the amount of cash that they have in their assets.
Different assets that they store allow them to leverage it more. For example, if they had plain old cash sitting there, money market type of funds, they could leverage pretty much ten times that money. If you put $10,000 into their bank account, more specifically, they have the ability to loan out $100,000 to somebody.
I want you to do the math on this. If you put in $10,000 and let’s say you get paid a whopping 1%, you make a whopping $100 in a year. If they can take that $10,000, they’re able to loan out $100,000, and they make 7% on that $100,000, they’ve now made $7,000 while the cost to them or the investment was only $100 of interest paid to you. The investment is $100 to then make $7,000, that’s a no-brainer. Life insurance is one of those that they can leverage up to almost that full max.
If they try to have money in stocks, they can’t leverage this money as much. They couldn’t do anything with it very easily. However, because you have the money sitting inside their life insurance and they have this life insurance cash growing and building and it’s guaranteed to grow and build, they’re allowed to leverage and pay for more money. They’re able to loan out more money to you and that’s how they make a lot more money. During recessionary times, they know this is a safe haven to go to. This is the kind of time we’re leading into right now. There are banks out there like Wells Fargo, Bank of America, and all these companies that have a lot of assets.
I won’t mention names but you could look these things up yourself. One bank in particular had about $10 billion in real estate owned between their branches as well as real estate in general. Whether it’s from things that they repossessed or whatever it might be, they had roughly about $10 billion in real estate. In life insurance, their total assets are about $21.2 billion so more than double. This is something you see very common. Yes, real estate is great and I love real estate, you know this, but they also have a lot of cash sitting in life insurance reserves.
That money is not just something that they can use as an incentive, although it is a good incentive for their employees. They use it because it’s liquid. They can access that money whenever they need to and that’s especially true. You need that during recessionary times just in case. Not just for emergencies in case something goes wrong but also if things become frothy or things become well.
If you have something where there’s a great opportunity to buy something, you want to make sure you have the cash to buy it when it’s there. There’s a great opportunity in that sense. It’s a great devastation type of fund and emergency fund. It’s a great opportunity fund all wrapped into one. It also has all those tax benefits where it’s tech deferred, it can grow and come out tax-free, all of those things. You get those benefits with it as well. There are so many things.
I even mentioned the Roth IRA. It grows tax-free and comes out tax-free. The great thing is that there’s no income limitation saying, “You make too much money. Sorry, you can’t contribute. You have to do this backdoor route to get there or this 59.5 rule and you get penalized.” There’s nothing like that. They don’t have those things going on. This is why banks have loved using life insurance for many decades and have been using it as a big part of their portfolio.
I’m not saying you put every dollar into this because banks don’t either. That’s not what’s important. The important thing is that you’re leveraging this as a tool for one to stay liquid. Right now, it’s more important than ever to be liquid. Warren Buffett increased his assets by $27 billion in cash in 6 months. That’s a lot of cash he’s trying to build up quickly because he knows there’s a big storm coming and it’s not a good one, at least if you’re not prepared but great if you are prepared.
Imagine that it was 2012. You could go back to 2012 and start buying real estate. That would’ve been a beautiful time. 2011 and 2012 would’ve been a great time to get more into real estate. If you had all that extra cash to buy it, that would be a great opportunity. There are some big economic wins coming. There’s a video that came out on this channel. We talked about this. They’re still planning to raise the interest rates. They don’t even want to lower them very quickly either. They think the rates will stay elevated for a couple of years.
There are tons of real estate investors that are banking. They’re wishing and praying that interest rates will come down because if they don’t, the financing that they got short-term is going to turn into long-term financing and they’re going to go broke. There are going to be a lot of opportunities in the multi-family and apartment space. You may have a lot of opportunities there. Even on a personal level for you, when you have cash, you can control the terms. That person that has the cash can become a king or a queen in times like these.
You want to make sure that you are a liquid. You want to be prepared. It’s not that you don’t invest or you put every dime into these things but this should be something that’s a part of your portfolio as much as you have decent health at least, you’re under the age of 70, and you’re not paycheck to paycheck. If you’ve got some cash that you’re trying to put away and build up for savings, this could be a great opportunity for you. Just like the banks have been doing for many years, they just don’t advertise it. They don’t care to. Why? They don’t have to. However, they have to disclose it, which is why FDIC.gov has a lot of these assets there.
I recommend this. I’m going to keep this short and sweet but I want you to ask yourself. Why would banks put so much money in here? Is it because they’re stupid? No, there’s a reason why banks have survived for a very long time. It doesn’t mean the banks haven’t gone out of business but the bigger banks, the ones that know what they’re doing, this is what they do to lessen the risk of their overall money. They want their money to work for them. They want to have better leverage, better use of that cash, and not just let it sit there and make nothing.
That’s why they don’t just put it with other banks necessarily making almost nothing in interest that they’re trying to loan money to different banks. It’ll do but they keep money here because they make bigger returns and it’s taxed while it grows. That is the key thing that they want. They want better tax benefits so it’s not taxed by the IRS. They don’t want all these limits and limitations put on them. They want to be able to put in more if they want. Also, they want to make sure that they have the ability to access it when they need it. That is important for you.
If you want to win with this coming recession, you need to have cash accessible when you need it. If you don’t, you’re going to be like everybody else saying, “I missed another opportunity. Hopefully, everybody will broke or get unemployed again, and then I’ll have an opportunity someday in another decade or whatever it might be.”
If you want to win with this coming recession, you need to have cash accessible. Click To TweetThis is your opportunity right now to prepare and be ready. I recommend getting the book, Pirates of Manhattan by Barry Dyke. If there’s something that you want help with or see how you set this up for your situation or see what it would look like, reach out to us at MoneyRipples.com. Go and make it a wonderful prosperous week. We’ll see you later.
Important Links
- FDIC.gov
- Video – How Big Banks Invest Their Safe and Liquid Reserves
- Pirates of Manhattan
- Eddie Wilson – Previous Episode