Bestselling book's financial promises don't add up

Vanguard Press

(MoneyWatch) Pamela Yellen's New York Times best-seller, "Bank on Yourself," made a splash by promising to help people build their wealth even as their investments were losing value. In the aftermath of the housing crash, the book seemed to throw a lifeline to consumers whose financial security was suddenly under threat and who were desperate for help on how to preserve their standard of living.

As usual with financial experts who retail in investment "secrets," the question is this: Are the remedies for real, or are they snake oil? At the urging of several readers, I decided to check out what category Bank on Yourself falls into.

Yellen's book says that more than 100,000 Americans of all ages and backgrounds are already using her method. Her book makes two primary claims. She says people can:

Sound too good to be true? Many people have expressed skepticism, including personal finance personalities such as Suze Orman and Dave Ramsey. Yellen dismissal of such doubts is summed up in an entertaining cartoon, claiming she is is offering "financial secrets [financial services companies] don't want you to know." I approached this investigation in that spirit, prepared to assess -- and to buy -- the products she recommends under the Bank on Yourself method.

Bank on yourself method

One aspect of the book I immediately sympathized with was its stinging critique of Wall Street. Yellen is nothing if not scathing in her description of the financial services industry, which played a starring role in the housing crisis. Yet that perspective, however accurate and in tune with the widespread popular antipathy toward bankers, doesn't conceal the book's lack of detail in supporting its extravagant claims.

For instance, the 2009 book promotes a particular whole-life insurance product that uses what's known as a "paid-up-additions" rider. Whole-life, as it's called in the trade, is a type of permanent life insurance that also lets policyholders withdraw cash while they're alive. The paid-up-additions rider is essentially a way to put more cash into the policy than the basic required premium.

As the book describes, I could build up the cash value in the policy and then borrow against it to finance major purchases, such as a new car. I would then repay the principal and interest from my borrowings, as well as pony up some extra cash in the form of the paid-up-additions rider. Yellen's book stated that, despite taking out what amounts to a hefty loan, readers can recoup every penny of their purchases.

Bank on Yourself put to the test

After reading the book, my wife and I met with a Bank on Yourself authorized agent in our home. I told him I was sick of market volatility and wanted to be able to spend money today without eating into our retirement income. In short, I said I wanted to "have my cake and eat it, too" ("Exactly!" he responded.) I also said I would refer clients to the agent if Bank on Yourself worked as well as advertised. I made only one demand at that initial meeting -- I needed to see the numbers.

A couple of weeks later, the agent presented illustrations outlining three different whole-life policies. The illustrations are essentially spreadsheets, detailing exactly how much money I put into the policy and how that money grows over time. The agent recommended I buy two policies on myself and one on my wife. He had prepared two different illustrations for each policy, with hundreds on numbers on each. Under two of the policies, my wife and I would be borrowing $30,000 two different times to purchase a car over the next decade. We would then pay it back. The insurance would be from Lafayette Life Insurance, a seemingly solid, highly rated mutual insurance company.

At first glimpse, the agent's projections seemed magical. By year 12, when I had planned to use the insurance policy to live on, I had more money under the scenario where I borrowed to buy a car than in the one where I didn't purchase a vehicle. Could it really be true that I could spend and grow wealthy?

I spent the next few weeks trying to assess the agent's pitch and his supporting materials, following up by phone and also speaking with a representative from NACFA-BOY, the company I was told had prepared the illustrations. An Internet search on the business turned up a "members-only" website called Nat'l Assoc. College Funding Advisors - Bank on Yourself that included Yellen's picture.

Eventually, I was able to run my own numbers in evaluating Bank of Yourself's offer. The bottom line: In repaying the $30,000 I borrowed to finance my purchases, I paid an additional $12,000 to Lafayette Life. But 12 years into the policy I had only an additional $8,759 guaranteed, which, depending on Lafayette Life's returns, could be as high as $9,832. In other words, I would've forked out an additional $12,000 to the insurance company, only to have less money years later around the time I expected to draw on the policy for my retirement. In other words, I would be out even more than 30 grand.

Bank on Yourself and Lafayette Life respond

To ensure my analysis was correct, I sent my numbers to the Bank on Yourself agent. Unfortunately, I could get no confirmation of my findings, and he eventually stopped responding to my questions. Next, I approached Pamela Yellen herself, and she disagreed with my numbers. In an email exchange, Yellen said I was taking her "get every penny back" pledge -- which is sprinkled throughout the book's early chapters -- too literally, suggesting that it is used chiefly to contrast her financial planning method with other approaches. She also pointed to the book's repeated acknowledgement that Bank on Yourself is not a magic bullet.

Yellen also threatened legal repercussions if I pressed forward with my story. "I absolutely will not tolerate defamation and vigorously pursue those who misquote me," she wrote, noting that she had discussed the matter with her attorney.

Determined to verify my calculations of Bank on Yourself's offer, and knowing that analyzing insurance can be difficult, I contacted Lafayette Life directly. I spoke with the insurer's CEO, Jerry Stillwell, twice. While clearly an advocate for whole-life insurance and the financial benefits of borrowing against a policy's cash value, he told me that "Bottom line, your numbers are right."

Is Yellen making money on these insurance policies beyond sales of the Bank on Yourself book? She declined to answer questions on her involvement in selling insurance, but I did find the following: "Bank on Yourself" and "Spend and grow wealthy" are trademarks registered to an entity called the Prospecting & Marketing Institute. [Editor's note: After this story was published, the material was removed from the site.]  The company's materials describe it as "the ultimate power prospecting and marketing system" and claim that users will "be earning the kind of commissions you've always dreamed of in practically no time." It further states: "Top producers pay me substantial fees to show them how to tilt the prospecting game their way. And several of the largest insurance companies in the world have paid me handsomely to teach prospecting skills to their entire network of representatives on national satellite broadcasts." Arizona state records show that Yellen is president and CEO of this entity. 

Bottom line

Like anyone else interested in securing his or her financial future, I wanted Bank on Yourself's claims to check out. With the financial industry focused on profits, consumers largely remain out in the wilderness when it comes to financial planning. On a personal level, I really am seeking refuge from the volatility that has whipsawed the markets and frayed investor nerves.

What resonated with me, and with people who contacted me about Bank on Yourself, was the book's tantalizing notion of consumers eventually recovering "every penny" they spend somewhere down the financial road. But the offer I got from Bank on Yourself's authorized agent fell far short of that promise. Rather, it seems like a pricey way to finance a purchase, and by paying others to borrow my own money, no less.

The takeaway? Whether financial counsel comes packaged in a best-selling book, delivered in TV homilies by some investment guru, or even dispensed in more personal fashion by a trusted advisor, beware of big promises with few specifics. The greatest risk in swallowing the latest financial elixir is wanting to believe that it will work.

[fredobrien]

Looks like Allen is another Broker trying to sell stocks.
Here's Pamella Yellens review. Thgis isnt the first time CBS has misconstrued the facts.
http://www.bankonyourself.com/response-to-allan-roth-cbsnews-com-moneywatch-review-of-bank-on-yourself.html

[fredobrien]

Dear Mr. Roth,
I just thought I'd drop you a quick email to let you know my experience. I have a whole life policy like Pamela Yellen talks about in her book and that you refer to in your article. It is not through her nor am I defending her but I have had nothing but positive results with it. Every time I open a statement I see again. Not like some of my friends who experienced losses. I had one friend say that his broker and financial advisor told him don't worry you're in it for the long haul. That was the beginning of the market crash in 2008. I ask him what his broker said. I can imagine you already know. Hang in there you're in it for the long haul. Of course he stayed in and we all know what happened in 2009. Here we are 4 years later and he has less than what he started with. I asked him now that he's at the age of 61 how many more 10 year periods does he have and how long is a long haul? Will he be 70? 80? 90? How old will he be no one has any idea I know I will be fine. I have guarantees and I will never lose money. Also when my time is up my children will be taken care of very well. In the meantime I haven't had to qualify for loans and pay a bunch of bank finance charges. Maybe others have enough money that they don't mind doing that. What I find very amusing is that people continue to do the same thing and expect different results. Isn't that the definition of insanity?

Although I don't expect it to make me a millionaire like a massive rare performing stock would, it has given me positive gains every year when others have lost everything they've had. I've also been able to access and will be be able to access my funds tax-free.

The bottom line is: I think that most people forget in other kinds of accounts their funds are taxable by the government and depending on what kind of account it may be there may even be a 10% penalty if it's withdrawn early not only that but most people don't realize they usually pay a 3% management fee from a broker. And that broker makes money whether you're there making money are losing money. It doesn't matter the broker still makes his money. When you look at a 3% management fee over a long period of time not only are you paying money on the amount you'll receive later your also paying the management fee on the taxes that you'll be paying. It doesn't seem like a good deal to me. These to me seem like a lot of unnecessary excess charges. Anytime I can keep the government out of my pants pocket I'm happy. I realize there will be a cost of insurance but I would rather pay a small cost of insurance then I would give it away in taxes. At least I'm getting a benefit for it. Just a thought to consider since I hadn't read anything related to these points in your article.
Best regards,
Fred O'Brien

[Reality_Check_2013]

If you find yourself swallowing Allan Roth's review of the Bank On Yourself book, you should Google "Allan Roth Bank On Yourself" and read Pamela Yellen's response. Then you'll realize that Allan Roth has an agenda and he wasn't about to let any "pesky" facts get in his way.

Pamela gives a very detailed response and rebuttal and you can read the response she sent to Roth - all the numbers and proof are there. Is it any wonder people don't trust the media?

Besides, Allan Roth revealed his true colors in this comment he made here on someone else's comment: "If I really knew how to get rich, I wouldn't write a book about it. If I shared my secrets they wouldn't be secrets any longer and I could no longer get rich from it."

Kudos to Pamela for taking all the bullets for being willing to share what's she discovered.

[joshnliz]

Allan,

I'll start by saying that I am biased as I make a living selling policies like this and helping my clients manage their loans. Also, I have never read Pamela Yellen's book and cannot comment on it directly.

There is no point in saying, "Trust me, it works." People need to do their due diligence before deciding to make any financial decision. Many people take months, and in some cases years, to come to the conclusion that they should or should not using the Infinite Banking Concept.

I was not completely satisfied with any of the literature out there about this concept even though Nelson Nash's book is the foundation of the concept. I decided to write a book myself that does not make any promises rather it follows the numbers and explains why this works from our point of view and from the point of view from the insurance company.

I didn't want to write a convoluted, overwhelming book that seems unapproachable. My book is short and to the point. It's always difficult to overcome a bad first impression but I am asking you to read my book with an open mind. I don't sell my book, I give it to people. How should I go about sending you a copy?

[hankthi]

Reminds me of an insurance plan pitched to me years ago called "Finacial Engineering" I think I will stick with Allan and Mike Piper, and other Bogleheads who are not interested in getting into my wallet. They are helping me gain distinctions around low cost, diversified investing

[IsHeThinking]

Allen, on your search for a "safe money" alternative to the ups and downs of the market, What else have you found that works or doesn't work?

I have looked into a Bank On Yourself plan, and want to know what else to consider that can consistently grow and use to purchase large ticket items (such as your car)... I'm looking at the tax deferment and the amount i'm spending on life insurance anyway, and for the amount of money I'm putting into the policy it seems like a good plan.

[tmajestic]

Ok I have to make this comment. Really good article in general. And if Pamela Yellen is misleading people I can understand that.

But it's important to note a facts that you left out, whether to make your article sound more prestigious or just because you aren't thorough in your reporting. Either way it's kind of frustrating how you tilt this article to make your picture look a lot better.

1. Let's make this clear, you make it sound extremely negative that you spent $2,500 in order to use this money. Over a 12 year period. If 17 dollars a month is a lot of money for you then ya... complain away.

However, you have missed the biggest and most important part of this. You are paying basically 17 dollars a month to have an account that will grow at 6 percent (historically) and ... wait for it...

THIS ACCOUNT IS BUYING THIS GUY 250-500 THOUSAND DOLLARS OF WHOLE LIFE INSURANCE.

So he's getting whole life insurance, that will always have a GROWING account value, with ever increasing lifetime life insurance, even if he stops contributing, for 17 dollars a month and ONLY when he uses the money in his account?

I mean that's a no brainer to me. To buy term it's going to cost you more than that, and that's going to end and most likely be no rate of return for you ever.

I mean what's with this war here. We got the Pamela Yellen team trying to prove that everything she does is perfect and makes 100 percent sense, then we got this guy and the other wall street side trying to do the exact opposite. When did things have to get so black and white.

Let's just say it how it is, THERE IS NO PERFECT INVESTMENT. There I said it. Either you get gains for risk, and you pay fees, or you get losses and risk, and you pay fees, or you get safety and use of money, and you pay fees, but come on everyone is going to make a fee. That's all this is, it's a fee. And at least it's a fee that GIVES you insurance. And an insurance that if kept active guarantees a payout if I might add.

In fact why wouldn't you want companies to make fees? If they didn't then you wouldn't have a business and we'd all be bartering for hummus from a little kid on the side of the road while his parents are in the corn fields plowing all day.

[jtmcfie]

Allan,

I don't know much about Pamela Yellen and her Bank On Yourself book (actually haven't even read the book) but I know of the concept she is trying to market, and it's really a very good financing concept (called Infinite Banking Concept.) R. Nelson Nash has pioneered and expounded this concpet in his book Becoming Your Own Banker.

I think R. Nelson Nash's book has the numerical proof you are looking for, and I'd encourage you to read it. Here is another quick example of the numbers in a hypothetical example built around Car Financing: http://youtu.be/5GcMDSNRJwI .

The concept is definitly not a get rich quick scheme but the results are very beneficial. It's about who controls the pool of money and earns intererst on all the purchases we must make in our lives.

Regards,

John

[Bondlawyer]

It is mathmatically impossible to come out ahead on these deals unless the insurance company is paying an above market rate of retun sufficient to cover their premiums and all the spread they charge to administer the loan.

If you think this is a great idea, you are effectively saying that insurance companies are giving you a free lunch. You really think that is the case?

Good Luck to you sir.

[brianbew00]

Hmm..Bondlawyer. Mathematically impossible?

https://dl.dropbox.com/u/7350169/Free%20Lunch.pdf

Check out the illustration from the link (Lafayette). I did the numbers for you. Borrowed $30k in year 4. Established equal annual payments that result in zeroing out loan balance (5 yr term). Rate that generates equivalent loan repayment is 3.8109538347245%. Over same period, I can take the initial cash value for the loan period(24571 loan balance + 5476 net cash value = 30047) and the ending cash value of $33,773, and determine an IRR of 2.965594%.

So riddle me this Bondlawyer...the IRR is less than the loan rate...correct? So, how is it that he earned $3,726, while only paying about $2995 in interest? Is that not an economic benefit? There is no magic here...just finance.

[tdullmaier]

Allan,

Thanks for all the great, and in this case very brave, work you do for us small investors.

Terry

[wildstar220]

How "rich" have Suze Orman and Dave Ramsey gotten via the multitude of books they have written that simply repeat the "conventional wisdom" of chasing rate of return? Yes, Ramsey made his name with his get-out-of-debt strategies, but why did people get in so much debt in the first place? Mr. Roth, thank you for your efforts and scrutiny into this subject. Perhaps I missed it, but have you also applied the same level of scrutiny to Ramsey's claims that you can "predict" 12% annual returns with mutual funds if you maintain an investment timeframe of 10 years or longer? "Predict" is a direct quote from Ramsey's book, the revised version after the 2008 meltdown. So, all of us who did what we were told and "maxed out" our 401(k)'s for the last 30 years - do you agree with Ramsey that we should have easily earned and "predicted" 12% annual returns?

[JerryNA100]

How does criticizing other authors and their books have anything to do with this book and this author? Total logical failure.

If you think this investment plan works, then explain how a high cost whole life policy makes more money (than e.g. CDs or stocks) for anyone except for the insurance company selling the policy. Stocks and mutual funds are not guaranteed, but insurance companies *still* invest in stocks to give you returns on annuities and insurance claims. The returned money is not all from premiums, and it has to come from somewhere.

[Allan_Roth]

Look, there are many things I disagree with regarding Suze Orman and Dave Ramsey. Ramsey's 12% historic average returns was based on arithmetic returns, not geometric. For example, if your investment gains 50% one year and loses 50% the next, your average return is zero but your investment is still down 25%.