Episode 2 of Infinite Banking Concept Series – The Mechanics and Benefits of the IBC
Welcome to the second part of our comprehensive series about the Infinite Banking Concept.
This blog will be discussing the mechanics of infinite banking, as well as the benefits as well as going over some of the differences between Canadian rules and the rules in the United States.
How does Infinite Banking work and what does a good policy look like?
The way the Infinite Banking Concept in Canada works is by overfunding a participating whole life insurance policy and using the cash value while you’re alive to invest and pay for things in your life.
We set you up as the policy owner and the insured, allowing you to control the policy and borrow against the cash values whenever you need to.
The policy’s cash value grow over time with a dividend paid from the insurance company’s participating account which builds up your capital that you can access tax-free through loans.
Now, the way the policy grows is it takes your premiums and that feeds your cash value and your death benefit, the part that we focus on here is the cash value.
This cash value grows with the money you put into it as well as through the dividends.
These dividends are paid by the insurance company and can be paid directly to you but with this strategy they are used to buy more permanent insurance which increases your cash value, which buys more insurance which increases your cash values on and on.
In Canada right now in 2024, the average dividend is about 5 to 6 percent depending on the life insurance company you work with.
These dividends are safe and secure and the companies we work with have paid out dividends every single year for over one hundred years.
This includes through world wars, great depressions, financial crashes, pandemics, they have never not paid these dividends.
As we have stated in previous videos, we are not allowed to promise you that they will pay a dividend in the future, but they would have some serious problems if they ever didn’t pay a dividend.
This is a strategy we’ve been doing ourselves since we started Safe Pacific more than 10 years ago. We walk the talk that I’m sharing with you today.
So, what does a “good” policy look like when it’s designed for the cash values that we want? How do you know if it’s set up correctly for the infinite banking strategy that we’re talking about now?
Well, the easy way to see if it’s set up right is there should be no zero-dollar cash values in the first few years. When we set these up, the cash values will be a minimum of 80% of the premium you deposited. On some policies we can get this number up to 90% depending on some factors like your age and the amount of dollars you are depositing into the policy and how long we set up the premium payment term.
We’ll talk more about the specifics of policy loans in a future video but cash in these policies allows you to leverage against it since it’s so safe and secure.
The simplest way to access the cash values in your policy is to borrow directly from the insurance company, this is called a policy loan. It’s super simple and hassle-free. You fill out 1 form requesting the money and you’ll usually receive it from the insurance company withing a few business days. No credit check, nobody asking you what the money is for or anything like that. You ask for it and you get it. Simple.
The other way you can leverage the cash values in your policy is taking a loan from a bank using your policy as collateral. This would involve lending a lot more money, and this process would involve going through the banks' underwriting process like credit check and financial underwriting.
If you need it more immediately and have a smaller policy, then borrowing from your insurance company is a great way to invest in whatever you would like.
We have clients using the money to invest back in their business, investing in real estate, paying for home renovations.
That’s the simple explanation of how the concept works. There’s more details, but those depend on your situation and we can chat about that for your situation when you book a meeting with us.
The Benefits of the Infinite Banking Concept
We have touched on the benefits of the Infinite Banking Concept earlier, like it being secure money.
That is one of the biggest ones, it is guaranteed to never go down – Warren Buffet’s number one rule of investing is DON’T LOSE MONEY – with the way this system works, your cash is immediately vested and guaranteed once it hits the account.
It doesn’t carry the risk of the stock market. There is great comfort in this. We had a client say “I love it when Laurent and Robert come over because they never tell me I lost money. I’ve lost money on all sorts of things, but I’m glad the life insurance values are always there and have never gone down. “
You know, you need to hold your money somewhere – and most people do this with a bank account only.
Having a bank account is great because they are convenient, but your money doesn’t grow in a bank account.
Whole life par accounts are a better place to store your medium- to long-term savings.
The main reason for this is because of the dividends right, they naturally grow your account but at the same time it allows you to “stack investments” and earn in two places at once.
You have your account growing at five to six percent through the year and then you have the beneficial investments you make when you borrow from your policy hopefully at an even better rate.
Another benefit of this strategy is that it makes a great bullet fund so you can take advantage of opportunities as they arise, since the account allows for great liquidity.
As soon as you want to borrow money from your policy it will be in your bank account at a fast rate.
One of the biggest benefits of this account is that Life insurance in Canada is tax exempt. The tax play with life insurance makes it very worthwhile.
The strategy makes a lot of sense when you are in the higher and highest tax brackets.
As the growth inside is tax exempt, and it doesn’t count towards your small business deduction with the new passive income rules.
The loan to value ratio is fantastic for a whole life policy, you can often get 80% to 100% loan to value ratio while using it as collateral compared to say a stock portfolio where you’re more likely get 50% to 80%.
So, this strategy allows for secure wealth growth, a great loan to value ratio, a high liquidity, and tax exemptions and deferrals on the money in the account. Those are the main benefits of the Infinite Banking Concept.
USA vs Canada Rules
A quick reminder that we are Canadian, so we can’t help you if you are American, but we do have American colleagues we could point you towards.
And since we operate in Canada, we are not going to get too into detail about the American rules.
So, in both Canada and the US, there’s a limit to how much you can put into your account.
Americans have the MEC limit, or Modified Endowment Contract.
Basically, in the US you have more flexibility in how you want to structure the premium deposits.
While we have the MTAR line in Canada, the Maximum Tax Actuarial Reserve.
The short and simple look at what MTAR is, it’s the insurance company actuaries run calculations on your policy every year to make sure it keeps its tax-exempt status
You don’t have control over this and no access to see the formulas they use to calculate unfortunately.
While we have no way to determine the MTAR, what we do is when we set it up and use the insurance company’s software, we 100% make sure that we are onside with the MTAR and the insurance company themselves won’t allow a policy to become offside of the MTAR.
So, they won’t allow you to put too much premium, or cash in the policy.
Another big difference is that some US insurance companies have guaranteed return that is accredited to the cash values while we don’t have that here in Canada.
A common difference between American and Canadian companies is that the US has more options of where you can get your life insurance.
Here in Canada, we have much fewer insurance companies and even fewer life insurance companies, and here at Safe Pacific we do have contracts with all the major companies that offer whole life products.
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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