Infinite Banking Concept Overview
R. Nelson Nash is the world authority on the subject, and the creator. He calls it "The Infinite Banking Concept".
The Infinite Banking Concept (IBC) is about the power of Dividend Paying Whole Life Insurance (not Universal Life Insurance) with a Paid Up Additions Rider and an Additional Deposit Option. Most of us when we hear the words life insurance, have been conditioned to concentrate on the death benefits instead of the Living Benefits, and few people are aware of the financing capabilities of Whole Life Insurance.
How it is structured to comply with the way Nash explains it in his book “Becoming Your Own Banker”, is what sets it apart.
Whole Life Insurance is built upon a series of guarantees from the insurance company to keep your savings safe while providing a competitive rate of growth that cannot lose its value even with a major market drop.
Many people know that you can borrow from a Whole Life Policy. But how you can leverage this is something very few people know, and believe it or not, very few insurance advisors know. In a nutshell, you can borrow against the cash value in the policy for whatever use you need the money, while still having the cash value grow on its full value. This can provide a significant gain since the growth will typically outpace the cost of the loan over an equal period of time - even if the loan rate is several percentage points higher than the growth rate.
SHOULD WE BORROW OR WITHDRAW THE CASH? (The answer may surprise you)
So here’s a truth that can change the way we look at money and finance forever. We all need financing.
We finance everything we buy. When we borrow we pay interest to someone else. When we pay cash we give up the interest we could have earned otherwise. Pay up or give up!
Better than paying cash we can borrow against an asset that we own and control such as the cash value sitting in a properly structured dividend paying life insurance policy.
One of the biggest misconceptions in everyone’s financial world is that if you pay interest at 8% and earn at 4% that the 8% paid would be a larger number. It’s not.
The reason for this over any time period is simple: you pay interest on a declining balance and earn interest on an increasing one! So with that little piece of information, we have to rethink paying cash.
All this is for us to recognize that our own capital has a cost, as well as that which is borrowed from banks or car loan companies.
This is called Economic Value Added (EVA).
If you borrow money from a bank, when you pay them back, you also have to pay them interest on the money, (even though it’s not their money, but rather their depositor’s money). The same with a credit card, you always have to pay them interest.
But if you use your own money, you never think to pay yourself interest. Why not?
When you stop your money from growing by withdrawing it instead of taking a loan against it, you are declaring that your money isn’t worth as much as other people’s money.
This is the essence of the Infinite Banking Concept - realizing our own money has economic value. This is realized by letting your money continue to grow while you’re borrowing against it.
The Infinite Banking Concept - Policy Holders In Canada
Although this strategy has broad appeal in both the United States and Canada, and policyholders in both countries receive numerous benefits, policyholders in Canada should note the following differences.
1. Participating whole life policies do not offer 100% guarantee solutions
2. Quick pay participating whole life insurance solutions may not be sufficient to cover future premium requirements. They are not guaranteed.
3. Policy loans in excess of the Adjusted Cost Basis (ACB) of a policy are treated as a taxable policy gain. There is no guarantee that 100% of all policy loans will be received tax-free.
4. Payment of a policy loan interest and repayment of policy loans does not increase the return to the specific policy; it merely ensures what will be received at death is not diminished by these liabilities.
5. Paying loans and bank loan interest is a cost to the policy owner. Often policy loan interest rates exceed bank loan rates.
6. Creditor protection is only available where certain beneficiaries are named and have limitations based on competing legal rights.
Note: Canadian participating whole life policies typically operate independent of policy loans. Dividends and all other policy values are the same whether or not a policy loan exists. The loan acts as a lien against the surrender value or death benefit generated by the policy, but has no effect on policy performance. Thus, any interest paid on a policy loan is an expense to the policy owner and does not improve the performance of the policy.
Properly Structured IBC Policy
IBC Authorized Practitioners have the knowledge to properly structure the policy so that it works now, as well as in the future. Using a Life Insurance agent who does not fully understand the Infinite Banking Concept as an Authorized Practitioner may have undesirable consequences of tying up what would normally be usable cash for long periods of time, keeping you from using the Infinite Banking Concept to pay down and redirect lost opportunity costs you would otherwise be paying to another institution.
Utilizing Your Policy -- The Loan Process
When Can I Take A Loan?
• Whenever you have enough money. Usually after a year or two.
• The faster you capitalize your policy the more funds available.
• When you take a loan, set up the repayment schedule immediately.
- Be an honest banker and pay yourself back.
- Remember Parkinson’s Law: “Expenses rise to equal income”. Don’t fall into this trap!
How Do I Take a Loan?
• Call or email our office and ask for a Policy Loan Agreement Form to be emailed to you.
• On the loan form is where you can indicate monthly repayment for the loan with Pre-Authorized Chequing (PAC).
Things You Should Do When You Take a Loan
• Instantly begin the loan repayment by indicating on the loan form the amount you will be paying back.
• This can be done monthly by signing the PAC portion of the loan form.
• Lump sum payments are also welcomed and this can also be done online.