Infinite Banking Explained In Canada

What if I told you you could be your own bank? Have you heard of infinite banking? What is this you speak of? In today's video, I will share with you everything you need to know about infinite banking. If you're interested in learning about this powerful strategy the wealthy use, make sure you watch this video till the end. What is infinite banking? It's a financial strategy that uses a whole life insurance policy as a personal bank by borrowing against its cash value, essentially becoming your own lender and allowing for tax-free self-funded capital. Instead of borrowing money from a bank, you borrow money from yourself using the cash value inside a whole life insurance policy. How does it work? The first step to do infinite banking is by a whole life policy offered by a mutual insurance company or a participating company. It needs to be a policy where the policy holders are the co-owners and receive a dividend, 5-6% and guaranteed growth. You will also want a policy that has flexible paid-up addition terms, a low base fixed premium, and allows for non-direct recognition loans and wash loans. In the US, there is a lot of insurance companies that work well with infinite banking. But in places like Canada, there may only be a handful. And in Canada, if not done correctly, it's possible to pay taxes on policy loans. This is why it's recommended to have your policy structured by someone who specializes in infinite banking. And you also want to choose a preferred beneficiary as this will offer more protection in the event of a lawsuit, creditors, or bankruptcy. Next, you'll want to build up your cash value. Your monthly premium is split into two parts, your death benefit and your cash value. At first, your premiums are mainly going to pay fees and insurance. As the years go on, your cash value earns a dividend and that grows and compounds tax-free. Eventually, usually between year 7 and year 12, your cash value may be worth more than your total premiums you paid, the break-even point. And at this point, your cash value grows more than the premiums you pay each year. To speed up this process, you need to do paid-up additions. They are like little life insurance policies that you add on to your main policy and they're fully paid for with just one payment. This increases your death benefit and most of the payment goes to cash value. And this in turn increases your dividend returns. Once you've built up enough cash value, you can then take out a loan, usually up to 90% of the cash value. The interest rate you pay will be similar to other secured loans, not as low as a mortgage rate, but more comparable to a HELOC. The cash value is your collateral. You can get quick access to capital without credit approval and this loan won't affect your credit score. There is no minimum monthly payment and you can repay the loan whenever you want. And depending on the policy, you may still earn a dividend on the lent-out money or you can swap your dividend for a no-interest loan. This is the magic. If you have $50,000 in cash value and you get a $40,000 loan, the $10,000 you have left earns a dividend and the $40,000 that's lent out also earns a dividend. Then you take that $40,000, invest it in other opportunities and grow your wealth. Your dividend is paying for your policy premiums and your investments are offsetting the interest you pay and then some. All while, if anything were to happen to you, your beneficiaries will receive your death benefit completely tax-free. Sounds great, but let's look into the reality of things. To do infinite banking, you need to have high income. The purpose of life insurance is to provide financial security for your family in the untimely event of your death. So if you're just looking for life insurance, don't think about infinite banking for a second. Compare term life insurance to whole life insurance. Term life insurance is 5 to 15 times cheaper than whole life insurance for the same death benefit. The difference is that term life insurance is only for a set term. If you are still alive after the term, you will need to start a new policy and the rates at that point will be unaffordable. While whole life insurance is guaranteed to pay out when you die. So no matter what, with whole life insurance, your family will eventually be paid out. Whole life insurance is for more high net worth individuals, dependents with lifelong special needs, business owners, those who maxed out other tax advantage accounts, and those looking for a force guaranteed savings for the next generation. With term life insurance, you're insured while your kids are young and by the time your policy runs out, hopefully your mortgage and cars are paid off and your grown ass kids can take care of themselves financially. If whole life insurance is taking up a big chunk of your budget, you are living paycheck to paycheck or struggling with debt, you're likely better with term life insurance. And you may not even need life insurance at all. Maybe you don't have any dependents, maybe have assets that can take care of your family, or maybe your union or employer provides life insurance as part of their benefits package. Or maybe you aren't concerned about life insurance and think of whole life insurance as an investment. While I hate to break it to you, it's not. Think of it more of a savings account that will benefit your beneficiaries the most the sooner you die. The earlier you die, the higher the return on your premiums. If you have unpaid loans when you die, they will be subtracted from your death benefit. Also note that your beneficiaries can't receive your cash value. The only way to receive the cash value is to cash out before you die, but then you lose the death benefit. The dividends you make from your whole life insurance policy are only on the cash value part of your policy. And on average, the return of a dividend-paying policy ranges from 1 to 3.5%. Yes, it may be guaranteed return and tax deferred, but whole life insurance is a long-term gain, while guaranteed returns are meant for short-term investments. A long-term investment would be the S&P 500 index that averages a 10% return. Let's do an example of how this would look. If you have two people, both age 40, Mikey and Donnie. Mikey picks whole life insurance while Donnie picks a 30-year term life insurance. Both get a death benefit of $500,000. Mikey pays $563 a month for whole life insurance. At age 70, Mikey has spent $202,680 on premiums, and the cash value of his policy is $274,077. So in 30 years, Mikey was insured, earned 2%, and only made around $71,000. Donnie, on the other hand, pays $52 a month and ends up paying $18,720 in the 30 years. If Donnie took the $511 he saved not choosing whole life insurance and instead invested that in the S&P 500 index and earned an average return of 7%, at age 70, his policy would end but his portfolio would be worth over $620,000. Even if they both died before 70, both of their beneficiaries would receive $500,000, but Mikey would have paid over 10 times more than Donnie. And if both were to live till 80, Mikey's beneficiaries would still only receive $500,000 while Donnie's would receive over $1.3 million from the stock portfolio. And even if somehow Donnie lost half due to taxes, which is unlikely due to tax advantage accounts, his portfolio would still be worth over $670,000. Now let's say Mikey used his cash value to invest in the stock market. He did a paid up addition of $10,000 right away for a loan of $10,000 plus an additional loan of $6,700 each year. He then invested in the stock market and got a 7% return. After his 4% interest on his loan, his portfolio would be worth around $500,000 plus the $71,000 from his uninterrupted growth of his cash value. So even with infinite banking, Donnie would still be ahead by $60,000. So yes, with infinite banking, you borrow against the cash value in your policy without interrupting the growth, but when you minus the fees and interest and costly premiums, the growth isn't that much. If you were to instead choose term life insurance, invest the rest in the stock market, and use a HELOC or PLOC if you needed capital, you'd be further ahead. A HELOC has similar rates to a cash value loan, but the stock market has a much better return than the growth in a cash value policy. Let's do another example. You overfund a whole life insurance policy with $30,000. You get a $20,000 policy loan to purchase a car. Now you don't have to pay interest on the car, but you do have to pay interest on the loan, which might actually be higher than the car loan. But the cash value of the policy still grows uninterrupted. Let's give it a generous 4% return, and the policy loan interest is only 3%. You could buy this car and instead pay interest. You earn interest. But this can be done with higher returns and without infinite banking. Get your $30,000 that you were going to overfund your policy with, invest that in the market, and earn yourself 7%, while you finance the car and pay 4% in interest. A 3% spread versus 1%. The point is, if you have money to overfund a policy, you have the money to save, invest, or spend. Infinite banking isn't a scam, and whole life insurance isn't a scam. But that doesn't make it a scam. The problem is that it isn't for the majority of people. If you are someone with a high net worth, and already do stock market investing and maxed out all those accounts, then yes, if you have extra money, you could do infinite banking and possibly make more money. If you are someone who needs whole life insurance, get it, and think of infinite banking as an additional benefit. Infinite banking isn't being your own bank. You never borrow your own money. You borrow the insurance company's money. You put money into it, automatically lose 10% to fees, and the only way to get it out is either as a loan with interest after you die, or if you cash out and forfeit your death benefit. And if you cancel your policy, especially in the early stages, the surrender fees will be costly and may be as much as 100% of your cash value. Infinite banking can be comparable to a mortgage and a HELOC. You pay down your mortgage with interest, and the equity you've built can be accessed with a HELOC. And while you use this HELOC, the equity in your house will continue to appreciate and grow. Or you can do a reverse mortgage with once again using your home equity as collateral. The majority of people who recommend infinite banking or whole life insurance are people that sell it. And these insurance guys will recommend infinite banking to anyone because of the high commissions they receive. Most financial advisors will have you stay clear of it altogether, but there are less common cases where whole life insurance and infinite banking will be a good fit, like if you have a lot of money. For the rest of us, it's better to use term life insurance, investing to difference, tax advantage accounts, and HELOCs. The main thing is that you don't just take advice from a YouTube or TikTok video. Research as much as possible and speak with your financial advisor. If you don't have a financial advisor or can't afford one, there's a good chance infinite banking isn't for you. Now, if you want to see if velocity banking is for you, check out the video on the right of the screen.