The infinite bank, or how to keep your money and spend it too

Infinite Banking boosters call it financial freedom, but there are downsides

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The problem with the average Canadian’s capital is that it is usually asked only one task at a time: to be spent, loaned or invested.

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But what if you could invest your money for a specific purpose? and continue to use it to generate income?

This is the idea behind the Infinite Bank (IB).

The infinite bank concept began to gain traction in 2000, with the release of the now classic R. Nelson Nash Become your own banker . In the book, Nash, a nearly 40-year veteran of the U.S. insurance industry, explains how whole life insurance allows policyholders to borrow money without disrupting their policy growth. .

Infinite Banking has garnered a devoted following over the years, with proponents claiming it’s a method all consumers can use to make better use of their savings. But those who have sipped rather than swallowed the IB Kool-Aid say it’s a strategy that may be too complex to market on a large scale.

Let’s take a closer look at Infinite Banking and see if it might work for you.

How Infinite Bank Works

IB 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 policies also have a savings component. The money can be stored in the policy, which receives regular increases in the form of dividends.

When a whole life insurance policy is activated, its value can be borrowed. The money can be taken out of the policy, which, because it’s backed by your provider, is great security. If you don’t repay the loan to your insurance company, they can still deduct the amount owed from your death benefit.

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In this way, IB is very much like a reverse mortgage. Either way, you still own the appreciating asset – your policy or your home – and you have the freedom to repay the loan as you wish, ideally at a lower interest rate than other lenders can. to offer.

To take full advantage of the infinite banking benefits, you will need to fund your policy beyond the minimum premiums you are required to pay. The more you save, the more you can borrow. There is a maximum additional amount that you will be allowed to channel into your policy; if you want to go beyond this limit, it will cost you.

“The amount of money you contribute is directly related to the amount of insurance you have. So if you want to invest more, you have to buy more insurance,” says Chris Karram, co-founder of Safebridge Financial Group.

Infinite banking is a fairly straightforward concept, but you’ll need to discuss funding your policy properly and its ultimate use with a financial advisor and your insurer.

The advantages of the infinite bank…

Infinite Banking can be an intriguing method of accessing cash. Need $50,000 for your child’s education or $10,000 for a long-awaited vacation? Borrowing the funds from your insurance provider can help you pay for the things you need without having to increase your line of credit or credit card or take out a high-interest personal loan.

But whether you need a loan or not, IB boosters say anyone can benefit from this method.

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If you spend money from your savings account, that money is lost forever. But if, instead, you borrow the money from your insurance policy, the borrowed amount stays where it is – in your policy. Instead of withdrawing that money from your bank account or liquidating other investments to access it, the money you have saved in your policy just keeps growing.

Scott Cordier, Certified Financial Planner at Opendoor Financial and founding member of Infinite Banking Canada Group, says the interest rates offered by insurers to borrow against a policy range from 4.45% to 6.2%.

Getting a loan from one insurance provider can be much faster and smoother than getting one from another lender. Approval times are short and because the policy is guaranteed, credit requirements are virtually nil. But you can also go to another lender, as your policy money is good collateral for a loan.

The capital that you constitute within the framework of a life insurance policy is exempt from tax; borrowing against it will not make you pay taxes; and in most cases, the final life insurance policy payment is also tax-free.

Some IB converts also view the strategy as a philosophical victory over Canadian banks, which basically follow the same method, only using your money instead of theirs.

“Banking is a necessity,” says Cordier, “but banks are not.”

…and the disadvantages

Infinite banking is not a one-size-fits-all solution. If you can’t get a whole life insurance policy or afford to fund it to a relevant degree, it might not even be an option for you.

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The rates offered by insurance companies are not always lower than what you will find elsewhere. Car loans that charge less than four percent interest, for example, are common.

Infinite banking can also cause problems for borrowers depending on the use of the funds.

It can be tempting to take out a loan against your life insurance as a rewarding investment, as the interest is tax deductible. But it can leave an individual’s family unprotected if the investment fails and the loan cannot be repaid. The death benefit decreases accordingly.

“Understand the power that [infinite banking] gives you if you use it correctly,” Karram advises, “but also understand the responsibility that comes with it, because it’s not child’s play.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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