Infinite Banking Concept: The Definitive Guide

Infinite banking is a personal finance strategy that leverages a whole life policy as a “personal bank.” This includes taking loans against the policy and growing cash flow through the insurance’s dividends.

The core of the infinite banking concept is a participating whole life insurance policy. Once such a policy is in place, it is possible to lend yourself money using the cash value of the whole life insurance policy as collateral. That avoids paying interest to lending institutions since a policyholder has his/her own mini bank. It allows very fast access to extra funds, which are just an insurance company call away.

Typically, a participating whole life insurance policy is used for the infinite banking concept. Participating life insurance means that a policy pays dividends, which allow contribution towards the cash value of the policy or to pay a part of insurance premiums.

A simple visual below highlights the key elements of the infinite banking concept.

In order to start infinite banking, you need to work with a life insurance broker who has access to a wide range of whole life insurance policies and can choose the best product for your needs (premium rate, coverage rate, ability to drive dividends). The insurance broker will develop a financial plan with a focus on infinite banking and assist you through all the steps of setting up the policy.

Setting up an Infinite Banking policy in Canada involves selecting a whole life insurance policy, funding it with premiums, and structuring it for cash value growth. This strategy allows policyholders to use the accumulated cash value as a financing source for various projects, such as investments, renovations, or retirement income.

For instance, consider Sarah, a 35-year-old professional. She sets up an Infinite Banking policy, paying $10,000 annually. When she needs funds for home renovations, she borrows $50,000 from her policy’s cash value, avoiding traditional bank loans and maintaining control over her assets.

While there is no strict minimum policy size, it is important to remember that this strategy usually works better for higher-income earners, and the premiums reflect that. It is also important to note that, as policy loans are taxable in Canada, you want to ensure you have the ability to obtain a collateral loan in the later years of the policy. Larger amounts of cash surrender value will usually give you a better chance of securing preferable rates with banks.

There are a number of pros and cons associated with infinite banking.

There are several aspects that matter when choosing the right infinite banking insurance policy.

First of all, it must be whole life insurance to ensure that the policy has both an insurance and cash accumulation component. It is against this cash accumulation component (cash value) that can lend money in future.

Secondly, it should be participating whole life insurance, meaning that you want it to pay regular dividends that will help your cash value to grow faster and/or you can use the dividends to pay a part of your insurance premium. Thirdly, it is advisable to use a life insurance policy from a mutual company. That means that policy holders become company owners. For example, Equitable Life, as a Canadian mutual company, has paid dividends constantly since 1936 without a single year interruption. Fourth, you want to determine the right size of a whole life insurance policy (coverage amount, etc.) based on your needs and on resulting life insurance premiums. That involves an understanding of the maximum amount that you are able to contribute to a life insurance policy on a regular basis. We recommend working with an experienced life insurance broker who understands the concept of infinite banking and has extensive experience with Canadian mutual life insurance companies and their whole life products.

Expert tip from Steve Meldrum “Watch out for taxable policy loans. In Canada, there is the concept of ACB (Adjusted Costs Basis). The ACB diminishes over the lifespan of the policy due to various factors. As you take out policy loans, you accelerate grinding down the ACB dollar for dollar. After the ACB hits zero, policy loans become taxable. Those policy gains are 100% taxable as income. Do not get fooled by a free lunch in Canada. The US does not have the concept of ACB, so taking out policy loans there does not trigger tax the same way.” More from Steve Meldrun

Choosing a mutual insurance company over a public insurance company for setting up an Infinite Banking concept (IBC) can offer advantages such as a customer-centric approach and potentially better policy terms, like higher dividends and lower premiums. Mutual insurers, owned by policyholders, often prioritize stability and long-term satisfaction. In contrast, public insurers, accountable to shareholders, may prioritize profit motives, potentially resulting in higher costs or less favorable terms.

To truly understand the ins and outs of infinite banking, let’s first learn about whole life insurance and what makes it different from term life insurance.

Whole life insurance is a form of permanent insurance. As long as the premiums are paid, it does not expire. It also comes with a savings component – part of your premium goes into a cash savings account that accumulates value over time. You can receive the cash when you surrender the policy, use it to enhance the policy, or borrow against the cash.

Since whole life insurance is permanent, it presents greater risk for the insurer. Therefore, it has a higher premium than term. However, when one balances the fact of this against the fact that term insurance gets increasingly more expensive as one ages, and term doesn’t come with cash savings, the value of whole life insurance is clear.

Within the whole life insurance sphere, there are two variations: participating and non-participating insurance. Participating policies return dividends to the policy holder that can be used to pay your premiums or increase the amount of the benefit. This is why participating policies work so well for infinite banking. Note, however, that participating policies are typically more expensive than non-participating, and that dividends are not guaranteed.

Whole life insurance is uniquely positioned for infinite banking because it combines two sub-components. The investment component protects policy beneficiaries should you pass away. The cash accumulation components allow you to generate cash value the longer you hold the policy. Once the cash value is meaningfully high, you can borrow against the cash value and start enjoying all the benefits of infinite banking. The best thing is, even if you leverage your cash value, you will continue getting interest on the entire cash value. Ideally you would choose a participating whole life insurance policy so you can benefit from regular insurance dividends paid by an insurance company.The “Paid-Up Additions” (PUA) Whole Life Dividend option is recommended. This option maximizes the policy’s cash value growth and death benefit by using dividends to purchase additional coverage, which also earns dividends.

While Participating Whole Life Insurance is the preferred choice due to its guaranteed cash value growth and dividends, other types of life insurance, such as Universal Life can also be used. However, these alternatives generally lack the same level of guarantees and dividend potential, making them less ideal for this strategy.

Choosing a mutual insurance company over a public insurance company for setting up an Infinite Banking concept (IBC) can offer advantages such as a customer-centric approach and potentially better policy terms, like higher dividends and lower premiums. Mutual insurers, owned by policyholders, often prioritize stability and long-term satisfaction. In contrast, public insurers, accountable to shareholders, may prioritize profit motives, potentially resulting in higher costs or less favorable terms.

The Infinite Banking Concept (IBC) may not be a good option for the following individuals:

1. Those with Limited Cash Flow: If you have limited disposable income and cannot comfortably afford the premiums for a Whole Life Insurance policy, Infinite Banking Concept may not be suitable. It requires consistent premium payments to build cash value.
2. Those Seeking Quick Returns: Infinite Banking Concept is a long-term financial strategy. Individuals looking for quick returns on their investments may find the slow and steady growth of Whole Life Insurance less appealing.
3. Those with High Debt: If you have significant high-interest debt, it might be more beneficial to focus on paying down that debt before starting an Infinite Banking Concept policy, as the interest on debt can outweigh the benefits gained from the policy.
4. Those Uncomfortable with Complexity: Infinite Banking Concept can be complex and requires a good understanding of how Whole Life Insurance policies and dividends work. If you are not comfortable with this complexity or do not have access to knowledgeable advisors, Infinite Banking Concept might not be the best choice.
5. Those Nearing Retirement: If you are close to retirement and have not already established an Infinite Banking Concept policy, starting one might not provide enough time to build the substantial cash value needed to benefit fully from the concept.
6. Those with Short-Term Financial Goals: If your financial goals are short-term, the long-term nature of Whole Life Insurance policies may not align well with your objectives.

It is important to carefully evaluate your financial situation, goals, and comfort level with the complexities of Infinite Banking Concept before deciding if it is the right strategy for you. Consulting with a financial advisor can also help determine if Infinite Banking Concept is a suitable option.

Infinite banking concept originated in the United States and, you might be asking yourself “does infinite banking work in Canada?”

The answer is yes, however, know that in Canada policy loans are taxable above the adjusted cost base (ACB). We cannot stress this enough – work with a financial advisor to set up infinite banking properly. Failure to do so can have a heavy tax burden that reduces the potential of the desired outcome.

Setting up an Infinite Banking policy in Canada involves selecting a whole life insurance policy, funding it with premiums, and structuring it for cash value growth. This strategy allows policyholders to use the accumulated cash value as a financing source for various projects, such as investments, renovations, or retirement income.

For instance, consider Sarah, a 35-year-old professional. She sets up an Infinite Banking policy, paying $10,000 annually. When she needs funds for home renovations, she borrows $50,000 from her policy’s cash value, avoiding traditional bank loans and maintaining control over her assets.

While there is no strict minimum policy size, it is important to remember that this strategy usually works better for higher-income earners, and the premiums reflect that. It is also important to note that, as policy loans are taxable in Canada, you want to ensure you have the ability to obtain a collateral loan in the later years of the policy. Larger amounts of cash surrender value will usually give you a better chance of securing preferable rates with banks.

The main difference between setting up an IBC in Canada versus the United States lies in the tax treatment and regulations.

In Canada, policy loans generally aren’t taxable in the early years of a policy, providing tax-efficient access to the policy’s cash value. However, these loans can become taxable in later years due to the fact that the policy’s adjusted cost basis (ACB) starts to decrease. However, you can use collateral loans from a bank that are not taxable, though this option involves additional qualifying criteria that need to be considered.

In contrast, policy loans in the United States are typically not taxable, allowing for consistent tax-efficient access to the cash value throughout the life of the policy.

The tax advantages of IBC in Canada include tax-deferred growth of the policy’s cash value, meaning you don’t pay taxes on the gains as they accumulate. Additionally, policy loans generally aren’t taxable in the early years of a policy, providing tax-efficient access to funds. Additionally, the death benefit is paid out tax-free to beneficiaries, making IBC a tax-efficient strategy for wealth building and estate planning.

Choosing the right infinite banking agent or broker is extremely important as this person should have several characteristics:

• Be knowledgeable about the infinite banking concept
• Have access to a wide variety of whole life insurance policies (including participating ones)
• Ideally work with mutual life insurance companies
• Be knowledgeable in underwriting large whole life insurance policies (especially if you have some conditions that might drive up your rates) to ensure that your insurance premiums are meaningfully low

Several of our insurance brokers check the boxes in all these categories and have assisted numerous Canadians who decided to become their own bankers and benefit from the infinite banking concept.

The infinite banking concept was formulated by Nelson Nash, a life insurance agent with 35 years’ experience. Nash was born in Greene County, Georgia. He started in the forestry industry and followed that with long-term military service, before he joined in the life insurance industry. Today, his son-in-law, David Stearns serves on the board of the Nelson Nash Institute after having taken over the leadership from Nelson in 2009.