Maximizing Your Wealth with Infinite Banking in Canada [2024]: A Basic Guide

Infinite banking is a unique financial strategy that involves using a whole life insurance policy as a savings plan, allowing individuals to access its cash value for their financial needs. With infinite banking, an individual can create a tax-free source of self-funded capital that can be used for several expenses or even investments. In this blog, we aim to provide a basic overview of infinite banking in Canada. We will delve into how infinite banking works, its benefits, the process of setting up a policy, the risks and limitations, and alternatives available. This blog will provide you with general information to understand the Infinite Banking Concept (IBC) here in Canada.

In this article: 

• Introduction to Infinite Banking in Canada
• What is Infinite Banking?
• What is Whole Life Insurance?
• How Infinite Banking Works in Canada
• The Pros of Infinite Banking in Canada
• The Cons of Infinite Banking in Canada
• How to Set Up an Infinite Banking Policy in Canada
• Risks and Limitations of Infinite Banking in Canada
• Is Infinite Banking in Canada Legit or a Scam?
• Tax advantages of Infinite Banking in Canada
• Conclusion: Is Infinite Banking Right for You in Canada?
  
• Frequently Asked Questions (FAQs) about Infinite Banking

Introduction to Infinite Banking in Canada

The Infinite Banking Concept is a financial strategy that has gained popularity in recent times, especially in Canada. The concept revolves around using a whole life insurance policy as a savings tool, allowing individuals to access its cash value for their financial needs. It provides an opportunity to establish a tax-free source of self-funded capital that can be used for various purposes such as funding big expenses, retirement savings, and leaving a legacy for loved ones.

The Infinite Banking Concept operates by purchasing a whole life insurance policy and borrowing against its cash value. The proceeds of the loan can be used to repay other outstanding loans, used for investment purposes or used for personal purposes (such as buying a vehicle). The benefit of this strategy is that the interest rate paid is typically similar to what a bank would charge on a similar loan, is often tax deductible (when used for investment purposes for example) and the loan can be repaid at any time with no penalty.

Furthermore, by borrowing from the policy’s cash value an individual can build a self-funded source of capital to cover future expenses (ie becoming one’s own banker). At the same time, the whole life policy continues to grow with both the cash value (through dividends) and death benefit increasing, allowing the owner to potentially leverage even more capital in the future.

It is crucial to understand that infinite banking is not a one-size-fits-all approach. The effectiveness of infinite banking as an savings plan depends on various factors such as an individual’s financial standing and more.

What is Infinite Banking?

Infinite banking is a financial concept that involves using a whole life insurance policy as a savings and investment vehicle. Basically, by borrowing against the cash value of the policy and then repaying those loans, an individual can build a source of tax-free, self-funded capital that can be used for various purposes.

It is important to understand the structure and type of Whole Life policy designed to maximize this strategy.  Not all Whole Life policies, even from the same life insurance company are designed the same.

What is Whole Life Insurance?

Whole life insurance is a type of permanent life insurance that provides coverage for the entire lifetime of the insured individual. There are two types of whole life insurance policies in terms of accruing interest: non-participating and participating.

In non-participating, or “non-par,” whole life insurance policies, the insurance company keeps any interest earned from the investments of the Cash Surrender Value (CSV). The premiums for non-participating policies are typically lower as they take into account these gains.

On the other hand, participating, or “par,” whole life insurance policies distribute the interest to the policyholders.  Policies that utilize the Infinite Banking Concept are always participating policies that pay the owner of the policies dividends.  This provides the policy owner dividend options.

What are the dividend options?

Dividend options in the context of life insurance refer to how policyholders can choose to utilize the dividends generated by their whole life insurance policies. Dividends are not guaranteed, however, Canada Life for example, which is the oldest life insurance company in Canada, has not missed a dividend payment since they first established a whole life policy in the 1830’s – before Canada was even a country!  Here are the common dividend options available:

Paid-Up Additions (recommended for IBC): With this option, the policyholder uses the dividends to purchase additional paid-up life insurance coverage. These additional coverage amounts are fully paid for and will accumulate their own cash value and dividends, further enhancing the overall policy value thus allowing the owner to leverage against a higher cash value in the future.

Additional options not recommended:

Premium Reduction: Policyholders can opt to use the dividends to reduce their future premium payments. This option allows the policyholder to maintain the same death benefit and cash value accumulation while reducing the out-of-pocket premium expenses.

Cash Payment: Policyholders can choose to receive the dividends in the form of a cash payment. This option provides immediate access to the dividend amount, allowing the policyholder to use it for any purpose they desire.

Enhanced Coverage: Policyholders can choose to use the dividends to enhance the death benefit of the policy.  This is only recommended in the case where the death benefit is very important to the policy owner.  The added cost of insurance for the enhanced coverage will reduce the cash value, thus not ideal under infinite banking where cash value dictates how much one can borrow.

It’s important to note that the availability of dividend options may vary depending on the insurance company and the specific policy. Policyholders should carefully review their policy contract and consult with their insurance advisor to understand the dividend options available to them and choose the option that best aligns with their financial goals.

Read more on the different types of permanent life insurance here.

How Infinite Banking Works in Canada

Infinite banking in Canada works by purchasing a participating whole life insurance policy and using its cash value as a source of self-funded capital. The individual becomes both the policy owner and the insured, allowing them to borrow against the policy’s cash value whenever they need to. The policy’s cash value continues to grow, providing the individual with a source of capital that they can access tax-free.

To get started with infinite banking, an individual would purchase a whole life insurance policy, which is a type of permanent life insurance. This policy builds up a cash value over time, which can be accessed through policy loans. The policyholder can then use the policy’s cash value to pay for expenses, such as big-ticket purchases, or to fund their retirement.

One of the key benefits of infinite banking in Canada is that it allows individuals to take control of their financial future. By using a life insurance policy as a savings and investment tool, individuals can access their own capital whenever they need it, without having to go through a traditional lending institution. 

The Pros of Infinite Banking in Canada

Infinite banking in Canada offers a number of pros to those who choose to use this financial strategy. 

Here are some of the key advantages:

Access to self-funded capital: Infinite banking allows individuals to access their own capital whenever they need it, without having to go through a traditional lending institution. This provides individuals with a source of self-funded capital that they can use for a variety of purposes, such as funding major expenses, saving for retirement, or leaving a legacy for loved ones.

Tax-free loans potential: Policy loans that do not exceed the adjusted cost basis of the policy are considered to be tax-free, which means that individuals can access their capital without having to pay taxes on the loan amount or the interest charged. This can be particularly beneficial for those who want to minimize their tax burden.

Cash value growth: The cash value of a whole life insurance policy continues to grow over time, providing individuals with a source of capital that can be accessed tax-free. This growth is based on the policy’s underlying investments, which can include stocks, bonds, and other assets.

Estate planning: A whole life insurance policy can also be used as an estate planning tool, providing individuals with a way to leave a legacy for their loved ones. The death benefit of a whole life insurance policy can be used to pay off debts, provide for surviving family members, or fund a charity.

Flexibility: Infinite banking offers individuals a great deal of flexibility, allowing them to access their capital whenever they need it and to use it for a variety of purposes. This flexibility can be particularly beneficial for those who want to be in control of their financial future.

Although there are great benefits for infinite banking, there are some things that you should consider before getting into infinite banking. There are also some cons to infinite banking and it might not be suitable for someone who is looking for affordable term life insurance, or if someone is looking into purchasing life insurance solely to protect their family in the event of their death.

The Cons of Infinite Banking in Canada

Infinite banking is not without its potential cons and drawbacks. It’s important to understand both the benefits and limitations of this financial strategy before deciding if it’s right for you. 

Here are some of the potential cons of infinite banking:

Complexity: Infinite banking can be complex, and it’s important to understand the details of how a whole life insurance policy works and how policy loans are structured.  It is important to correctly set-up the life insurance policy to optimize infinite banking to its full potential.

Reduced death benefit: Policy loans can reduce the death benefit of a whole life insurance policy, which is the amount paid out to the policy’s beneficiaries upon the policyholder’s death. This can be particularly problematic for individuals who rely on the death benefit to provide for their loved ones.

Overall, infinite banking can be a useful financial strategy for those who understand the details of how it works and are willing to accept the costs and limitations associated with this investment. It’s important to carefully consider both the benefits and drawbacks.

How to Set Up an Infinite Banking Policy in Canada

In order to reap the benefits of the Infinite Banking Concept it is important to correctly structure a policy:

Here are the basic steps of the Infinite Banking Concept:

1. You first purchase a dividend-paying whole life insurance policy, which will accumulate cash value over time.  Choose Paid-Up Additions (PUAs) as your dividend option (as opposed to enhanced coverage or cash payments).  Maximize the additional deposit option (ADO) allowed inside the policy – this allows you to maximize the cash value inside the policy.  Choose the “wealth” option rather than the “estate” option.  Most companies have 2 different types of Whole Life plans.  Choose the one with higher cash values earlier on.
2. Over the course of several years, you contribute a substantial amount of money to the policy to build up the cash value.
3. Once the cash value has accumulated to a sufficient level, you can start borrowing against it. You’re essentially lending money to yourself, and you repay the loan over time, often with interest.
4. As you repay the loan, the cash value of the policy is replenished, allowing you to borrow against it again in the future.
5. Upon death, the death benefit is reduced by any outstanding loans, but any remaining death benefit is paid out tax-free to the beneficiaries.

Some Insurance Companies Ideal for the Infinite Banking Concept

• Canada Life
• Desjardins Insurance
• Industrial Alliance
• Manulife
• Sun Life

There are other insurance companies that may be fit but the best option is to contact a life insurance broker who can help you find an appropriate life insurance plan for you.

Risks and Limitations of Infinite Banking in Canada

Here are some of the risks and limitations of infinite banking in Canada:

Interest Rate Risk: Changes in interest rates can impact the borrowing power 

Liquidity Risk: Borrowing against the cash value of the policy can reduce the amount of money available for emergencies or other purposes.

Insurance Risk: The policyholder must maintain premium payments to keep the insurance coverage in force. If premium payments are not made, the insurance coverage may lapse and the policyholder may lose their investment.

Time Horizon Risk: If the policyholder decides to cancel the policy early, the cash surrender values may be substantially lower than later years of the policy.  It is advisable that when exploring this plan that one has a mid to long term time horizon.

Taxation: The policyholder may incur tax consequences on the loans, dividends, and death benefit payments received from the policy. It is important to understand the tax implications of infinite banking before implementing it.

Complexity: Infinite banking can be complex, and it is important to understand the details of the policy and the cash accumulation component before making any investment decisions.

Is Infinite Banking in Canada Legit or a Scam?

Infinite Banking in Canada is a legitimate financial strategy, not a scam. Infinite Banking is a concept that was developed by Nelson Nash in the United States, and it has since been adapted and implemented by financial professionals in Canada and other countries.

Infinite Banking is a strategy that involves using a specially designed whole life insurance policy to build and access cash value over time. This strategy can offer benefits such as increased financial flexibility and control, as well as potential tax advantages.

However, as with any financial strategy, there are potential risks and drawbacks that should be carefully considered before deciding whether Infinite Banking is the right strategy for your individual financial situation and goals. Additionally, there may be fees and costs associated with the implementation of an Infinite Banking strategy.

Tax advantages of Infinite Banking in Canada

One of the key tax advantages of Infinite Banking in Canada is the potential to grow the cash value of the policy tax-free. Unlike other investment vehicles, the growth of the cash value component within a participating whole life policy is not subject to income tax. Additionally, the policyholder may be able to access the cash value of the policy tax-free, as long as the withdrawals or policy loans do not exceed the policy’s adjusted cost basis.

The adjusted cost basis of a participating whole life policy represents the amount of premiums paid into the policy, less any dividends or policy fees. Policy loans or withdrawals that do not exceed the adjusted cost basis of the policy are considered to be tax-free. However, if policy loans or withdrawals exceed the adjusted cost basis, the excess amount may be subject to taxes.

It is important to note that the tax advantages of Infinite Banking may be subject to change based on changes to tax laws and regulations in Canada. Additionally, the structure and implementation of an Infinite Banking strategy can impact the tax implications.

Conclusion: Is Infinite Banking Right for You in Canada?

In conclusion, whether Infinite Banking is right for you in Canada ultimately depends on your financial goals, risk tolerance, and overall financial situation. While Infinite Banking can offer benefits such as increased flexibility and control over your money, as well as potential tax advantages, it may not be the best option for everyone. It is important to carefully consider the costs and potential returns of participating in an Infinite Banking program, as well as to thoroughly research and understand the associated risks. Ultimately, consulting with our financial professional can help you make an informed decision on whether Infinite Banking aligns with your individual financial needs and objectives.

Contact us for your Life Insurance Needs

At Protect Your Wealth, we’ve been providing expert advice for all types of life insurance, and retirement and investing planning, since 2007. As your Life Insurance broker and financial planner, we work with you to create a personalized plan for your family or business that covers and meets your needs.

To schedule a consultation about your investment goals, or if you have any questions about insurance in Ontario or Canada, please contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia and Alberta  including areas such as Guelph, Edmonton, and Kelowna. 

Frequently Asked Questions (FAQs) about Infinite Banking