What is a Private Family Bank?

Private family banking (PFB) is a strategy that involves using whole life insurance policies to build a multi-generational bank… kind of. In this article, you will learn more about a private family bank, what it is, what it is not, and if there are benefits.

  • Private Family Banking Strategy: Utilizes whole life insurance policies to create a family-managed financial system, enabling borrowing against these policies for various purposes like debt payoff and financing investments.
  • Advantages: Offers financial protection, guaranteed returns, easy fund access, market risk elimination, and tax benefits including tax-free loans and deferred growth.
  • Implementation Considerations: Requires careful policy selection to avoid Modified Endowment Contract status, consideration of dividend opportunities, and understanding the impact of policy loan interest rates.
  • Pros and Cons: Promotes generational wealth and financial flexibility but can lead to perceived inequality among family members and potential wealth reduction due to unpaid loans. It involves higher premiums and interest on policy loans.

What is Private Family Banking (PFB)?

Whole life insurance policies develop cash value. Cash value in a whole life insurance policy can be borrowed as a loan against the policy. That’s where PFB comes in. In short, PFB is a financial strategy that promotes: First, funding whole life insurance policies to develop cash value; and second, borrowing money against your policies to:

  • Payoff debt
  • Payoff mortgages
  • Finance business
  • Finance cars
  • Fund college and
  • Fund retirement

Some people who promote this idea called whole life insurance policies “banks”. They may refer to a whole life policy as your family bank.

Why Use Private Family Banking?

There are a number of reasons to use a private family bank. Here are the top 5 reasons for using a “family bank”:

  1. Protection is critical for financial security. A private family bank, which in reality is a whole life insurance policy, not only has policy cash value that the policy owner can use like a line of credit during their lifetime, but also provides a death benefit that gives a family financial protection.
  2. Growth is another important consideration when purchasing your private family bank. A whole life policy provides a guaranteed return on premium monies. In addition to the guaranteed return, there is also the opportunity to earn dividends in a whole life insurance policy, if the policy is with a mutual life insurance company. 
  3. Access. Being able to access money to do any of the things listed above is critical to make the private family bank strategy work. Other financial products are not as attractive as whole life insurance because access is more limited or penalized in many typical financial products.
  4. No market risk. Using whole life insurance as your private family bank eliminates the need to assume market risk because growth is already built into the policy and guaranteed.
  5. Taxes. Last, but far from least, are the tax benefits of using whole life insurance as your private family bank. First of all, policy loans which are the foundation for using the private family bank strategy are tax free. Whole life insurance itself grows on a tax deferred basis. This means that as long as the money stays in the policy no taxes are due on the growth.  In the case of withdrawal, money is taxed on a first in first out (FIFO) basis. This is ideal because the policy owner can withdraw everything they’ve paid in premiums (cost-basis) tax free. Policy dividends are also tax free up to cost-basis, and the policy death benefit is tax free to the heirs.

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How to Start a Private Family Bank

Starting a private family bank can be intimidating. There’s a lot to know. There are a few things to watch out for, and a couple of “must haves” if you want your bank to perform well. Getting setup badly will cost you money.

Get a Whole Life Insurance Policy

As you know by now, a private family bank is really a whole life insurance policy. Buying a whole life insurance policy isn’t hard, but buying a whole life insurance policy that is designed to work as a private family bank is critically important.

Whole life insurance accumulates cash value relatively slowly, but with a paid up insurance rider attached to the policy, it can accumulate cash value much faster. Cash value is critical when using a private family bank, so having the right amount of paid up insurance on a whole life insurance policy that will be used for a private family bank is important. 

But adding a paid up insurance rider to a whole life policy could cause a different problem. If you get a policy with too much paid up insurance, it will become a Modified Endowment Contract (MEC). This will cause different tax implications which are often better to avoid.  At McFie Insurance, we like to design whole life insurance policies with enough paid up insurance to maximize the cash value, without letting the policy become a MEC.

Earn Dividends

Buying a policy with a mutual life insurance company will also give you the potential to earn dividends from the insurance company. Although dividend payments are not guaranteed, many mutual life insurance companies in the U.S. have been paying a dividend every single year for the last 100 years.  At McFie Insurance, we sell life insurance policies from 5 different mutual life insurance companies. The companies we represent have been paying dividends every year for the last 96-128 years, depending on the company.

There are two different ways insurance companies calculate dividends. The two ways are direct recognition and non-direct recognition. Although the debate continues over which way is the better way, this is not as important as getting a well designed policy.  If you wish, you can go here to read more about direct recognition vs. non-direct recognition I own whole life policies with companies that are direct recognition, non-direct recognition, and with a company that allows you to select between one option or the other every year. I like both options for different reasons.

In addition to having a paid up insurance rider on a policy with a mutual company, there are also other riders that may be advantageous to have on your policy, although not necessary. These riders include the:

  • Term insurance rider
  • Waiver of premium for disability rider
  • Long-term care rider
  • Accidental death benefit rider
  • Accelerated benefit rider
  • Guaranteed insurability rider
  • Child benefit rider

Some of these riders require additional premiums and some of them are free to attach to a policy. We will discuss the term rider in this article because there is a lot of uncertainty as to whether it makes a private family bank policy better or not.

There are some life insurance agents who swear by putting a term insurance rider on every private family bank policy. At McFie Insurance, we have a love-hate relationship with the term rider because although it can be used to boost the cash value, it’s not always the best option for the customer. The term rider is a paid for rider, so there is additional cost for it.  In years past, it was very rare when putting a term rider on a policy made the best financial sense. More recently, with newer policy products, we are seeing more policies that benefit from having a term rider. As far as we have found, there is no “one size fits most”, so we continue to evaluate the results case-by-case.

The other riders in the list above are not riders that are required to set up a policy that will work well for private family banking. But they provide protection in additional areas, and at McFie Insurance, we use them to maximize a customer’s protection as appropriate.

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Taking Policy Loans Against Your Cash Value

The last thing I’ll mention here is that some companies will charge a fixed interest rate, and some companies charge a variable interest rate on policy loans. If you plan to take policy loans against your cash value to use the PFB strategy, this will be helpful information to know when you are buying a policy.

Getting a good policy, set up the way I just described, is how you start a private family bank.

Pros and Cons of the Private Family Bank Strategy

While some of the benefits are listed earlier in this article, we wanted to provide you with even more, and inform you of some potential downsides. Here is a comparison of the potential pros and cons of the private family banking strategy:


Wealth Transfer Across Generations
The primary advantage of a family bank lies in its ability to foster generational wealth. This strategy typically involves a whole life insurance policy, which includes a death benefit. After your passing, this benefit is passed on to your family as a substantial sum, enabling them to perpetuate the family bank and augment wealth.

Maintaining Cash Value During Loans
Unlike traditional savings accounts, where withdrawing funds halts interest accrual, borrowing against a whole life insurance policy doesn’t affect its cash value. Your cash value is used as security for the loan but continues to grow and yield dividends. This way, you can obtain a loan without hampering your financial progression.

Flexible Repayment Conditions
Borrowing from conventional financial institutions involves adhering to their repayment terms, including fixed monthly payments and associated fees. In contrast, borrowing from your life insurance’s cash value allows you to set your repayment terms. You can decide your repayment amount and schedule, or even choose not to repay, though this will have implications for your policy’s interest and cash value.

Reducing Tax Liabilities
Investments in stocks or traditional savings accounts usually attract income tax on the returns. However, the cash value in a whole life insurance policy grows tax-deferred, similar to certain retirement accounts. Additionally, the death benefit paid to beneficiaries from your policy is typically exempt from taxes.

Investment Security
Investments in stocks or real estate carry the risk of substantial losses. In contrast, the family bank strategy, underpinned by a life insurance policy, is more secure, provided premium payments are maintained. Furthermore, in many states, life insurance proceeds are protected from creditors in case of unsettled debts after death.

Promoting Financial Responsibility
A family bank can be a tool for teaching financial responsibility to younger family members. For instance, if a teenager needs a car but isn’t eligible for a loan, a loan can be taken from the policy’s cash value. By setting up a repayment plan with your child, you’re teaching them about loan repayment in a safer environment, without the need for credit checks and other complexities of traditional loans.


Risk of Unequal Perception
Improper management of loans within a family bank can create a sense of unfairness among family members. This perceived inequality may lead to financial disputes and discord within the family.

Diminishing Family Wealth
It’s crucial for the family to establish strict rules regarding loan repayment and forgiveness. Lack of such guidelines can result in unpaid loans diminishing the family’s collective wealth. Additionally, not repaying loans against a life insurance policy decreases the policy’s death benefit by the outstanding loan amount.

Costly Insurance Premiums
The premiums for whole life insurance policies, which are essential for building a family bank’s cash value, tend to be substantially higher compared to term life insurance policies offering similar coverage. This can make maintaining the family bank an expensive endeavor.

Loan Interest Rates
While loans from a family bank aren’t sourced from conventional financial institutions, they still incur interest. The insurance company will charge interest on loans taken against the life insurance policy. This is an important factor to consider when using the family bank for loans.

Is a Private Family Bank Really Your Own Private Bank?

No, a private family bank is not a private bank by any stretch of the imagination. In this article, I use the “bank” terminology for the benefit of the reader who is looking for information about “private banking” and is used to seeing or hearing the “banking” vernacular already.  

For what it’s worth, the banking vernacular is rooted in the Infinite Banking Concept which was first written about by R. Nelson Nash. In his book Becoming Your Own Banker, Mr. Nash described how you can use whole life insurance to effectively create your own monetary system. Since you are the one in control of the money you lend and the money you borrow, you can in a sense, become your own banker.

Since the spread of the Infinite Banking Concept other strategies have popped up that are based on the same root idea with some variations.  A Private/Personal or Family Banking system (PFB) is one of them, with another one being: Bank on Yourself. That’s how the term “bank” and “banking” got involved in the equation.

Understanding the Infinite Banking Concept pdf ebook Understanding the Infinite Banking Concept and How It Works In Our Modern Environment 31-page eBook from McFie Insurance Order here>

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