Infinite banking in Canada: Should you borrow from your life insurance policy?

Now, after a fair bit of research and a few interviews with experts on infinite banking, I feel I know enough to pass on the basics—plus what you should think about before signing up. 

What is infinite banking?

According to a useful primer from independent insurance firm PolicyAdvisor, “Infinite banking is a concept that suggests you can use your whole life insurance policy to ‘be your own bank.’” It was created in the 1980s by American economist R. Nelson Nash, who introduced the idea in his book Becoming Your Own Banker. He launched the “Infinite Banking Concept” (IBC) in the U.S. in 2000, and eventually it migrated to Canada.

An article on infinite banking that appeared both on Money.ca and in the Financial Post early in 2022 bore a simplistic headline that said, in part, “how to keep your money and spend it too.” The writer—Clayton Jarvis, then a MoneyWise mortgage reporter—framed the concept by declaring that the problem with the average Canadian’s capital is that it’s usually doing just one job at a time: it’s 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),” Jarvis wrote. He compared IB to 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[.]” But Jarvis also evinced some skepticism when he added: “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.”

Borrowing from your life insurance policy

If you’re not familiar with the finer details of insurance, infinite banking does seem a bit arcane. Rather than put your money in a traditional bank—which until the last year or so paid next to nothing in interest on accounts—you would invest in a whole life or universal life insurance product, both of which provide some “cash value” from the investment portion of their policies. Then, if you want to borrow money, instead of making hefty interest payments to a bank, you would borrow against your life insurance policy. 

As PolicyAdvisor explains, “Because you’re only borrowing from your policy, the insurance company is still investing your entire cash value component. So, your cash value still grows even though you’ve borrowed a portion of it.” 

Those new to infinite banking should watch a YouTube primer made by Philip Setter, CEO of Calgary-based insurance broker Affinity Life. In it, he readily concedes that much of the marketing hype portrays infinite banking as some kind of “massive secret of the wealthy,” which essentially amounts to buying a whole life insurance policy and borrowing against it. Setter has sold many leveraged insurance products himself, but to his credit, in the video he calls out some of the conspiracy-mongering that seems to be attached to infinite banking, including the primary message from some promoters that traditional banks and governments are out to rip off the average consumer. 

Infinite banking seems to be geared to wealthy people who are prepared to commit to the long term with the leveraged strategy, and who can also benefit from the resulting tax breaks (more on this below). It’s not for the average person who is squeamish about leverage (borrowing to invest) and/or is not prepared to wait for years or decades for the strategy to bear fruit. As Setter warns in his video: “Once you commit to this, there’s no going back.” If you collapse a policy too soon, it’s 100% taxable: “It only is tax-free if you wait until you die … you commit to it until the very end.” 

How are insurance advisors paid for selling infinite banking products?

Asked how advisors are paid, Setter said they receive a lump-sum commission based on the premium amount of the policy. I also asked this of Asher Tward, financial head of estate planning at TriDelta Private Wealth. In an email, Tward said it’s “the same as with any insurance policy—mostly upfront commission based on premiums paid (higher if there is more initial funding). Fundamentally, this is a life insurance sale. If one undertakes an external or collateralized loan versus a policy loan, they may be compensated on the loan as well.”

How is infinite banking different in Canada compared to the U.S.?

Asked if the Canadian and American rules governing infinite banking differ, Setter said: “The fundamental rule that is different between Canada and the U.S.A, involves taxation of a policy loan within a whole life insurance policy.” In Canada, any policy loan in excess of the policy’s ACB [adjusted cost base] will be taxable. In a policy’s later years, the ACB will become quite low, usually resulting in taxation when a policy loan is triggered, Setter explained. Some practitioners “will suggest using a third-party collateral loan to sidestep this tax issue. However, taking a loan from a bank goes directly against Nelson Nash’s principles.”

On this topic, Tward pointed out, “Insurance and tax laws are different in the U.S. and Canada. We don’t typically try to understand U.S. insurance plans, as they are wholly inapplicable to our market. But for the most part, the individual elements of infinite banking can be deployed here.”

Buyer beware: Infinite banking isn’t suitable for everyone 

Skeptics of the financial services industry are fond of declaring that mutual funds are sold rather than bought. Asked whether this is also the case with infinite banking, Setter replied: “There are specific circumstances with specific clientele where this strategy has a very good product fit. Usually, these are wealthy individuals who have taken advantage of traditional strategies such as registered accounts and other investments and are looking for alternative wealth strategies. These individuals are also comfortable with risk and should have a high degree of knowledge when it comes to investing. However, as with any product that carries a high commission, this strategy is often sold to individuals who have no place in owning it.”

To the same question, Tward responded: “Almost all these products are vendor-push or broker-push. They are merely sales strategies to close more deals. That’s not to say there aren’t niches where leveraged insurance cannot work—but it is the exception versus the rule.” 

Tward added that there are also cases where people have high cash surrender values (CSVs) in their life insurance policies and need to access those. “Leveraging can be very beneficial in those cases,” he said. “But I am arguing that initiating a policy for this purpose is a bit unethical unless the situation is ideal. My take is that infinite banking is a way to market a high-net-worth concept to the masses.” 

According to Tward, brokers with smaller clients can use infinite banking to generate sales they would not otherwise be able to get by doing only risk/tax assessment planning. “Had I employed leverage strategies, I likely could have sold 25% to 50% more insurance in my career,” Tward said. “I have consistently chosen not to go that route, which I believe was in the best interests of my clients.”

Many of these strategies are recycled and renamed but effectively are the same, Tward added. “In this case, you can liken this strategy to an immediate financing arrangement (IFA) or insured retirement plan (IRP). I have never been a fan of strategies that are undertaken with the intent of future leveraging of insurance. That is not to say that insurance cannot be used for this purpose—and in fact, that is a key selling point, as it pertains to liquidity options.”

Tward cautioned that initiating a policy strictly on the basis of leveraging is typically a method used by aggressive insurance brokers looking to sell insurance to people who don’t like, need or want insurance. It’s “a marketing strategy to spin the sale of a life policy—which as you know generates incredibly high initial revenue.”

In any case, Tward says infinite banking has up until now not been widely marketed in Canada: typically the key leveraging strategies are IFA and IRP. The 10/8 insurance strategy used to be a big one, before the CRA nuked it. (10/8 was a front-end leveraging concept widely used over 10 years ago. The CRA shut it down, to the dismay of some high-net-worth Canadians.)

Personally, though in theory my family could meet some of the criteria needed to take advantage of infinite banking, I doubt that we will do so. I prefer simplicity, and this strategy seems anything but. Caveat emptor, especially if you’re a retiree.

More from Retired Money:

• The best ETFs for retirement income

• Is semi-retirement stressful? You bet—here’s what to do about it
• The five factors of retirement for Canadians
• How much money do you need to retire in Canada? Is it really $1.7 million?

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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