What Is The Infinite Banking Concept (IBC) or Bank On Yourself?

The Infinite Banking Concept (IBC) was created by R Nelson Nash is a strategy that involves the intentional growth of the available liquid cash value inside a properly-designed participating whole life insurance policy and borrowing against it to fund major expenditures, emergencies, and outside investment opportunities. The Infinite Banking Concept is a financial strategy  that can only be implemented effectively through the use of a specially designed whole life insurance policy and when executed properly, can allow the policy owner to set up their own personal banking system.

After spending decades advocating liberty, free markets, sound money, and the Austrian school of economics, Nelson Nash discovered and developed The Infinite Banking Concept (IBC) as a means to get as close to those ideals as possible and squeezing out the middle man (the banker) at the same time. The goal is to create a self-contained system that provides individuals with control over their money and the ability to leverage it for their financial needs while still earning interest on the policy’s cash value.

Does The Infinite Banking Concept (IBC) work in Canada?

Although R Nelson Nash was from the United States and many of the resources, books and videos focus on the tax code in the U.S., The Infinite Banking Concept (IBC) works incredibly well here in Canada for those at a personal level with supercharged benefits for those Canadian incorporated business owners. There are a handful of unique participating whole life insurance policy designs that we may not be able to mimick here in Canada, but all of the same benefits of capitalizing high early cash value whole life insurance policies in order to leverage for asset purchases or tax free income can be achieved efficiently.

High early cash value participating whole life insurance policies that are optimal for The Infinite Banking Concept (IBC) here in Canada can be designed at a number of well-known life insurance companies including Equitable Life, Sun Life, Manulife, Canada Life along with many others, however not all licensed life insurance agents are well-versed in how to design and structure the most efficient whole life insurance policy to suit, so do not just randomly reach out to any insurance agent or office.

We here at Canadian Wealth Secrets [subscribe to our podcast] are known to design some of the most efficient and effective high early cash value participating whole life insurance policies to utilize for the Infinite Banking Concept (IBC), Bank On Yourself, or simply optimizing your Canadian investment portfolio to utilize conservative leverage to your advantage.  

What are the characteristics of a typical participating whole life insurance policy designed for Infinite Banking?

A typical participating whole life insurance policy is structured where the policy owner pays regular premiums into the policy, which typically remain level throughout the life of the policy in order to provide a death benefit that is paid out to the beneficiaries named on the policy upon the death of the insured.

Since participating whole life insurance policies are structured mathematically using actuarial probability, the insurance company is able to share the present value or “cash value” of that future death benefit now based on the age, health details and other factors that an applicant shares with the insurance company when applying for whole life insurance.

While most understand that the cash value of a whole life insurance policy is the amount that they would receive if they were to cancel their whole life insurance policy and move on, what few recognize is that a policy owner has the ability to borrow against the cash value of their whole life insurance policy through policy loans. This means that the owner of a whole life insurance policy can request up to 90% of the cash value of their whole life insurance policy via a policy loan without any sort of financial qualification, application or credit check.

Of course, there is an interest rate charged to the policy owner, however there are no terms for repayment as the life insurance company knows that the whole life insurance policy is as solid of an asset as any out there. Just think: a typical lender will only fund a mortgage up to 80% of the value of a home after a pretty thorough credit check and approval process, while a life insurance company will allow a loan up up to 90% of the cash value of a policy without the need of an application process, credit check or otherwise. 

A bonus to the typical structure of a participating whole life insurance policy is an annual dividend payment that every policy owner receives to boost the cash value of their policy generated from the profits the insurance company generated over the last year with the premiums from their policy owners. Win-win!

Why Doesn’t My Whole Life Insurance Policy Seem This Awesome?

The fact is: most whole life insurance policies issued today are structured to solve the same problem they were originally designed to solve back in 1847 here in Canada (but likely earlier in other countries): to provide a guaranteed death benefit to the beneficiary named in a whole life policy. 

Unfortunately, structuring a whole life insurance policy to solve this particular problem makes premiums very high and cash value very low – especially in the early goings. Whole life insurance policies structured in this way is likely why many ‘gurus’ in the financial advisory community such as Dave Ramsey and Suze Orman are often cited as “hating” whole life insurance.

The fact of the matter is that few life insurance agents or life insurance brokers are experienced enough to both understand the Infinite Banking Concept (IBC) as well as the necessary characteristics required to construct a whole life insurance policy that emphasizes the cash value of the policy as a means to create both a personal banking system as well as a means to minimize income taxes.

How should one structure the participating whole life insurance policy to implement the Infinite Banking Concept (IBC)?

To implement the Infinite Banking Concept (IBC) effectively in Canada, a participating whole life insurance policy must be structured to minimize the base premium of the policy, while overfunding the policy to maximize the cash value in the early years to a point just before the whole life insurance policy would be deemed an “investment” rather than “life insurance”. In the United States, this “line in the sand” is called the “MEC” line which is short for “Modified Endowment Contract while here in Canada, this is known as the “MTAR” or “Maximum Tax Actuarial Reserve.” 

Structuring a policy in this way will actually reduce the death benefit in the earlier years as a trade-off to receive a higher early cash value and ultimately put the policy owner in a position to have access to more of their policy premiums through leverage (or borrowing) while they are alive than one would receive if they had set up a traditional whole life insurance policy.

While participating whole life insurance policies have been criticized for their lack of flexibility and the incorrect perception of their higher cost, the reality is that many participating whole life insurance policies offer a significant amount of flexibility related to premium payments and features that can be helpful to ensure that one can leverage the Infinite Banking Concept (IBC) in Canada even if a situation in life changes and plans for continuing the policy must change with them.

What are the tax advantages of an Infinite Banking Concept (IBC) participating whole life insurance policy?

The Infinite Banking Concept (IBC) can provide certain tax advantages, including:

1. Tax-Deferred Growth: The cash value growth within a participating whole life insurance policy is tax-deferred, meaning that policyholders do not owe taxes on the growth as long as it remains within the policy. This can allow the cash value to accumulate and compound over time without immediate tax consequences.
2. Tax-Free Policy Loans: Policy loans taken from the cash value of a participating whole life policy are generally tax-free. These loans are not considered taxable income since they are collateralized by the policy’s cash value, not treated as a distribution or withdrawal.
3. Tax-Free Death Benefit: The death benefit paid out to the beneficiaries upon the insured’s death is typically income tax-free. This can provide a tax-free inheritance to beneficiaries.
4. Tax Efficiency of Dividends: Dividends received from a participating whole life policy may be eligible for favorable tax treatment. These dividends are often considered a return of premium and not subject to income tax.
5. Potential Estate Tax Benefits: The death benefit proceeds of a life insurance policy are generally not included in the insured’s taxable estate. This can be advantageous for estate planning purposes, as it can help mitigate potential estate tax liabilities.

Is it true that well-known wealthy families use participating whole life insurance to preserve generational wealth?

Several wealthy families have utilized participating whole life insurance as a strategy to create and preserve generational wealth.

Some notable examples include:

The Rockefeller Family

The Rockefeller family is known for its extensive use of whole life insurance policies as a wealth preservation tool. They have employed these policies to protect and grow their wealth across multiple generations.

The Rothschild Family 

The Rothschild family has utilized participating whole life insurance policies to preserve and transfer wealth within their family for centuries. These policies have played a role in their comprehensive wealth management strategy.

The Walton Family

The Walton family, founders of Walmart, has leveraged participating whole life insurance as part of their wealth preservation and estate planning efforts. These policies have been used to facilitate the transfer of wealth to future generations while providing tax advantages.

The Mars Family

The Mars family, known for their confectionery empire, has used participating whole life insurance policies to create and maintain generational wealth. These policies have helped them protect and grow their assets while minimizing tax implications.

It’s important to note that while these families have been associated with participating whole life insurance, the specific details of their strategies and policies may vary. However, what is hard to argue is how whole life insurance can be a component of a comprehensive wealth management plan for affluent families, providing benefits such as tax advantages, asset protection, and estate planning opportunities.

… but I thought all the financial gurus said that participating whole life insurance a waste of money?

While it is not accurate to say that all financial advisors hate whole life insurance, there are many very vocal financial advisors that have been known to be very outspoken when it comes to the suitability of whole life insurance for the average person.

Here are a few reasons why some financial advisors may have reservations or concerns about whole life insurance:

Cost: Whole life insurance policies tend to have higher premiums compared to other types of life insurance, such as term life insurance. Some advisors argue that the high costs associated with whole life insurance make it less attractive, especially for individuals who prioritize affordability or need coverage for a specific period. However, what is not recognized is the fact that you have access to the cash value through leverage immediately while you are alive and the death benefit will pay out, unlike over 90% of term policies that never pay out the death benefit due to early cancelation. 

Complexity: Whole life insurance policies can be complex, with various components, riders, and fees. Some advisors believe that the complexity makes it challenging for clients to fully understand and evaluate the policy, potentially leading to confusion or misunderstanding.

Limited Flexibility: Whole life insurance policies often have limited flexibility in terms of premium payments, death benefit, and cash value accumulation. Advisors who prefer more flexibility in financial strategies may view this lack of flexibility as a disadvantage.

Opportunity Cost: Critics argue that the cash value growth of whole life insurance policies may not provide attractive returns compared to other investment options available in the market. They contend that individuals could potentially achieve higher returns by investing in alternative vehicles, such as stocks, bonds, or real estate.

Suitability: Financial advisors consider the specific needs and goals of their clients when recommending life insurance. Some advisors may believe that for many individuals, simpler and more affordable options like term life insurance adequately meet their coverage needs without the added complexity and costs associated with whole life insurance.

While some of the challenges or objections shared above may come up in various situations when exploring participating whole life insurance as a tool for improving your financial landscape, a properly structured policy that minimizes the death benefit and maximizes the cash value in the early years will ultimately eliminate the common objections listed above. 

Is The Infinite Banking Concept (IBC) for All Canadians?

As is the case for most tools in life, The Infinite Banking Concept (IBC) through a specifically structured high early cash value participating whole life insurance policy is not going to be a good fit for everyone at all phases of their Canadian Wealth Building Journey. 

For example, those who are just beginning their financial freedom plan and do not believe in putting aside 3, 6 or 12 months worth of expenses into an emergency fund and instead want to maximize their long-term Tax Free Savings Account (TFSA) investments by buying equity index ETFs may not be a great fit until they have built up enough growth assets to justify allocating a portion of their savings/investment cash flow to this type of strategy.

On the other hand, for those early in the journey who are following the common advice (i.e.: Dave Ramsey’s 7 Baby Steps) to build up an emergency fund, then doing so through a participating whole life insurance policy makes a ton of sense as we shared in this video. 

Another example highlighting those Canadians who may not be a great fit for applying The Infinite Banking Concept (IBC) at this point in their wealth building journey include those with an adverse relationship with using debt as a wealth building tool. Since the Infinite Banking Concept (IBC) hinges on the use of leverage by collateralizing up to 90% of the cash value in order to make asset purchases in order to compound your money in two or more places at the same time, growing comfortable with using conservative leverage is important. Those who have invested time learning the differences between good debt and bad debt as well as how certain individuals are able to generate wealth and keep it are those who this strategy is most suitable for.  

Even though the Infinite Banking Concept (IBC) may not be a great strategy for those Canadians with an aversion to debt, many of these same individuals may also have an aversion to being exposed to the volatility in the equity markets and opt for more balanced portfolio funds offering lower, but more consistent returns. For these individuals, a participating whole life insurance policy may still be a great move in place of those 3%-6% annual returns they may be receiving from balanced funds. With similar internal rates of return for the cash value while alive and even better returns on the death benefit payout after death, this financial tool can still be helpful for many Canadians even without applying the typical Infinite Banking Concept (IBC) approach.

Common Infinite Banking Concept (IBC) Misconceptions

Of course when a helpful strategy is introduced in the investment and wealth building space, there are often misconceptions and myths that are formed – whether intentional or unintentional – along the way.

Unfortunately for the Infinite Banking Concept (IBC) and participating whole life insurance policies, there are many. 

One common misconception is that when you borrow against your participating whole life insurance policy, the interest you pay goes back to your individual insurance policy. While I think we’d all enjoy directly paying interest back to ourselves, the reality is that the interest you pay goes back to the participating investment fund – not your policy individually. It is nice to know that the interest you are paying goes back to the same fund that generates the dividend the insurance company pays out at the end of each policy year to create additional death benefit and along with it, additional cash value, but it is a massive stretch to think that the interest you are paying is going to make any sort of material positive impact on your whole life insurance policy. 

Another common misconception is related to how the interest is calculated when you take a policy loan through the insurance company. Many out there state that the insurance company uses simple interest to calculate your interest and therefore, the interest does not compound (i.e.: you don’t pay interest on the interest you owe). While the interest is only calculated at the end of a year, while many credit cards, bank loans and lines of credit apply interest semi-annually, monthly or even daily, if you do not pay the interest owing by the end of the year, your interest will in fact be compound interest – just annually. Still extremely favourable comparative to what you’d receive from a typical bank, but a misconception none the less.

Why The Infinite Banking Concept (IBC) is a Must for All Canadian Incorporated Business Owners

 By now you’re probably recognizing that The Infinite Banking Concept (IBC) through the use of a properly structured high early cash value participating whole life insurance policy can be incredibly helpful for many Canadians seeking to use conservative leverage to supercharge their wealth. 

Fortunately for Canadian incorporated business owners, they are able to benefit in ways that make it almost a no-brainer for any profitable Canadian corporation due to the low corporate income tax rates on active income (especially on the first $500,000 of profit) and the favourable tax treatment of the death benefit as a means to pay less personal tax on the retained earnings held inside the corporate structure.

When a corporation chooses to purchase a participating whole life insurance policy on a key person such as a shareholder of the corporation, you are funding the same participating whole life insurance policy using after corporate after tax dollars – which could be 12.2% or lower depending on the province – instead of using personal after tax dollars that could be as higher than 54% in some cases. This is a massive win for any Canadian incorporated business owner just in how few corporate dollars are required to fund the same policy that might require upwards of 60% more personal after tax dollars if purchased outside the corporation. 

One of the other massive benefits is that 100% of the net death benefit (death benefit less the adjusted cost basis of premiums funding the policy) when the insured person dies will create a credit to the corporation’s capital dividend account (CDA) allowing the shareholders – be it the remaining shareholders or shareholders that the deceased passed the shares on to – the ability to withdraw that money from the corporation as a tax-free dividend. 

Of course, all of the other features of The Infinite Banking Concept (IBC) are still in play for the corporation to leverage the cash value to purchase assets and all the other goodness, but we’ve also solved a massive tax problem for those Canadian incorporated business owners at the same time.

When the cash value of a corporate owned life insurance policy is large enough, we can look to creative and compliant structures to keep personal taxes minimized while maximizing asset accumulation along the way. 

Next steps for those interested in implementing the Infinite Banking Concept (IBC)

While this article is a great start to getting yourself acquianted with the Infinite Banking Concept (IBC) through participating whole life insurance, we suggest that you continue your journey by reading R Nelson Nash’s book, Becoming Your Own Banker and consider reading some of the other related books on our Canadian Wealth Secrets Booklist.

Of course, we would also love to help you in your journey.

Don’t hesitate to reach out and receive support as you begin this journey!

Design Your Wealth Management Plan

Crafting a robust corporate wealth management plan for your Canadian incorporated business is not just about today—it's about securing your financial future during the years that you are still excited to be working in the business as well as after you are ready to step away. The earlier you invest the time and energy into designing a corporate wealth management plan that begins by focusing on income tax planning to minimize income taxes and maximize the capital available for investment, the more time you have for your net worth to grow and compound over the years to create generational wealth and a legacy that lasts.

Don't wait until tomorrow—lay the foundation for a successful corporate wealth management plan with a focus on tax planning and including a robust estate plan today.