Episode 1 of the Infinite Banking Concept Series – What is it? Who is it for?
Today’s blog is the first blog in our new comprehensive series all about the Infinite Banking Concept.
This first blog will go over what the Infinite Banking Concept is, who should and shouldn’t use it, and then we’ll give you a sneak preview of what’s to come in the following weeks as the series progresses.
What is the Infinite Banking Concept
So, what is the Infinite Banking Concept?
What we are doing is we buy a maximum funded participating whole life insurance policy. Once we have this policy set up, you’re going to put as much cash into this policy that the CRA will allow.
You want to maximize your Cash Surrender Value, or CSV, and the minimum amount of permanent life insurance.
This CSV of yours is going to be built up with every premium payment you make and when you want to spend this built-up cash value you are going to borrow against it instead of withdrawing it.
Now, because these cash values are so secure and guaranteed once they hit the account, you can use the cash value as collateral to get 90% loan to value from the insurance company right away. You can also set up this lending with a bank in Canada – officially it’s not “pure” infinite banking when you borrow from a bank, but in Canada sometimes you have to.
Again, the security of the cash values is so strong that some banks will lend you 80 or 90 or 100% loan to value.
The big benefit that this gives you is that it allows you to have compound growth forever inside your policy because you never withdraw the money and stop the compounding like you would in a regular bank account.
When you borrow the money against your cash values, you can use those funds for whatever you want. Here at Safe Pacific, we strongly encourage our clients to use the funds to invest, but really you can do whatever you want with the money.
Now when you run your money this way, it is effectively growing in 2 places at once. You are growing your money inside the policy from the dividend paid from the insurance company par fund and then you are growing your money in whatever outside investment you used the money for.
Brief look at how it works
Well, when you buy one of these participating policies it comes with two parts to the account.
One part is the regular life insurance that everyone thinks about and understands when they hear about life insurance. If you pass away, the money will be paid out tax-free to your beneficiaries.
The second part is that cash value part of the account, this the part that we want to make as big as possible.
Your cash value growth comes from a dividend that's paid by the insurance company so today in 2024 the dividend on average is around five or six percent depending on the company you work with. These dividends are safe and secure. The companies we work with have paid these dividends every single year for more than a hundred years.
Now I’m not allowed to promise that they’ll pay a dividend in the future but if they ever didn’t pay a dividend then they would have some serious problems.
We will get into more detail in future videos, but this cash value is so secure allowing you to use it as collateral for policy loans directly from your insurance company or use it as collateral for a bank loan or another third-party lender.
Who is it for and who shouldn’t use it?
You can use this if you are doing it personally, so it’s set up for yourself and for your family or you can use it corporately, so you’ve got an incorporated business and you’re doing it inside your company.
So, who should do this?
This strategy is great for people who have financial stability in their lives and can commit to a long-term savings plan.
And when I say long-term, I mean it. This is a plan that involves saving, at the very least, a thousand dollars a month for at least 10 years. So, if committing to a 10-year savings plan sounds scary to you, then this strategy is probably not a good idea for you right now and that’s OK.
If you’re an incorporated business owner, this is a great strategy if you keep retained earnings in your Corp every year. It’s even more ideal if you are flowing those retained earnings up to your holding company every year.
The benefit to you as business owners is it allows you to earn a return on your funds inside the policy that is not subject to high taxes and especially here in Canada as we’ve got these passive income rules. Because life insurance is tax-exempt in Canada, growth inside a life insurance contract is not subject to those new passive income rules.
Another benefit for business owners is that it allows you to keep liquidity. As a business owner you don’t want to tie up your cash, you need cash for whatever may come your way. Because the cash values are so secure and easy to leverage, you can always have access to funds if you need the money in your business to operate or grow. We’ve got other videos on our YouTube channel that talk about examples of how our business owner clients are using the funds in their policies. Some of our clients are doing some super cool things.
A third big benefit is it allows you to build a retirement plan for yourself. When you are ready to stop working and retire, the funds inside your policy can be used to supplement retirement income. There are different lending provisions that facilitate this and you can search for our other video called Insured Retirement Plan or IRP on our YouTube channel.
Lastly, a huge benefit of setting up a policy this way as a business owner in Canada is that life insurance pays out to your corporation tax free and increases what’s called a Capital Dividend Account or CDA. The CDA allows you to flow money to your beneficiaries in a tax free way. Most of our business owner clients would much rather flow the money they’ve worked so hard for their whole life to their kids or charity of their choice rather than send it to Ottawa to decide how to spend it. A life insurance payout is one of the most tax efficient and fastest ways to make sure your money gets to your beneficiaries the way you want it to.
So, the business owner really should have consistency of revenues and consistency of profit and a reasonable expectation that they are going to be saving high retained earnings into their company every year, and especially this works well for people who have high margin businesses and not a huge ability to go out and get more expenses.
These are the people who should really be doing it.
Who should avoid this strategy? Well just because you’re avoiding the strategy for now, it doesn’t mean that you couldn’t eventually be able to use it.
That said, this is not a good strategy for someone who is hurting financially, is in a lot of debt, or doesn’t have good saving habits.
Online, there are a lot of videos that oversell the Infinite Banking Concept to just about anyone and this is wrong. You really shouldn’t be thinking of a strategy like this if you’re not in a good financial position, if you don’t have a high cash flow and good savings habits. It also doesn’t make a lot of sense to set up a big life insurance policy to do this strategy if you don’t need the insurance in the first place.
So generally, this works well for people who’ve got children or a big mortgage or business partners – basically if you need life insurance this is a good idea, but if you don’t need life insurance this isn’t a good idea and there are other things you should be doing with your money.
So, no one should do this until they sort out any negative financial factors in their lives, a good benchmark to look at is, as I mentioned before, being able to save at least a thousand dollars a month for 10 years.
Unless you’re able to do that, this is not the strategy for you, most of our clients are saving a lot more than that. Some are saving fifty thousand or a hundred thousand or five hundred thousand dollars and even millions of dollars a year. If we work with you, we would figure out what’s suitable for your situation.
What’s Ahead?
So that is the Infinite Banking Concept in a nutshell and who should do it and who shouldn’t.
YouTube should automatically pop up the next video in the playlist about infinite banking for Canadians.
Week 2 will be focused on the mechanics and the main benefits of infinite banking, as well as the differences between American and Canadian rules as it can be confusing with so much social media coverage.
Week 3 will be focused on Policy loans, how they work and how you can use them, as well as looking at some numbers to show you what an ideal scenario would look like on paper.
Week 4 we’ll go over all the reasons you shouldn’t do Infinite banking for yourself and why there are a bunch of videos out there calling it a scam.
And finally, Week 5 we’ll talk about how important that need for life insurance can be and how it can be used to help you leave a legacy.
Contact Us
At Safe Pacific Financial, we specialize in helping Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, and business growth.
If you would like to discuss whole life insurance or investments, we’re happy to chat and see if we can be a good fit to work with you. Fill out our contact form and we will get back to you within 24 hours on business days.
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