Feeling Cool About a Hot Personal Finance Book

It’s pretty rare for a personal finance book to hit the New York Times bestseller list. So, when my Next Avenue editor asked me to evaluate the latest one, The Bank on Yourself Revolution by Pamela Yellen, I welcomed the opportunity.

I had reviewed the author’s earlier book, Bank on Yourself, for CBS Moneywatch which did not endear me to Yellen, a self-described financial security expert who says she has investigated over 450 financial products and strategies. (She wrote a scathing rebuttal on her website.)

The first Bank on Yourself book made two pretty spectacular promises: 1) Get back every penny you pay for major purchases and 2) Spend money and grow wealthy

What Yellen Told Me

Unfortunately, as I noted in my Moneywatch article, that book’s promises didn’t add up. In response, Yellen wrote me that she only meant those promises as a way to contrast her approach with conventional financing methods.   

Like Yellen’s first book, this one promises to show how to buck the financial system and secure your family’s future without going near what she calls “the Wall Street casino.” This one, however, goes into a bit more detail.

Yellen also has some rather harsh things to say about the financial services industry in this book and I wholeheartedly agree with her about the high and hidden fees investors often pay. I also go along with Yellen’s view that, when it comes to stocks, many small investors consistently and painfully buy high and sell low. 

But it’s when Yellen gets to her “bank on yourself” strategy that we part ways.

The 'Bank on Yourself' Strategy

That strategy is: Buy whole life insurance to build wealth with the option to borrow against the policy to finance larger expenditures.

Specifically, Yellen advocates purchasing dividend-paying whole life (also known as permanent or cash value) insurance and what's known as a paid-up-additions rider (which lets the policyholder deposit additional funds regularly) so you will “maximize the growth of your cash value without increasing your premium.”

Yellen recommends funding this insurance through many means, including:

• Restructuring debt and paying it down more slowly
• Reducing funding of your 401(k) or other retirement plans
• Tapping your IRA or 401(k)

But by my calculations, despite the charts in her book, Yellen’s insurance solution promises to deliver a return barely above historic inflation rates.

The charts do seem to make a convincing case for her insurance program. They show the S&P 500 index going nowhere between March 24, 2000 and April 11, 2013, while the Bank on Yourself insurance policy has spectacular and steady growth.

Like her last book, there was no data on the returns these policies produce. But in this one, Yellen offers an illustration of the non-guaranteed growth of the cash value of three policies for a 35-year-old male (though not one for older consumers). With annual premiums of $12,000, the policy designed for maximum growth (highest cash value) is projected to be worth $672,718 when the man turns 65.

Since Yellen didn’t disclose the annualized returns, I calculated them as follows:

 
When I was working on the review of Yellen’s first book, she sent me an email stating “At this point, further correspondence would be unproductive.” Still, to give her a chance to respond to this review, I sent her an email and a fax, asking if she agreed with my numbers, and received no response. So, I then sent the numbers to Rick Ferri, a Chartered Financial Analyst and founder of Michigan-based Portfolio Solutions, who confirmed the calculations.

Note that the returns are negative for the first five years but by the 30 year, the projected annual return is 3.77 percent, a bit higher than the 3.2 percent long-term inflation rate since 1913.

Yellen notes these returns are not guaranteed; this means the insurer has the right to credit lesser amounts. I requested the policies’ guaranteed amounts, but again received no response.

If you want to tap your insurance policy without paying taxes while you are alive, you must also pay to borrow the funds, owing interest to the insurer.
 
Reviewing a Key Graph

Over a 15-year period, I calculated a 2.98 percent annual return for the policy that was designed for maximum growth. And you may be thinking that’s still better than the stock market, which showed no growth in Yellen’s graph. Well, graphs can be misleading. 

For instance, Yellen chose to start the stock graph at the height of the internet bubble and to do exactly the same thing I frequently criticize Wall Street for doing: use as a benchmark the S&P 500 index, which excludes the return from stock dividends and is comprised of only the largest U.S. companies. In short, it’s just part of the return of part of the market. 

I looked at what I think is a more accurate market gauge: the Vanguard Total Stock Market Index Fund, comparing its performance over the last 15 years through 2013 with the 2.98 percent projected Bank on Yourself return. No one knows what stock market growth will be over the next 15 years, of course. But in spite of two plunges of more than 50 percent during the past 15 years, this fund returned 5.38 percent annually. A more conservative, rebalanced allocation of stock and bond index funds did even better.

In dollars and cents, a $1,000 investment earning 2.98 percent annually would grow by $553, while a 5.38 percent return would yield $1,195 (both letting dividends reinvest). 

I am not about to tap my 401(k) or even use my taxable money to get a non-guaranteed 2.98 percent annual return over the next 15 years. The return would likely be far less for me since I’m substantially over 35 (OK, 56) and the cost of my insurance presumably would be far greater than for the 35-year-old man.

While I’ve got college to fund for my son, I’m going to stick with the Utah 529 College Savings plan using Vanguard funds. It’s true, as Yellen says, that there are some tax benefits to whole life insurance. But I’ve generally found they’re not worth the added expenses; I recommend separating insurance from investing. 

I’m sure my opinions will, again, not please Yellen, a vociferous defender of her approach, but encourage her to show me how I can get a guaranteed return significantly higher than 2.98 percent over the next 15 years. Otherwise, I'll stick to CDs.