Infinite banking’s boosters call it financial freedom, but there are downsides.
The problem with the average Canadian’s capital is that it’s usually only asked to do one job at a time: be spent, lent or invested.
But what if you were able to put your money to a specific purpose and continue using it to generate income?
That’s the idea behind infinite banking (IB).
The infinite banking concept began gaining traction in 2000, with the release of R. Nelson Nash’s now-classic Becoming Your Own Banker. In the book, Nash, an almost 40-year veteran of the U.S. insurance industry, explains how whole life insurance allows policy-holders to borrow money from themselves without disrupting the growth of their policies.
Infinite banking has amassed a dedicated following over the years, with proponents saying it’s a method all consumers can use to make better use of their savings. But those who have sipped rather than chugged the IB Kool-Aid say it’s a strategy that may be too complex to be marketed on a mass scale.
Let’s take a closer look at infinite banking and see if it might work for you.
Infinite banking starts with the purchase of a whole life insurance policy.
In addition to providing benefits in the event of a person’s death, whole life insurance policies also have a savings component. Money can be stored in the policy, which receives regular boosts in the form of dividends.
When a whole life policy is activated, its value can be borrowed against. Money can be taken out of the policy, which, because it’s guaranteed by your provider, makes for excellent collateral. If you don’t pay back the loan to your insurance company, it can always take the amount owing out of your death benefit.
In that way, IB is a lot like a reverse mortgage. In both cases, you still possess the appreciating asset being borrowed against — your policy or your home — and you have the freedom to pay back the loan at your leisure, ideally at an interest rate lower than what other lenders may offer.
To get the full benefit of infinite banking, you’ll need to fund your policy beyond the minimum premiums you’re required to pay. The more you save, the more you can borrow. There is a maximum additional amount that you’ll be allowed to funnel into your policy; if you want to go beyond that limit, it will cost you.
“The amount of money you contribute is tied directly to the amount of insurance you own. So if you want to put more in, you’ve got to buy more insurance,” says Chris Karram, co-founder of Safebridge Financial Group.
Infinite banking is a fairly simple concept, but funding your policy properly and using it to its ultimate use is something you’ll need to discuss with a financial advisor and your insurance provider.
Infinite banking can be an intriguing method of accessing cash. Need $50,000 for your kid’s education or $10,000 for a long overdue holiday? Borrowing the funds from your insurance provider can help you pay for the things you need without having to add to your line of credit or credit card or take out a high-interest personal loan.
But whether you need a loan or not, infinite banking’s boosters say anyone can benefit from this method.
If you spend the cash in your savings account, that money is gone forever. But if instead you borrow the money from your insurance policy, the amount borrowed stays where it is — in your policy. Instead of removing that cash from your bank account or liquidating other investments to access it, the money you’ve saved in your policy keeps growing.
Scott Cordier, certified financial planner at Opendoor Financial and founding member of Infinite Banking Canada Group, says the interest rates insurers offer to borrow against a policy range from 4.45 per cent to 6.2 per cent.
Getting a loan from an insurance provider can be much faster and smoother than securing one from another lender. The approval times are short and, because the policy is guaranteed, the credit requirements are basically nil. But you can go to another lender too, as the money in your policy makes for good collateral on a loan.
The capital you build inside a life insurance contract is tax-exempt; borrowing against it won’t cause you to owe taxes; and in most instances, the final payout on the life insurance policy is tax free as well.
Some IB converts also consider the strategy a philosophical victory over Canada’s banks, who basically follow the same method, only by using your money instead of their own.
Infinite banking is not a one-size fits all solution. If you can’t secure a whole life policy or afford to fund it to a relevant degree, it may not even be an option for you.
The rates offered by insurance companies aren’t always lower than what you’ll find elsewhere. Car loans that charge less than four per cent interest, for example, are common.
Infinite banking can also get borrowers into trouble depending on what they use the funds for.
It may be tempting to take out a loan against your life insurance to make a revenue-earning investment, as the interest is tax-deductible. But it can leave an individual’s family unprotected if the investment falls through and the loan can’t be repaid. The death benefit shrinks accordingly.
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