Understanding Infinite Banking and the Relationship with Whole Life Insurance
You’ve never heard of Whole Life Insurance? But have you come across the term infinite banking? If so, you already know more about Whole Life Insurance than you think! “Whole Life Insurance” is basically the Canadian version of what our friends in the U.S. call “infinite banking”.
Infinite banking is a financial strategy that is popular among U.S. residents who seek a structured method to increase and manage their wealth. In this post, we’ll explain what infinite banking is, how it relates to Whole Life Insurance, and showcase its role in strategic personal finance.
Unraveling the Term "Infinite Banking"
The term infinite banking is often promoted by wealth strategists in contemporary finance as a way to leverage the value of a Whole Life Insurance policy to bolster personal investments. It’s essentially a financial approach that involves using a Whole Life Insurance policy’s cash value to finance major life expenses, such as purchasing a home or funding retirement.
The Origin of Infinite Banking
The Infinite Banking Concept (IBC) gained prominence through the teachings of R. Nelson Nash, who established this innovative approach in his influential book, Becoming Your Own Banker. But while Nash’s work heavily influenced the concept of IBC, the term is now understood and implemented in various forms and its meaning changes slightly depending on the context. We’ll go through the major interpretations of IBC in this post.
U.S. vs. Canada — Usage and Application
Given Nash’s background and the vast market for life insurance in the United States, the concept of IBC is more entrenched in American culture. In Canada, it’s still gaining momentum, especially amongst those who value the financial predictability and lifetime coverage that whole life policies offer.
Uncertain about what Whole Life Insurance is? We break it down for you in our page: “Whole Life Insurance: What is it?”
Steps in Infinite Banking
Here’s how infinite banking typically works:
1. Purchase a Whole Life Insurance Policy:
Instead of relying solely on traditional savings or investment vehicles, individuals purchase a Whole Life Insurance policy from a mutual insurance company. Whole Life Insurance provides a death benefit to beneficiaries upon the policyholder’s death, but it also accumulates a cash value over time.
2. Build Cash Value:
With each premium payment, a portion goes towards the cost of insurance, administrative fees, and other expenses, while the remainder goes into a cash value account within the policy. This cash value grows over time, typically at a guaranteed minimum rate of return set by the insurance company.
3. Accessing Cash Value:
Policyholders can “borrow against” the cash value of their life insurance policy. This means they can use the accumulated cash value as collateral to take out loans from the insurance company. The policyholder can then use this borrowed money for various purposes, such as financing purchases, investments, or paying off debt.
4. Repaying Loans:
The policyholder is not required to repay the loan to the insurance company. When you take a loan against your policy, the insurance company essentially uses your policy as collateral and the loan amount is subtracted from the death benefit when you pass away.
5. Continuous Cycle:
As the policyholder repays the loan, the cash value account continues to grow, and the policyholder can borrow against it again if needed. This creates a continuous cycle of borrowing and repaying within the policy (hence the term “infinite banking”). Even if the policy loans are not paid back, the cash inside the policy still grows.
Infinite banking can offer significant benefits, including tax advantages, asset protection, liquidity, and control over one’s finances. However, it’s essential to carefully evaluate the costs, risks, and potential returns associated with Whole Life Insurance policies and consider whether they align with your own financial goals and circumstances.
Infinite Banking and Whole Life Insurance
Infinite banking and Whole Life Insurance are not completely distinct concepts. This is because both entail the ownership of Whole Life Insurance policies.
Does this mean the terms can be used interchangeably? Not exactly.
The core discrepancy lies not in the products themselves, but in their usage. “Infinite banking” is simply a name that Nelson Nash gave to the practice of overfunding a participating Whole Life Insurance policy. Infinite banking emphasizes the use of cash value in Whole Life Insurance as a banking tool, essentially turning policyholders into their bankers, allowing them to borrow against the policy’s value, tax-free.
So, while infinite banking employs Whole Life Insurance primarily as a financial instrument, Whole Life Insurance in general offers a much wider range of benefits. It fulfills various roles, such as providing a death benefit payment to beneficiaries and acting as an asset class for portfolio diversification.
The Future of Infinite Banking in Canada
The concept of infinite banking resonates with those who want to take a more active role in their financial lives. However, it’s important to approach it with a clear understanding of its workings and a firm grasp on its implications. Infinite banking is not a one-size-fits-all solution, and not everyone will find it suitable for their needs.
If you’re contemplating whether Whole Life Insurance and infinite banking is right for your financial vision, don’t hesitate to reach out to us! At Lifestyle Legacy,our team of dedicated professionals provide personalized guidance, helping you assess which approaches best fit your broader financial landscape.