What is Infinite Banking and How Does it Work in Canada?
The Infinite Banking Concept is a financial strategy that allows you to grow your wealth and become your own banker through dividend-earning, participating whole life insurance policies. It is a personal finance strategy based on the idea of “creating a personal banking system”, to finance your own loans when making major purchases or investments, so you never have to borrow money and pay interest to a traditional bank or a third-party lender because you do have your own cash flow banking system. Note that your infinite banking policy shouldn’t be used or construed as a bank account. The purpose of an infinite banking policy is to finance your own borrowing and benefit from uninterrupted wealth growth even when you’re borrowing.
While originally conceptualized in the US, this concept can work in Canada, with a little bit of a twist due to the withdrawal and tax-free policy loan limits imposed because of the policy’s adjusted cost base or ACB, which we will cover in more detail in the succeeding section of this article.
A lot of high-income Canadians and those who are looking to build wealth outside the stock market, and real estate get attracted to the concept of infinite banking strategy because participating whole life policy can provide the policy owner and the life insured with a variety of benefits, which includes tax-deferral and/or tax shelter on compounded wealth growth, a more predictable asset growth, and a higher net estate value, to mention a few.
To get started with Infinite Banking in Canada, you will need to purchase a participating whole life insurance policy usually from a mutual life insurance company. This should be structured in a way that allows you to pay the lowest cost of insurance possible, to maximize the part of your deposit that goes to the cash value component of the policy, thereby earning the most dividends on an annual basis, which results in higher wealth accumulation over time.
You can do this by working with a life-licensed Canadian financial advisor, who is knowledgeable about how infinite banking works in Canada. If you’re a resident of Ontario and Manitoba, feel free to book an appointment with us, and we’ll help you set up a policy for infinite banking and wealth accumulation purposes.
This goes without saying that you’re someone who makes wealth-building a priority and that you can commit to financing your policy, and stick to the plan long-term in order to get the full benefit of infinite banking, as well as take full wealth-building advantage of the Canadian insurance industry.
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Once you’re approved, you will need to aggressively fund your personal banking system in the next 10 to 20 years, as you would a traditional investment strategy. The length of time of contribution depends on the amount of your monthly or annual contributions, of course. As opposed to what most Canadians do when implementing a life insurance contract (contributing the bare minimum), you have to contribute a higher-than-usual amount on a monthly or annual basis to fast-track the growth of your bank’s capital in order for it to finance your loans down the road. Remember, you’re not simply buying life insurance here, you’re building an intergenerational wealth strategy that has a banking function to support your own borrowing.
Once your policy’s cash values are established, you can start using your policy to finance planned purchases such as a vehicle, furniture, your children’s post-secondary education, a real estate purchase, or fund other investment opportunities that may come along the way. By this time, instead of applying for car loans, you can simply borrow against your policy, pay your car in cash, and pay your policy loan much as you would a dealership or a bank’s financial products.
By simply borrowing against your policy, your policy continues to earn both guaranteed cash values and dividends every year, which grows compounded, and on a tax-free basis, while you utilize the insurance company’s money to finance life events or major purchases.
This is one of the many advantages of growing wealth inside participating Canadian insurance policies, not to mention that you will never have to worry about dealing with negative returns on your assets, such as the case when you’re investing in the stock market or mutual funds, as the savings component of your policy grows consistently every year, unaffected by market volatility and crashes.
Advantages of Infinite Banking
Talking about advantages, there are many advantages to building wealth with life insurance and using the Infinite Banking Concept in Canada. One of the biggest advantages is that it can help you save on taxes. While you can’t use your policy contributions as income tax deductions against your active income, your wealth and death benefit grows tax-free over time, and the asset accumulation stays tax-free unless withdrawn. Additionally, when you pledge your policy to finance a business or an investment, the interest incurred on the loan is often tax-deductible.
Another advantage of the Infinite Banking Concept is that it can provide you with opportunities for more asset growth by giving you the opportunity to earn interest on your own loans, so technically, instead of paying interest to another bank, you pay yourself interest by borrowing against your whole life policy. The interest earned by participating whole life policies is distributed to policyholders, which in effect increases your policy’s dividend earnings, thereby pushing your wealth, and estate value higher.
Finally, Infinite Banking can help you create a safety net for yourself and your family. If you were to pass away, your policy’s death benefit will be paid out to your beneficiaries tax-free. Your policy’s basic coverage can help your loved ones cover expenses like funeral costs, outstanding debts, and more. And if you live long, you will be able to leave a good amount of legacy to the next generation, even after borrowing funds from your own banking system multiple times in your lifetime.
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Disadvantages of Infinite Banking Concept
Of course, it wouldn’t be fair to talk about the advantages without discussing the disadvantages as there are a few disadvantages to using the Infinite Banking Concept in Canada. One of the biggest disadvantages is that the infinite banking concept isn’t for everyone. One disadvantage of the infinite banking concept is the fact that you can’t borrow money from your policy right away. This is because, you don’t have enough cash value in your policy yet, technically, there’s really nothing to borrow or use as collateral for a policy loan.
There is a need to “build your bank first” before you can use your policy to finance high-ticket purchases as an infinite banker. With that said, the infinite banking concept is not recommended for people living paycheck to paycheck or who do not have enough money to put aside to finance their own banking system. The monthly contribution required to fund an infinite banking concept may be considered expensive by most, especially if wealth building isn’t a priority, and most of their money is already tied to other financial obligations. Remember, that in order to take full advantage of the infinite banking concept and eventually become your own banker, you will need to fund your bank in the early years, and this requires a higher-than-usual amount of monthly or annual contribution.
In the Becoming Your Own Banker book, R. Nelson Nash compares this to building your own business (or bank) – you need capital to build a bank! Luckily, you don’t have to put in a lump sum deposit to fund your banking business, you can fund your personal bank slowly by either contributing funds on a monthly or annual basis, and in Canada, you will have to build it slowly, at least in the next 10 years due to MTAR limits. Does it mean that you have to wait for 10 years before you can borrow? Well, not at all! As soon as there’s enough money in your bank, you can loan up to 90% of your cash value. Do remember that you have to pay it back so your banking system will not collapse!
Paying back your own banking system has been elaborated on by R. Nelson Nash in his book so many times because it’s an important component of the strategy. This may also be looked upon as another disadvantage of the concept because a lot of people wouldn’t want to pay back their loan “because it’s their own money”. As an example given in his book, R. Nelson Nash cites a grocery store, if the owner takes home items from the store without paying for them as every customer would, the business will easily collapse due to internal theft. He emphasizes the need for paying for the items taken from the store if the owner wants the business to thrive. This has no different from the concept of becoming your own banker, if you don’t pay back the money borrowed from your own banking system, your bank will go bankrupt!
In the US, you can keep on making tax-free policy borrowings from your own banking system without much regard for possible tax consequences on policy loans. One thing you have to be aware of when practicing the infinite banking concept here in Canada is the fact that your policy’s adjusted cost base or ACB will eventually go down to zero, at this point a policy loan will trigger a taxable event, therefore taxable. As we age, the ACB of a permanent life insurance policy tends to decrease, this is helpful for business owners who are considering corporate-owned life insurance policies as this is what creates a higher capital dividend account, which allows for tax-free distribution of the life insurance proceeds outside the corporation, and into the hands of your heirs.
To understand it better, let’s briefly define what a life insurance ACB is: adjusted cost base is the sum of premiums paid, minus the accumulation of the net cost of pure insurance or NCPI. As you may know, a person’s cost of insurance increases with age, and the older we are, the higher our net cost of pure insurance. The ACB will slowly shrink down to zero when the annual net cost of pure insurance is higher than the premiums contributed to the policy. This usually happens in the later years of the policy and is indicated in your policy’s annual statement.
At this point, the infinite banking concept, which suggests using policy loans to finance your purchases instead of borrowing money from a third-party lending institution such as a bank may no longer be a viable strategy, especially when it comes to tax-planning because policy loans are taxable when the policy’s ACB is zero.
So, does this mean that you can no longer leverage the wealth you’ve built inside your “own banking system”? As I always tell my clients, there are a lot of options in old age when you have the money but there’s only one option when you don’t, which of course, is to continue working.
Your policy’s adjusted cost base becomes zero when you’re already way into your retirement years, not when you’re still actively working. So instead of continuing on with policy loans and paying taxes on these loans, you should switch your strategy to an insured retirement plan, instead. Since you already have the wealth inside your policy, all you have to do is simply switch your borrowing, and as you may already know – third-party borrowing is tax-free.
You will come to understand that paying interest on a collateral bank loan is a much better tax-planning strategy in old age compared to paying taxes on policy loans or withdrawing taxable funds to finance your retirement income needs.
If you need $50,000.00 annually for retirement, you receive $14,400.00 from the Canadian Pension Plan, and Old Age Security. You still have a discrepancy of $35,600.00. This income requirement should come from your own retirement savings or wealth.
You have a couple of options here, either you use tax-free money (such as a bank collateral loan), a taxable policy loan, or a taxable withdrawal from a retirement account, such as an RRSP. If you draw taxable funds, your tax bracket at retirement increases as it’s based on $50,000.00. If you use the bank’s money by leveraging your insured retirement plan, your tax bracket remains low, which is only based on your taxable government pensions of $14,400.00. So, even when you’re paying interest to a third-party bank, you still save money overall because you’re paying fewer income taxes at retirement.
Option 1: Pay taxes on $50,000.00 a year.
Option 2: Pay taxes on $14,400.00 a year.
Which one do you think would be a better choice?
Why Use Participating Whole Life for Infinite Banking?
There are a few reasons why using participating whole life insurance for infinite banking can be an excellent choice but first let’s talk about what participating whole life insurance is. A participating whole life policy combines two financial products – a life insurance contract and a dividend-earning, savings account. These two elements can help you build tax-free asset accumulation inside your policy and can be used to finance large purchases, life events, or fund your financial needs on retirement.
Compared to universal life insurance, the cash value and death benefit growth in participating whole life insurance aren’t dependent on the market’s volatility. Every year, albite conservatively, mutual life insurance companies pay their policyholders dividends and have been consistently doing so since par whole life entered the marketplace. The policy dividend scale is usually between 4% and 7%, with an average dividend scale of 5% for most Canadian insurance carriers with participating whole life insurance. As of this writing, the dividend scale of the insurance company that we use is 6.05%. This is like averaging 6.05% on a mutual fund investment without market volatility, plus a tax-free death benefit in the event that you pass while you’re still accumulating wealth. Not to mention that you could still leave a tax-free financial legacy to your loved ones after you utilize your policy to finance your retirement.
Understandably, these numbers wouldn’t excite the majority of Canadian investors who land on this article but one important thing to remember here is that you’ll never have negative returns regardless of market conditions if you’re building wealth with participating whole life insurance. And while it excites the majority of us to see a 20% return on a market investment in a given year, some years your return may be negative 20% as well (or even more). With participating whole life insurance, the returns are somewhat boring but you do have peace of mind in times of market downtrends when market investors are fearful since you will never have a losing year because every year your policy earns a dividend regardless of market conditions. Participating whole life not only saves you from the emotional roller coasters that come with investing in volatile market instruments but gives you the opportunity to build a more predictable and steady stream of wealth, not only for yourself but for your next generation through a tax-free wealth transfer
Another important thing to note is that participating whole life insurance is the perfect collateral for either a policy loan or even a bank collateral loan due to the non-volatile returns. This means that it’s easier to get a policy or even bank collateral loan with participating whole life insurance than universal life or even stand-alone investments that are prone to negative returns. When the markets are down, the cash values on a universal life insurance policy, as well as the market values of stand-alone investments are usually lower than when the markets are up – this means that you get less in a down market!
The market has no impact, whatsoever on the cash value of a participating whole life insurance policy. When you need the funds, you just tell the insurance company where to send the money. They will not tell you to move your portfolio to a daily interest account, such as in the case of universal life insurance, or when borrowing against a stand-alone investment since no lender will lend money when collateral is invested in a volatile portfolio.
To top it up, by borrowing against your own banking system (participating whole life insurance), you benefit from the interest of your own borrowing, which helps increase the dividend distribution – the interest earned by the insurance company’s participating policy funds pushes your cash value accumulation further. This is a key benefit of using whole life insurance for infinite banking, as it allows you to access your funds quickly and build a higher net worth by financing your own loans.
How to Get Started with Infinite Banking in Canada
If you’re interested in getting started with Infinite Banking in Canada, you can work with a licensed life insurance advisor who has access to participating whole-life policies and one who can help support your infinite banking goals. If you’re not working with an advisor who is familiar with setting up infinite banking in Canada, you can book your initial consultation with us, and we will help you develop a financial plan with a focus on infinite banking.
Mutual Life Insurance Companies in Canada
Mutual life insurance companies in Canada are the largest providers of participating whole life insurance. These companies pay dividends to participating life insurance policyholders, who in effect, own the company. Equitable Life is one of the biggest mutual life insurance companies in Canada, but there are many other life insurance companies that offer participating whole-life policies. Examples of such companies include Sun Life, Canada Life, Industrial Alliance, RBC Life Insurance, and Manulife.
The benefits of infinite banking extend beyond the financial aspect. Whole life policies are an asset that protects your funds inside the policy against liquidation in case of credit issues or lawsuits. It’s also an effective estate planning strategy that helps you leave wealth to the next generation, and do it tax-free, leaving more to your loved ones compared to when you leave wealth in other asset forms.
Mutual life insurance companies in Canada support the long-term benefits of the infinite banking concept. Infinite banking relies on the cash value accumulation of an insurance policy, which allows you to take loans against it and increase your wealth over time. You can then borrow against the cash value of the policy, avoiding paying interest to someone else, and instead, using your own interest payments to build your own wealth and legacy. You can transfer wealth across generations only using the power of participating whole life insurance and the infinite banking concept.
Infinite Banking - Becoming Your Own Banker
Becoming your own banker is based on the idea of infinite banking, in which a person has the ability to spend, invest, and borrow money to fund his or her needs. The key to this system is to use the money you borrow to fulfill a specific purpose. This way, you can generate income while you are spending it.
Infinite banking begins with the purchase of a whole life insurance policy, which provides death benefits as well as a savings component. The money stored in the policy receives regular boosts through annual dividend earnings.
The interest on your loan also helps your wealth grow as your policy participates in the interest earnings of the insurance company’s participating policy funds each time you borrow from “your own bank”. The cash values you build in your policy will eventually allow you to become your own banker.
Is Infinite Banking Worth It?
There is no one-size-fits-all answer to this question, as the infinite banking concept may or may not be worth it for you based on your specific financial situation. However, if you’re looking for a way to grow your wealth and achieve financial independence, and you can commit to long-term wealth accumulation, then the infinite banking concept could be a good option for you.
With participating whole life insurance as your foundation, you can use the cash value accumulation to borrow money from your own banking system. This can help you generate income while you are spending, and over time, the interest on your loans will help your wealth grow even more.
The key is to use the power of infinite banking to its fullest potential. By funneling funds first into your participating whole life policy in its early years, and borrowing wisely, i.e., borrowing from your “own bank”, you can see significant growth in your wealth over time.
As mentioned earlier, it’s important to note that the infinite banking concept is not for everyone. You need to have enough money put aside in order to build your own mini-bank, and you should be cautious about borrowing money recklessly – yes, even if you’re borrowing from your own bank. This goes without saying that you have to pay your loans against your policy as you would a third-party lender such as your local credit union or a bank. Otherwise, your own banking system will collapse!
If you can commit to funding participating whole life insurance that’s designed to build wealth, and you manage your finances responsibly, you can utilize the power of infinite banking, and an insured retirement plan to build intergenerational wealth.
Infinite Banking Inventor - R. Nelson Nash
Infinite banking was a revolutionary financial concept that was popularized by American economist, and author R. Nelson Nash in the 1980s. Basically, this concept allows people to “become their own banker” and eliminate the need to rely on banks and other financial institutions to finance their borrowing and/or major purchases such as a vehicle, business equipment, or even real estate investments.
Aside from using the concept as an alternative to third-party bank borrowing, the becoming your own banker concept was designed as a way to privatize family wealth, which doesn’t only allow for favorable borrowing but also has the power to support intergenerational wealth building because, as you may already know, wealth passed on through a life insurance death benefit is tax-free in the hands of the beneficiaries.
The strategy calls for the aggressive funding of participating whole life insurance in the early years of the policy to boost the policy’s cash values through its guaranteed cash value and policy dividend earnings. Once there are enough funds inside the policy, the policy owner then uses the policy as collateral to apply for policy loans to finance their purchases. In the US, it’s suggested that you pay back your loans in the same manner that you would a third-party lender, including the interest rates. Before borrowing money from your own banking system, you have to check how much it would cost to borrow from another lender, including how much you need to pay back on a monthly or bi-weekly basis, and how many payments you need to make over the term of the loan. You then simulate these payments on your policy loan, paying exactly the same amount of interest as if you’re paying a third-party lender. The difference here is that you do have ownership of the institution that you’re borrowing from.
In Canada, this can be done by paying the loan based on the interest rate set by the insurance company. If the third-party loan has a higher interest rate than that of the insurance company, any extra interest earnings can be channeled into the policy through the additional deposit option or ADO, if not already being used by your existing monthly contribution. Otherwise, you just pay the interest rate set out by the insurance company. While you may not be able to pay exactly the same interest rate as a third-party lender would charge you, your funds inside the policy continue to earn dividends while you’re using the insurance company’s money to finance your purchases while at the same time participating in the interest earned by the company’s participating policy funds from your own borrowing, which is distributed to all participating policyholders. In essence, the more policyholders borrow from the insurance company’s par funds, the more it earns, which then pushes everyone’s dividend distribution upwards.
If you have a high enough income, or you have the cash flow to support the accumulation phase of your policy, infinite banking may be the perfect solution for you to not only save on interest from your own borrowing – interest, you would have otherwise paid to another institution but to build intergenerational wealth that will not only change the trajectory of your own life but of your children, and even your children’s children when both the tax-free death benefit and knowledge of this concept is passed on to the next and future generation.
This approach to financial freedom is a step in the right direction that keeps money within the family and will make each generation wealthier than the last. It’s a powerful tool that can help you break free from debt and increase your wealth in ways you never imagined possible.
Whew! That was a long read!
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