The Infinite Banking Concept Explained: A Guide For Canadians

When you first hear about the Infinite Banking Concept (IBC), your first reaction might be: This sounds too good to be true. Perhaps you’re skeptical and think Infinite Banking is a scam or scheme. We want to set the record straight! 

The Problem with the Infinite Banking Concept 

The problem with the Infinite Banking Concept is not the concept but those persons offering a negative critique of Infinite Banking as a concept. First, they’re likely not experts authorized in IBC and fail to understand the complexities and intricacies of how IBC works. 

Second, someone offering a critique can confuse Infinite Banking as a concept with whole life insurance as a product. Infinite Banking is not a life insurance product but a strategy that uses whole life insurance as a financial vehicle. 

There is also a cognitive bias in the financial world for critics of Infinite Banking to push people towards traditional investments correlated to the stock market and risk. The Infinite Banking Concept and everything it teaches you about financing are counterintuitive to this line of thinking. 

So as IBC Authorized Practitioners through the Nelson Nash Institute, we thought we would answer some of the top questions people search for online when learning and understanding everything to do with the Infinite Banking Concept.

What is Infinite Banking? 

So, what is Infinite Banking? 

Infinite Banking was created by Nelson Nash in 2000 and fully explained with the publication of his book Becoming Your Own Banker: Unlock the Infinite Banking Concept. 

Nelson Nash described the Infinite Banking Concept as “Austrian economics in action.” IBC can help individuals exert greater control over their finances and everyday lives by creating and managing some banking functions for themselves instead of relying on big banks.

Nelson famously said, “You finance everything you buy…you either pay interest to someone else or give up the interest you could otherwise have earned.” 

What Nelson means by this statement is you finance everything you buy at the expense of losing out on opportunities to multiply your money through interest and compounded growth. 

SPENDING CASH: THE SAVER

When you need to purchase a car, you save your money and pay cash for it. You think you are coming out financially ahead because you pay no interest, but you are not. When you save money for something, it usually means sacrificing something else and cutting back on your lifestyle in other areas. You can repeat this process, but you are simply “shrinking your way to wealth.” 

Are you happy living with such a reductionist or scarcity mindset?

With saving and paying cash, you may not pay interest, but you are using your money once; when you spend it, it’s gone forever, and you give up on the opportunity to earn lifetime compound interest on that money. Every time you save your money, then spend that money, you end up interrupting compound interest each time.  

BORROWING: THE SPENDER 

Borrowing money through a loan from a bank or other lending institution or charging your credit card puts you in a perpetual cash deficit. When you borrow from a bank through a loan or charge your credit card, you must pay back the principal on the money you borrowed plus interest. You lose that money for good but make the banks and financing companies richer. 

This process repeats itself every time you borrow money to finance something you must repay. Unless you can save more than what you pay to the banks or financing companies, you stay in a downward spiral financially by continually giving up control of your money. When you apply for a car or mortgage loan, you must also meet specific credit qualification requirements; you must show proof of income and assets and have a good credit score.

Nelson Nash designed the Infinite Banking Concept as a financial strategy to solve this problem.

We are not talking about a bank in the traditional sense of the word, but rather privatized banking that empowers you to reclaim some of the banking functions yourself to get your money flowing back to you instead of away from you and into the pockets of big banks. 

Nelson Nash accomplished this by leveraging the advantages of participating (par) or dividend-paying whole life insurance to teach you how to create an independent banking system to learn to self-finance the items you need throughout your life using some of the same principles that banks use. We will get into how IBC works further down in this blog. 

Is Infinite Banking a scheme? 

No, Infinite Banking is not a scheme. As IBC Authorized Practitioners, we have used this strategy to create cash flow for self-financing purposes in our business and personal life. Check out how in the video below. 

We have also taught many of our clients over the years how to use Infinite Banking as a financial strategy to create their own personal or family banking systems too! Based on our and their success, we can say that Infinite Banking is a legitimate financial strategy. 

Participating whole life insurance as a tax-deferred savings vehicle for creating cash flow and wealth building is not a novel idea. 

Billionaires such as Walt Disney, the Rockefeller family and Jim Pattison have leveraged the properties of whole life insurance that dates back 174 years. Even banks use whole life insurance for the same purposes. It is called Bank-Owned-Life-Insurance (BOLI). 

The Canada Revenue Agency (CRA) even recognizes the value of participating whole life insurance as a unique asset class used to generate long-term equity safely and predictably and provide tax benefits outside the scope of traditional investments. 

Why Whole Life Insurance and Infinite Banking

So why did Nelson Nash choose whole life insurance as the financial vehicle for Infinite Banking? 

A participating whole life insurance policy has a tax-free death benefit component and a cash accumulation component. 

The death benefit financially protects your loved ones should you pass away and is the feature most people are familiar with when purchasing permanent life insurance. 

However, according to Nelson Nash, your need for financing throughout your lifetime is extensive. While both are important for financial security, financing capabilities throughout your life present a much greater immediate need than a death benefit.

Think of the cash value component as your personal and private savings account you can leverage to build wealth by generating safe, tax-sheltered, long-term equity through guaranteed growth and potential dividends for the rest of your life. 

How is this possible? 

Participating in whole life insurance is a unique asset class because it is considered minimal risk; its value is not subject to stock market fluctuations the traditional investments like equities and mutual funds are. That is why growth is guaranteed and predictable and only gets better the longer you pay premiums and hold the policy. 

How does Infinite Banking work? 

So how does Infinite Banking work? Infinite Banking is a blend of spenders, savers, and bankers all in one. It allows you to generate wealth by fulfilling the banking function in your own life and the ability to self-finance major lifestyle purchases and expenses without interrupting the compound interest.  

One of the easiest ways to think about an IBC-type participating whole life insurance policy is it is comparable to paying a mortgage on a home. The longer you make mortgage payments, the more principal you pay off on that mortgage and the more equity you build up in your home as an asset. 

You can borrow against the equity in your home through a Home Equity Line of Credit (HELOC). Borrowing against the equity in your home doesn’t mean your home goes down in value. The value of your home can continue to increase even if you borrow against it.

It works similarly with a participating whole life insurance policy. The more premiums you pay into your policy, the greater the cash value accumulation you incur. Participating whole life insurance also pays potential dividends. Using dividends as a contribution towards your cash value or offsetting it to pay your premium, fast-tracks the growth of your cash value and death benefit over time. 

Think of using dividends as stacking more cash values on top of your original base participating whole life insurance policy. These potential stacks could create even more growth! And so on…and so on. Over time, this would create a “constant compounding” effect. You get the picture! 

When you borrow from your participating whole life insurance policy, the cash value continues to grow uninterrupted as if you never borrowed from it in the first place. This is because you are using the cash value and death benefit as collateral for a loan from the life insurance company or as collateral from a third-party lender (known as collateral lending). The interest you pay goes back to the life insurance company while all the principal goes back to you to reuse it again. This allows you to pay for lifestyle purchases and expenses.  

Does Infinite Banking work in Canada? 

Even though the Infinite Banking Concept originated in the United States, you might wonder, “How does Infinite Banking work in Canada?” 

There are slight differences in how IBC gets implemented in the United States and Canada based on our Income Tax laws under the Income Tax Act of Canada. In Canada, the cash values can be considered taxable if the policy loan is above the adjusted cost base (ACB). That’s why it’s imperative to work with a Licensed Life Insurance Broker authorized in Infinite Banking who structures your participating whole life insurance policy correctly so you can avoid negative tax implications. 

Pros and Cons of Infinite Banking 

Infinite Banking as a financial strategy is not for everyone. Here are some of the pros and cons of Infinite Banking you should seriously consider in deciding whether to move forward. 

PROS                           

• The ability to warehouse and grow your money in a tax-deferred and potentially tax-free, secure and predictable savings environment without being subject to the ups and downs of stock or real estate markets with minimal risk. 

• Using Infinite Banking as a lifestyle tool gives you greater financial autonomy. You can borrow from your personal or family banking system without paying interest to third-party lenders. Instead, you recapture interest.

• An Infinite Banking structured participating whole life insurance policy provides you with guarantees you don’t necessarily get from traditional investments. These include a cash value accumulation, a guaranteed tax-free death benefit, and guaranteed fixed premiums.

• Infinite Banking can eliminate the need to apply for a loan at a bank and go through a lengthy lending process. You don’t have to explain why you need a loan, provide proof of income, or undergo a credit check. 

• Infinite Banking allows you to fast-track and expedite the cash value growth in your participating whole life insurance policy even when you borrow from it. 

• You have flexibility in repaying your policy loan/s instead of a repayment schedule set by a third-party lender. You do not have to worry about collection calls or a black mark on your credit report because you missed payments.

• Infinite Banking provides an opportunity to create and transfer wealth across multiple generations using participating whole life insurance as the financial vehicle. 

• Your premium is a set amount based on the contract type. There are also various payment options: 10-Pay to 20-Pay and  Life Pay. You can even customize your pay schedule if the cash values inside your policy support it. The amount of premium we recommend is 10% (which is comparable to what you might allocate to saving anyway) to a minimum of $50 in premium per month for a child’s policy.

CONS 

• Infinite Banking might not be the right choice for those who cannot qualify for a participating whole life insurance policy due to pre-existing health conditions or other extenuating factors. However, there are other options available to you that we would be happy to discuss. 

• Infinite Banking is not a strategy for those looking for a quick fix to their financial problems or goals. Infinite Banking is a life-long plan you must commit to, not just in the present but into retirement and beyond. 

• Infinite Banking as a lifestyle tool requires a disciplined approach to finances and an inner conviction to be what Nelson Nash calls an honest banker. The entire premise of Infinite Banking is to fuel long-term growth by borrowing against your policy and paying it back. If you don’t repay what you borrow, you miss the opportunity to maximize your policy or policies to pass on as a legacy and create intergenerational wealth

• When using the Infinite Banking Concept that promotes storing your money in an asset like a whole life insurance policy, financial gurus might argue you overlook the importance of asset diversification. However, that’s not true. The principle behind diversification is spreading your assets across different markets in various financial vehicles to hedge against market volatility. With a participating whole life policy, you have certain guarantees that protect you against market volatility, so you don’t have to concern yourself with diversification. The Infinite Banking Concept promotes using whole life insurance as an asset to borrow against, so you can purchase other assets and investments. So, you’re diversifying your assets and portfolio, but with minimal risk and without losing money.

How do I start Infinite Banking?      

Nelson’s book Becoming Your Own Banker: Unlock the Infinite Banking Concept is a fantastic first-step resource for understanding the fundamentals of Infinite Banking. However, we cannot stress enough the importance of consulting an IBC Authorized Practitioner who is a Licensed Life Insurance Broker such as us. Our client intake process also focuses on educating you on the fundamentals of Infinite Banking as a financial strategy so you can successfully use it during your lifetime and for generations to come. 

We also do most of the leg work for you by conducting a needs analysis and educating you on choosing the right whole life insurance policy and choosing the right life insurance company compatible with Infinite Banking based on our recommendations for your particular financial conditions. 

Our preferred insurance carrier, Equitable Life of Canada, a mutual life insurance company, specializes in participating whole life insurance policies specific to Infinite Banking. Also, in a mutual life insurance company, policyholders are considered company co-owners and receive a share of the divisible surplus generated annually through dividends. We have an array of carriers to choose from, such as Canada Life, Manulife and Sun Life–depending on the needs of our clients.

If you have questions about the Infinite Banking Concept, if participating whole life insurance is right for you, and how to get started, you can schedule a 30-Minute Discovery Call with us.  Please also download our 5 Top Questions to Ask An Infinite Banking Agent Before You Hire Them. 

For more information about Infinite Banking visit: https://macdevfinancial.com/infinite-banking

Disclaimer: The material provided in this newsletter is for informational and/or educational purposes only. The information, opinions and/or views expressed in this newsletter are those of the authors and not necessarily those of the distributor. All financial endeavours should be vetted through a financial professional: life insurance broker, financial planner, accountant, lawyer, and/or other professional, as the reader, sees fit. MacDev Financial Group Corp., SET Financial Solutions Inc., including but not limited to its agents, staff, associates and/or partners will not assume any liability for any information printed in this article; indirectly, or assumed. The MacDev tagline, “Financial Control For Life” and “Bank On Whole Life” are trademarks of the MacDev Financial Group Corp. Click Legal for further information