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How To Be Your Own Bank in Canada: Infinite Banking Strategy

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Have you ever wondered how to be your own bank in Canada? If you’re on a journey towards financial independence, you might have come across the concept of infinite banking. In Canada, this can be achieved by implementing a dividend-earning, permanent life insurance policy designed for wealth accumulation, which allows you to borrow against its cash values in case of financial emergencies, to fund major purchases, or to invest. This approach gives you more control over your financial destiny than relying on traditional lenders such as major Canadian banks. This guide lets you learn more about the process, its benefits, potential pitfalls, and how to get started. Whether you want to diversify your wealth or leave a higher legacy, knowing how to use infinite banking can help you achieve a more secure financial future for yourself and your loved ones.

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Key Takeaways

  • Utilize a participating whole life insurance policy as a personal banking system to access extra funds without paying interest to lending institutions such as traditional banks.
  • Work with a life insurance broker to help you select the most suitable whole life insurance policy and contribute a portion of your income.
  • Benefits of becoming your banker include the safety of your principal, access to equity without credit checks, protection from creditors, and uninterrupted compounding of money over a lifespan.
  • Control and financial security can be achieved by building wealth outside the stock market, avoiding market volatilities, continuous funds growth, family protection, and significant tax savings.
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Benefits of Infinite Banking

As you delve into the infinite banking strategy, you’ll discover many advantages that can significantly impact your financial future. Here are the top 3 benefits of infinite banking:

  1. Financial Security: Your principal is safe with predictable wealth growth year after year, regardless of market conditions, uninterrupted by emergencies or major purchases, and offers protection from creditors. As your wealth grows, the policy’s death benefit also grows, giving your heirs the financial security they need.
  2. Fast and Easy Access: You can access funds without credit checks, expediting access to cash when needed. Whether for personal finance needs or business investments, your own banking system becomes a powerful financial tool as your wealth grows.
  3. Tax Advantages: Asset growth in permanent life insurance policies is tax-deferred, meaning you don’t pay yearly taxes. Your policy earns dividends and stays tax-free if the funds remain inside the policy. When you pass away, the death benefit gets paid tax-free to your beneficiaries.

Infinite banking is not a financial product; it’s a financial strategy for building generational wealth while having access to funds when needed, giving you better control of your financial future.  It’s a powerful mechanism for managing money, meeting temporary financial needs, and enjoying the benefits of tax-efficient wealth accumulation.

Setting Up an Infinite Banking Policy

To benefit from the infinite banking concept and be your own bank here in Canada, you’ll first need to apply for a dividend-paying whole life insurance policy. This policy should come from an insurance company that offers participating whole life insurance policies, as these will allow you to earn dividends, which makes your funds grow and compound during your lifespan.

Your health plays a substantial role here; the better your health, the lower your cost of insurance. In addition to your health, your lifestyle plays a crucial role. Smoking increases the cost of insurance, while drug use and high-risk activities (i.e. sports/hobbies) may cause a declined life insurance application.

A significant part of setting up an infinite banking system involves managing your cash flow effectively. You’ll need to regularly contribute to your policy to build up the cash value you can borrow against. Like any other wealth-building strategy, building your own banking system requires capitalization. Hence, you must be willing to fund your policy. The more you contribute, the faster you’ll achieve your financial goal.

Remember, the key to making the most of this strategy is fully understanding the concept and diligently managing your finances. Working with a financial services professional who can guide you through the process is also beneficial. With careful planning and money management, you can successfully be your own bank in Canada.

You’ve probably heard about “infinite banking,” but what does it mean, and how does it work in Canada? More importantly, how can it work for you and your family? 

In a nutshell, the infinite banking concept is a financial strategy that empowers you to be your own banker. It was popularized by Nelson Nash and is rooted in utilizing participating whole life insurance policies for wealth building outside the stock markets.

Here’s how it works: 

The strategy involves obtaining a participating whole life insurance policy, aggressively funding it, and letting the money grow through annual dividends. Once the policy accumulates sufficient cash values, the infinite banking concept allows you to finance emergencies, major purchases, or investments. Being your own bank means borrowing from yourself through policy loans against the cash value, rather than from external financial institutions. While you can withdraw funds directly from the policy, doing so contradicts the purpose of setting up an infinite banking strategy.

In terms of major purchases like a car, appliances, or furniture, it’s natural for most of us to finance these purchases through dealerships or major banks and lending institutions. Paying exorbitant interests and fees to these third-party lending institutions – makes these lenders wealthier and the borrowers poorer.

The concept of becoming your own banker involves using a participating whole life insurance policy to continuously grow your money. This strategy allows you to finance major purchases or emergencies without eroding your wealth or paying interest to external lenders. While you pay interest for using the life insurance company’s funds, you can recapture part of it through policy dividends, which represent interest earnings on loans made by all policyholders. This approach gives you control over your finances, allowing tax-efficient growth and access to wealth while maintaining borrowing within your control. Success with infinite banking requires discipline, patience, and a solid understanding of how participating whole life insurance policies function.

Choosing a Whole Life Insurance Policy

When planning to build your own banking system to finance your loans, it’s essential to understand that not all whole life insurance policies are created equal. You can have a non-participating or participating policy. A participating policy is better if you use it for the infinite banking concept. It allows you to earn policy dividends, which helps your wealth grow over time, unaffected by market volatility.

You also need to understand that there are two ways people implement life insurance: one is for the death benefit, and the other is to build wealth. 

Wealth growth is usually prioritized over the initial death benefits for life insurance wealth plans. In this case, a separate life insurance policy for income protection must be set up, at least while your death benefit is still low on your par policy, to fully protect the financial well-being of your loved ones in case of premature death.

Your borrowing timing should also be considered when setting up the policy – are you planning to borrow in the early years of the policy, or are you borrowing at the backend?

When setting up a participating whole life insurance policy to become your own banker, it’s essential to work with a financial advisor who is knowledgeable about the concept, as the policy should be appropriately structured to meet your goals

Dividend Options

A couple of available dividend options exist when implementing a participating whole life insurance policy. This tells the insurance company how you want to use the dividend earnings on your policy. 

One of the most common dividend options is Paid-Up Additions (PUAs). When you choose PUAs, you’re essentially using your dividends to purchase additional insurance, increasing your policy’s death benefit and cash value. This option also maximizes the other deposit option (ADO), which is the amount that you can deposit in addition to your policy’s required contributions, allowing you to purchase more Paid-Up Additions over and above what your annual policy dividends can. As a result, you benefit from accelerated growth of the life insurance death benefit and the accelerated development of your policy’s cash surrender values on a tax-deferred basis.

Other policy dividend options include policy enhancement, or the enhanced dividend option, and paid-in cash or premium reduction options. However, paid-up additions allow your wealth and policy’s death benefit to grow exponentially.

Understanding Adjusted Cost Basis

The adjusted cost base (ACB) is a critical factor in the infinite banking concept in Canada, especially regarding the potential tax implications of policy loans. 

Generally, the (ACB) is a tax concept that applies to calculating capital gains for tax purposes. Essentially, it’s used to determine the cost of an investment for tax purposes.

The ACB is initially the amount paid to purchase a security plus any associated costs, such as commissions or other acquisition expenses. Over time, the ACB can be adjusted due to additional purchases of the same security, returns of capital from the investment, or reinvested distributions. 

The ACB is crucial when determining the taxable capital gain or loss when you sell, redeem or dispose of the security. A capital gain or loss is the difference between your ACB and the proceeds of disposition (what you sell your investment for) minus any outlays and expenses incurred to sell the security. 

For example, if you purchase company shares for $1,000 (including all associated costs), that amount is your initial ACB. If you later purchase additional shares of the same company for another $1,000, your ACB becomes $2,000. 

Let’s say you sell all the shares later when they’re worth $2,500. Your capital gain will be determined for tax purposes by subtracting the ACB from the sale price. In this case, your capital gain would be $500 ($2,500 – $2,000). This $500 is subject to capital gains tax. 

However, if distributed dividends or return of capital takes place, it would decrease the ACB. If new shares are bought, the purchase price of those shares would increase the ACB. All these adjustments are critical for accurately determining one’s tax obligations. 

It’s essential to calculate the ACB accurately and any adjustments over time to correctly determine the capital gain or loss for tax purposes. If you are uncertain, it’s always a good idea to seek the advice of an accountant or tax professional.

In cash-value life insurance policies, the ACB is calculated as the total of premiums paid into the policy minus the net cost of pure insurance (NCPI), which is the actual cost of life insurance protection provided by the policy. When the CSV of a policy exceeds the ACB, it signifies that the policyholder has accumulated a significant gain within their policy, which could lead to a taxable event called a policy disposition if they access or use funds that exceed their policy’s ACB.

When a policy disposition occurs, and the proceeds exceed the policy’s ACB, the surplus is taxable income. 

A life insurance policy disposition, as defined by the Canada Revenue Agency (CRA), includes a surrender thereof, a policy loan (made after March 31, 1978), the dissolution of that interest by virtue of the maturity of the policy, disposition of that interest by operation of law only, and the payment by an insurer of an amount (other than an annuity payment, a policy loan or a policy dividend) in respect of a policy (other than a policy described in paragraph 148(1)(a), 148(1)(b), 148(1)(c), 148(1)(d) or 148(1)(e)) that is a life annuity contract, as defined by regulation, entered into after November 16, 1978, and before November 13, 1981,

but does not include

  • (f) an assignment of all or any part of an interest in the policy for the purpose of securing a debt or a loan other than a policy loan,

  • (g) a lapse of the policy in consequence of the premiums under the policy remaining unpaid, if the policy was reinstated not later than 60 days after the end of the calendar year in which the lapse occurred,

  • (h) a payment under a policy as a disability benefit or as an accidental death benefit,

  • (i) an annuity payment,

  • (j) a payment under a life insurance policy (other than an annuity contract) that

      • (i) was last acquired before December 2, 1982, or

      • (ii) is an exempt policy

      • in consequence of the death of any person whose life was insured under the policy, or
  • (k) any transaction or event by which an individual becomes entitled to receive, under the terms of an exempt policy, all of the proceeds (including or excluding policy dividends) payable under the policy in the form of an annuity contract or annuity payments, if, at the time of the transaction or event, the individual whose life is insured under the policy was totally and permanently disabled; (disposition)

Policy Loan or Loan Against the Policy

A policy loan is when you borrow money from the insurance company, using your policy’s death benefit and cash value as collateral. This is the strategy used for infinite banking purposes. In the US, what is traditionally taught is that you infinitely borrow and repay your policy loans throughout your lifetime. This is not applicable in Canada due to the adjusted cost basis, where your borrowing could be deemed a taxable policy disposition in the later years of your policy’s life due to exponential cash value growth that exceeds your policy’s ACB. This means that the disposition is taxable when the amount of your withdrawal or policy loan exceeds the policy’s adjusted cost basis; note that your cash value will surpass the policy’s ACB in the later years if you have a life insurance wealth plan, perpetually practicing the infinite banking concept will eventually result to a taxable event.

A third-party collateral loan, or loan against the policy, is when you borrow funds from third-party financial institutions, such as chartered banks, using the policy’s cash value and death benefit as collateral. As per the policy disposition definition above, an assignment of all or any part of an interest in the policy for the purpose of securing a debt or a loan other than a policy loan isn’t considered policy disposition.

Both options allow policyholders to access the value within their policy while retaining their life insurance coverage and cash value growth. 

During your active working years, you can get policy loans (infinite banking concept) while your adjusted cost base is higher than your policy’s cash values. As mentioned, the policy’s cash values will usually surpass its ACB in the later years of its life – and yours. If you’re concerned about possible taxable disposition while practicing infinite banking, you can always check with the insurance company before drawing the loan proceeds. Insurance companies that offer participating whole life insurance policies have client access platforms similar to online banking, where you can access your policy details online. This includes amounts of your death benefit, cash values, and ACB at any given time. 

Now that you understand what the adjusted cost basis means and how it can affect a life insurance wealth plan, you know that perpetually practising the infinite banking concept in Canada isn’t advisable. 

You must stop drawing from policy loans at retirement to avoid deemed policy disposition. This may result in potential taxable implications in old age, where your ACB has already been depleted. Instead, you loan against the policy, drawing funds from a third-party financial institution instead of the life insurance company. This is otherwise known as an insured retirement strategy. The infinite banking strategy advises against third-party borrowing to save on interest during wealth accumulation. Switching to an insured retirement strategy allows you to save on taxes at retirement while still allowing your wealth and death benefit to accumulate further inside your participating whole life insurance policy. 

While you will incur interest on a bank collateral loan, you need not pay the loan or the interest during your lifetime. The bank will have a lien on your policy’s death benefit to the extent of your indebtedness. At death, the life insurance company will pay part of the death benefit to cover the total amount of your bank loan, then pay your heirs the net amount of the death benefit. 

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Be Your Own Bank in Canada

Becoming your own banker in Canada is not just about signing up for an insurance plan or an investment account; it’s a mindset change.  There is a profound shift in how you approach your finances and think about money and wealth building. When you become your own bank and start financing your loans, you become the lender… and the borrower. It takes discipline to pay back the loans you owe yourself with interest because “that’s my money; why would I have to pay interest or pay myself back?”. Most people come from this mindset; it takes a mindset shift to become financially successful. Remember, for your banking system to work, it has to be administered by an insurance company. Understanding that you’re not actually borrowing your own money and instead drawing from the insurance company’s coffer makes it easier for most people to comprehend why they must pay it back. 

Also, before you can borrow, you must have capital first; you can only withdraw from your chequing account if you have money, would you? The same thing applies to the infinite banking concept, and you need an asset you can leverage for the infinite banking to work. And when you do, there’s no space for irresponsible borrowing. The infinite banking concept is a wealth accumulation strategy that allows you to build wealth uninterrupted by life emergencies, significant purchases, or market downtrends. The long-term goal is wealth accumulation, not debt accumulation – at least during your active working years. So, while you have the money in your banking system, you still have to be mindful of your borrowing to continuously use the same cash to build and compound wealth while borrowing.

It’s a strategy that empowers you to take control of your financial destiny, build wealth, and secure a brighter future for yourself and your loved ones. 

By treating your banking system like a family business, you make intentional decisions about where to keep your money, how to save, and when to lend to yourself. This approach puts you in control, leading to a more secure financial future.

Expert Advice

To be your own bank, you need to work with an insurance advisor who can help you structure participating whole life insurance designed for wealth accumulation purposes. This policy structuring aims to minimize the cost of insurance while maximizing your deposit to allow for accelerated growth of both your cash values and death benefits. Consideration should also be given to whether you plan to borrow early or if you’re willing to wait out a bit before you start leveraging your policy. Policy leveraging should also be given extra care and advice during retirement. 

If you need to work with an insurance expert who’s well-versed in structuring infinite banking plans in Canada, please book a discovery call with me. I am passionate about helping Canadians build wealth without market risks using an asset class that enables you to build wealth safe and secure from market volatilities on a tax-deferred basis, that is creditor-protected, tax-efficient at retirement, and tax-advantaged at death, helping you build wealth for yourself, and leave more to your heirs. Contact Us.

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