Is Infinite Banking in Canada Only for the 1%?

by: Kathleen O’Hagan

Is infinite banking in Canada only for the 1%?

While “infinite banking” may not be a familiar term to many Canadians, it’s a concept that I had to familiarize myself with as a writer for a life insurance organization.

Initially it took me a while to wrap my head around it, but infinite banking is essentially the idea that you can use your whole life insurance policy as you would a savings account at your bank. That’s because a whole life policy comes with an investment component where you can earn interest – and let that money you earned sit and grow. It can also be a spot you dip into when you need some extra cash.

The biggest difference, in my opinion, is that anyone can make use of a bank for their saving and spending purposes – it doesn’t matter what salary bracket you happen to fall into. But for my generation and those younger than me, infinite banking can feel like it’s only accessible to the wealthy.

I mean, what working parent with an enormous mortgage can actually afford to put an extra $800¹ a month towards a whole life policy? Not me!

Luckily, I have a much more affordable term life insurance policy – one that gets me the same amount of coverage, but only costs me around $30 a month². The reason it’s significantly cheaper? First off, it expires at the end of the term I signed up for (unless I decide to renew). And it doesn’t come with that investment component I mentioned above. Its main purpose is to replace my income in the event I were to die too soon, allowing my family to afford our lifestyle (and mortgage) without a second salary.

But if you want to take advantage of infinite banking in Canada and, like me, can’t afford to pay several hundred dollars extra each month, I’ve got good news: I found a way around it.

Insure your kid instead.

Of course, this only makes sense as a strategy if you view your own investments as something that will benefit your children in the long run too. So read on if that sounds like you!

My story starts a few years back, when I first purchased a 20-pay whole life insurance policy for my then 6-year-old son. At his young age, and with no real health concerns to worry about, payments ended up being around $30 monthly³ – less than my coffee habit costs me every four weeks!

And the cool thing is, it’s called “20-pay” because payments stop after 20 years. Yes, there’s an end in sight… but my son will be covered for life. Plus, he will be eligible for additional coverage when’s he older without the need for a medical exam despite any new health diagnoses – thanks to a rider called the Guaranteed Insurability Option, which is only a few extra dollars a month.

I feel good knowing we are investing in his future in more ways than one – and in a way that nicely complements his RESP. But unlike an RESP, which is to help fund post-secondary education only, he can dip into what is called the cash value portion⁴ of his policy when he’s an adult to help fund whatever he chooses. Whether he wants some extra cash to travel during a gap year, save for a down payment on a home, or fund his retirement, he’ll have some financial help.

Fast forward to now, and I’ve made some updates to my infinite banking strategy. Why? Because my advisor and I are in contact regularly to discuss any changes to my lifestyles or needs. And since I originally bought my son a policy, my priorities have changed from “get the cheapest option” to “get the best bang for my buck.”

In addition to my advisor’s invaluable guidance when I need it, it helps that I’ve also written a lot of articles for the Serenia Life blog (and learned a lot in the process). One article in particular, The Compound Effect: Grow Your Money With Whole Life Insurance, made me realize I’m not taking full advantage of my son’s investment. So, after meeting with my advisor, I’ve decided to take out a second 20-pay whole life policy – this time, with a little something extra called ADO (Additional Deposit Option).

Without boring you with all the details, ADO allows him to earn interest on his interest, which will snowball to some very significant savings over time. (Yes, my monthly payments have gone up, but they’re still about $665 cheaper⁵ than that $800 whole life policy I mentioned earlier.)

Even better, his grandmother is helping out with a portion of the cost as a gift to him. She has told me on more than one occasion that she’d rather share the wealth with her children and grandchildren while she’s still around to watch us enjoy it. (Thanks, mom!)

Seeing how grim the current economic climate is for those of us who don’t fall within the 1%, sometimes I like to paint a little picture of how good my son will have it when his time comes to start ‘adulting.’ Thanks to the potential growth of his whole life insurance policies, here’s what sort of money⁶ may be available to him at different stages of his life:

• Let’s say my adventurous little boy grows up to have the travel bug like his mom and dad. At age 25, he could potentially withdraw up to $30,000 from his policy to travel the world for a year.
• Or if housing is still ‘in crisis’ by the time he reaches adulthood, maybe he’ll opt to save this money until he decides to buy his first home at – say – 40 like I did, at which point he’ll have about $90,000 to put towards a down payment.
• And he’ll never have to worry about the fact that fewer and fewer jobs come with a pension since his retirement will be nicely funded.

However he chooses to use his cash value⁴ one day, I’m just happy he will have a bit of a cushion to help him through the transition from kid to adult. Because if today’s kids grow up to have it as hard as (or harder than) we do, they’re certainly going to need the extra help.

By the way, if this idea appeals to you and you’re concerned you may not be able to afford it because you have several kids, the most financially accessible way to take advantage of the infinite banking strategy is when they’re as young as possible – like when they are newborns.

Or if they have grandparents that would like to help out, that’s another great way to make it more affordable for you. Reach out to your advisor to learn about your options!

Want to learn more about infinite banking in Canada? Give this MoneySense article a read: Infinite banking in Canada: Should you borrow from your life insurance policy?⁷

ABOUT THE AUTHOR

Kathleen O’Hagan is the Digital Content Strategist & Writer at Serenia Life. She is married with one kid and two cats, and enjoys travel, discovering new restaurants, and idealizing life in the 80s. (Yes, she bought life insurance for her son – it’s an investment in his future! And yes, her pets are in her will.)

 

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Disclaimers

¹This is for $500,000 of whole life coverage for a 43-year-old female non-smoker

²This is for 500,000 of term life coverage for a 40-year-old female non-smoker

³This is for 25,000 of 20-pay whole life coverage for a 6-year-old male non-smoker

⁴Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the cash value of the policy will reduce the available cash surrender value and death benefit.

⁵This is based on the total cost of my two policies, which are approximately $30 (Policy 1) + $105 (Policy 2).

⁶Numbers are approximate and are rounded up to the nearest ten thousand.

⁷External links are for informational purposes only; they do not constitute an endorsement by Serenia Life Financial. Serenia Life Financial bears no responsibility for the accuracy, legality, or content of the external site or for that of subsequent links. Contact the external site for answers to questions regarding its content.