How To Set Up Your Own Virtual Bank Account That Earns Up to 12% Annually
The Problem With Traditional Savings Accounts
Savings Accounts at America’s largest banks, like Citibank and Bank of America, pay interest rates around 0.1%. That means if you put $100,000 in your savings account, never pay fees, and never make withdrawals… then after 50 years you will have a grand total of… $100,501.23.
Your bank, however, will fare much better. Your $100,000 deposit allows the bank to lend $1,000,000 through what is called the “fractional reserve system.” If we assume, for the sake of illustration, that the average interest rate collected on these loans is 5% annually, then the bank has generated $50,000 per year in revenue off your $100,000.
That’s an incredibly high return. You deposit $100,000 into your savings account, and the bank makes $50,000 in revenue each and every year… but it only pays you 0.01% in interest, or $10 per year.
If you shop around online, you can find higher interest rates. Capital One, for example, offers 0.75%. But 0.75% is still a measly return.
When you consider that inflation is reported at around 1% to 2% per year, it becomes quickly apparent that by keeping your money in the bank, you are losing ground every year.
So why does anybody put up with savings accounts?
Savings accounts and checking accounts offer us a few important benefits:
Ability to easily pay bills
Ability to withdraw money at ATM’s and bank branches
If you need to set cash aside for emergency savings or investing purposes, then it makes sense to keep your cash where it is safe and easily accessible.
But what if you could keep your cash safe and easily accessible… yet earn up to 12% per year?
That would be far superior to a bank account, wouldn’t it?
At The Capital Warehouse, we help clients use Indexed Universal Life insurance (IUL) to keep cash as safe as it would be in a bank account (and perhaps safer) while still enjoying returns that have historically averaged 6% per year.
What is IUL?
Indexed Universal Life is a form of life insurance in which your policy contains a capital account called the “Cash Value”. This capital account is owned by you.
Interest accumulates in your capital account every year. The amount of interest you are credited with depends on the performance of the S&P 500 or a basket of stock market indices.
You are guaranteed to never lose money due to stock market performance. You only participate in the gains.
However, there is also a cap to your returns. Today, a normal cap is about 12%.
Here are some hypothetical IUL returns for a policy linked to the S&P 500, with a 12% cap:
(Note: this is for illustration purposes only and is not intended to predict actual returns.)
In the scenario represented by the table above, the S&P 500 experiences a market crash similar to what was experienced in 2008. It then enjoys three successive up years. The IUL account never loses value due to stock market downturns. It also never gains more than 12% in any given year. The IUL comes out victorious with a 28% gain before fees. The S&P 500 has suffered a loss.
Actual performance varies. Looking back in history, there are periods during which the S&P 500 outperforms IUL, and vice versa.
At the end of the day, IUL is a form of life insurance. That means there are fees. Furthermore, the vast majority of fees are front-loaded. What that means is that you have larger fees in the beginning of your policy, but once your policy is fully funded the fees become very small. In the first 10 years of your IUL, you will likely pay more in fees than you would for index linked ETFs, but less over the next 10 years. As a side note, if you compare the IUL with fees, to an index linked ETF with Vanguard type fees (perhaps the lowest in the business), over the last 30 years, the IUL would have actually left you with more money in the account even after fees and taxes were drawn out.
One other disadvantage of IUL is that a percentage of your capital account is inaccessible. We aim to provide a minimum of 80% accessibility in your first year. Younger clients can often achieve 90% accessibility. These numbers improve as time goes on. (Make sure you check out the table further on this report, featuring sample numbers of what you could expect year over year with an IUL vs. a savings account.)
Comparing IUL to a Savings Account
Savings accounts give you a safe place to put your cash, and the ability to access your cash any time you please. IUL provides similar (if not superior) safety. Accessing your funds takes around 72 hours, but depending on the situation can be as quickly as the same day. IUL also involves fees. In return, you get much higher interest rates in most years.
We put together this table to give you a side-by-side comparison of IUL to savings accounts.
IUL returns will vary based on stock market performance and your cost of insurance. At The Capital Warehouse, we structure IUL policies to have the lowest possible fees. We do this by reducing the size of the death benefit to your heirs, which makes the insurance cheaper.
Remember: IUL is always at a disadvantage during the first 10 years. That’s because you pay most of your fees up front, at the beginning of the contract.
Still, if we assume for the sake of illustration 6% returns every year for a hypothetical 30 year-old male policy holder who contributes $100,000 every year for seven years, we see that IUL is profitable by year two. Please note that this is just an illustration and not a prediction or guarantee of future results:
Note: While we chose a premium contribution of $100,000 per year, iul can also be used as an alternative to traditional banking
After five years, the policy holder has created an extra $48,693 in wealth. After 10 years, it has created an extra $210,824 in wealth.
By year 10, you also have a death benefit of $4,455,669. That’s what you’ve been paying all of those fees for.
Yet even if we disregard the death benefit, the advantages of IUL over a savings account are clear.
Yes, there are fees. True, it takes a bit more time to access your fund, and accessing your funds is somewhat less convenient than the bank. Indeed, a percentage of your capital (10%-20% the first year and less in following years) is inaccessible. But when all is said and done, the IUL can create some significant wealth while giving you safety and quick access to the majority of your funds.
Where People Go Wrong with IUL
IUL is only effective as a high-return alternative to traditional banking when the policy is structured correctly. Unscrupulous insurance agents may try to sell you on policies that involve much higher fees, and significantly less access to your funds.
At The Capital Warehouse, we minimize your fees and maximize access to your funds as much as possible, even though we in turn receive less compensation. Why do we do it? Because we want to look back with each and every client 5 years down the road and be delighted with the policy’s performance. Some of the highest praise we get is “everything happened exactly the way you said it would.”
Lower fees and maximum liquidity enable our clients to scale up their IUL accounts. For some clients, that can mean placing millions of dollars in the IUL, and then using liquidity to reinvest 80% to 90% of that money twice for greater returns.
If you would like to start earning up to 12% on your money instead of losing to inflation year after year, reach out to us for a free consultation. We’ll discuss your goals and possible means of getting there.