Personal Finance

Leveraging a Whole Life Insurance Policy... AKA Infinite Banking Concept

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  • Jun 12th, 2021 11:02 pm
[OP]
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Feb 14, 2005
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Toronto

Leveraging a Whole Life Insurance Policy... AKA Infinite Banking Concept

I wanted to start a thread on leveraging a whole life insurance policy as I didn't see it here discussed before. With that said, I understand that there's a negative stigma regarding whole life policies and the strategy isn't for everyone.

I went down this rabbit hole over the weekend and started researching as much as I could, but I still have a few gaps in knowledge that I'm hoping someone here can shed light on. I'll try to distill what I've learned here and I'm hoping Cunningham's Law applies.

If you're contemplating about this strategy, then I assume you've already maxed out your other tax sheltering or tax deferral vehicles. This strategy also takes years to implement and develop, and there is significant upfront capital required to make it work practically. For those with corporations, this is another tax strategy you can use - purchase policies for your "employees" using retained earnings.

The premise... dumbed down by my dummy understanding...
With a whole life insurance policy, monthly premiums are paid into the policy to grow the Cash Surrender Value (CSV) and the Death Benefit of the policy. For each year of the policy, the insurance company would pay out a dividend according to the "dividend scale interest rate", and the CSV and Death Benefit would increase in relation to the interest rate. Note that the policy has guaranteed values as well, so in theory, your CSV and Death Benefit are protected.

Over a long period of time (10+ years), and depending on how much your premiums were, your CSV would grow to some substantial number, upon which you would be able to take out a LOC using the policy as collateral. Because you're taking out a loan, you're not realizing any capital gains, so there are no taxes to pay. Regarding your CSV, because you're borrowing against it and not withdrawing it from the policy, it continues to compoundly grow as well. In essence, you're able to realize tax-free growth and get access to your principal and gains tax free.

As you're taking out a LOC, you can also capitalize the interest. So in theory, like a HELOC, you can never pay it off and just refinance at a later time as your CSV continues to grow. When you die, the Death Benefit would pay off the LOC. Since it's an insurance policy, your Death Benefit is paid out tax free.

Paid Up Additions
Under the conventional policy model, in order for your CSV to grow to anything substantial, you will need at least a decade to build it up. Like mortgages, the first few years of your premiums is going towards commissions, overhead, and the Death Benefit portion of your policy. As a result, you typically don't "break even" until close to a decade when the sum of your premiums are greater than your CSV.

So how would you build up the CSV relatively quickly and not need to wait a decade? Apparently you can make bolus deposits into the policy as Paid Up Additions - basically buying mini policies that get added to your bigger policy. These PUAs will increase your CSV and Death Benefit and also increase the dividends you receive each year. There is a maximum amount per year that is set by CRA, so you can't go crazy here.

What's the catch?
This section is where I have a lot of gaps, and I'm hoping we can get some discussion here around them. I've highlighted a few things I've been able to come up with...
  1. You need a lot of capital and time to make this strategy work. I'm talking 5-figure annual premiums and still not hitting breakeven point until Year 9 or Year 10 depending on your age, health, and death benefit coverage requirements. The older you are, the more money you're going to be putting into the death benefit portion of the policy and not growing your CSV. Take the equivalent term life insurance and you're paying 1/20th of the premiums.
  2. Your annual dividend scale interest rate is at the mercy of the insurance company, and it has been decreasing every year these past 5 years due to a low interest rate environment. Currently Manulife and Sunlife are at 6%. I've read that these usually lag the bond market, and it is likely that the interest rates will continue to fall in the near future.
  3. I don't know what kind of interest rates will financial institutions charge for the LOC. What you're essentially doing is "profiting" from the difference between the cost to borrow and your expected returns. If anyone has implemented this strategy, are you getting Prime? Prime + 1%?
  4. It's a whole life policy, so you're going to need to pay premiums until the day you die, especially if you've taken out LOCs with the policy as collateral. Once you start you can't really stop.
  5. A lot of the "marketing" material, especially when you search for Infinite Banking Concept on Google, says to purchase a policy from a mutual insurance company - one that is owned by its policy holders. I believe the strategy here is to obtain the LOC from said insurance company, and any interest you pay on your loan is "returned" back to you because you're part owner of the insurance company. Not entirely sure how this would work out as the insurance company needs to make money somehow. If they're charging you 3% interest you're not getting that full 3% interest back as dividends.

Why I'm thinking about it?
Instead of an informal trust account, I was thinking of taking out a policy for my children. The premiums would be a couple hundred a month, and they wouldn't need access to the CSV until they're >20 years old for any big purchases. Tax-wise it seems less complicated than an informal trust account where the dividends and interest can be attributed back to me.

Anyway food for thought. Please discuss.
8 replies
Member
Feb 26, 2005
241 posts
113 upvotes
London
Just wanted to add that dividends are specific to participating life insurance policies, which are a type of whole life insurance. There are other types of whole life insurance policies which do not pay dividends though.

The amount of paid up additions you can purchase depends on the dividend scale in place which, in turn, depends on other factors like the interest rate. In a low interest rate environment, it may take a while until you accumulate a significant amount of paid up additions. There’s no reason to think that ten years is a magic time period after which you’ll have accumulated a significant amount.
[OP]
Sr. Member
Feb 14, 2005
817 posts
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Toronto
Planker wrote: Just wanted to add that dividends are specific to participating life insurance policies, which are a type of whole life insurance. There are other types of whole life insurance policies which do not pay dividends though.

The amount of paid up additions you can purchase depends on the dividend scale in place which, in turn, depends on other factors like the interest rate. In a low interest rate environment, it may take a while until you accumulate a significant amount of paid up additions. There’s no reason to think that ten years is a magic time period after which you’ll have accumulated a significant amount.
Good point about participating policies.

And yes I was using 10 years as it was the mode given to me by my broker and based on my age and death benefit requirement. For others the break even point may be shorter or longer. There were also comparison models if the dividend scale interest rate dropped by 1% or 2% and this pushes the break even point out even further.
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I think @xgbsSS started a similar thread a while back, with some very good info as well?
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Some comments:

You need to be clear that those trying to utilize this should exhaust all other tax shelters such as RRSP and TFSA. In the majority of cases, people are better off saving in these vehicles.

You need to buy a policy that is conducive for your plan. You need to really front-load the policy, so you should utilize a yearly/annual renewable term and utilize the low cost of insurance to build a nest egg

Whole Life is much more difficult to deposit around. You have a set investment that makes it harder to tailor your needs. Also, many Whole Life policies have more restrictions making it difficult to overfund as much as Universal Life. For that reason, I prefer Universal Life

Depending on how you set up the policy, you may have selected a policy where the cash value is not paid out. You need to be careful not to do this. While this reduces your insurance cost, if you haven't selected this, you are out the cash value on death.

Most life insurance companies don't offer Line of Credit directly. They can offer policy loans but the interest rate is very high at most places. Equitable Life is 6.7%. You can go to a bank that offers line of credits on life insurance policies such as Manulife, or EQ Bank and these are closer to prime. But we need to be careful because we assume the ability to borrow will exist in the future,. Your creditworthiness is also a factor

When you are about to utilize the funds, you may need to consider switching the investments to a daily interest savings or GIC equivalent under the UL policy. By doing so, this increases cash value that can be accessed. If you utilize equity linked, the max cash value you can borrow against can drop significantly (~50%)

Taxes: There is one time premium taxes when paying into a policy depending on the province of 2-5% on premiums deposited. This can eat a lot of the initial cash value.

Your health: What if you don't qualify at a good rate? If this is the case, insurance might not be a great option.


TLDR, this option should only be considered if you are high income, healthy and have maxed all your other tax shelters and have significant non-registered already. Perhaps if you are in this instance, the issue is whether you need more investment options, or perhaps you just need to spend more money in life in general? These plans can work, but if you are considering them, people should do their homework.

I am fairly happy with mine, except I probably could grow my money better in non-registered, but the taxes become significant.

And whatever you do, don't buy from a Greatway, Primerica, or World Financial Group Agent.
Fund options. Each company has their own options. Many are expensive or not compelling funds. Index may sound better, but in this case, the fees are expensive so you will be underperforming the index. I generally pick options that show good return.

Mutuality or not? Really depends. Most Canadian mutual insurance companies like Equitable don't pay ownership dividends regularly, so the benefit because it is a mutuality is fairly low. I would base it on the cost of insurance and investment options. There could be a potential payout should the mutuality decide to demutualize (Manulife and Sunlife used to be mutualities. You can also see Economical Insurance is currently doing the same.). This can become a huge payout but that assumes the company plans to and the company is financially successful.
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[OP]
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Feb 14, 2005
817 posts
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Awesome stuff @xgbsSS. Lots of questions for you below.

Can you clarify what you mean by "utilize a yearly/annual renewable term"? I've only seen this strategy described with whole life policies. The sample I got was based off the Sunlife Par Accumulator II product.
xgbsSS wrote: Whole Life is much more difficult to deposit around. You have a set investment that makes it harder to tailor your needs. Also, many Whole Life policies have more restrictions making it difficult to overfund as much as Universal Life. For that reason, I prefer Universal Life
Are you referring to the annual limits set by CRA that limit the amount of PUAs you can buy before they start taxing you? And a UL policy doesn't have such limits?
xgbsSS wrote: Depending on how you set up the policy, you may have selected a policy where the cash value is not paid out. You need to be careful not to do this. While this reduces your insurance cost, if you haven't selected this, you are out the cash value on death.
The Sun Par Accumulator II increases Death Benefit and your CSV as you pay your premiums, so your Death Benefit always exceeds your CSV. So on that note, your CSV is "forfeited" upon death. How it was explained to me is that you wouldn't get both CSV and Death Benefit, otherwise you're getting free money. What products out there would pay both Death Benefit and CSV?

xgbsSS wrote: Most life insurance companies don't offer Line of Credit directly. They can offer policy loans but the interest rate is very high at most places. Equitable Life is 6.7%. You can go to a bank that offers line of credits on life insurance policies such as Manulife, or EQ Bank and these are closer to prime. But we need to be careful because we assume the ability to borrow will exist in the future,. Your creditworthiness is also a factor
Thanks. I figured this was the case where policy loans have much higher interest rates. In theory though, would it be easier to borrow against an insurance policy versus getting a HELOC? The bank is going to collect their money, regardless if you live or if you die, through the CSV or Death Benefit.

xgbsSS wrote: When you are about to utilize the funds, you may need to consider switching the investments to a daily interest savings or GIC equivalent under the UL policy. By doing so, this increases cash value that can be accessed. If you utilize equity linked, the max cash value you can borrow against can drop significantly (~50%)
I assume you do so to access a higher LTV by reducing risk to your CSV? Doesn't that kind of defeat the purpose of the strategy to continue recognizing set returns at a rate that is higher than your loan interest rate?

Thanks!
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Is the insurance company loosing money on this product? If yes, there must be glitch how it is set up. No company is in the business to loose money. Eventually they will figure it out.
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raxen wrote: Awesome stuff @xgbsSS. Lots of questions for you below.

Can you clarify what you mean by "utilize a yearly/annual renewable term"? I've only seen this strategy described with whole life policies. The sample I got was based off the Sunlife Par Accumulator II product.
Universal Life policies generally are priced in two ways: level cost or annual renewable. Level cost means the cost of insurance is the same each month. Annual renewable is similar to getting a 1 year term insurance policy. The price is super cheap at the start and it gets higher later. When using life insurance to build wealth, and you are still somewhat young, you should use annual renewable and overfund the policy. This allows you to accumulate and compound on the cash value before the cost of insurance gets higher. Once you have achieved a high cash value, you switch to level cost which will then lock you in at the level cost at the age you do it at. It goes higher but you are now down accumulating funds, so do not want to increase you insurance costs further,.
raxen wrote: Are you referring to the annual limits set by CRA that limit the amount of PUAs you can buy before they start taxing you? And a UL policy doesn't have such limits?
No. Whole Life contracts tend to be built less flexible. Some don't allow you to deposit more than you want at any time. This makes it harder to implement the strategy, but again, it more depends on the policy you buy. UL tends to be more flexible. It is however still subject to the 7 year rule and 300% rule set by the CRA etc.
raxen wrote: The Sun Par Accumulator II increases Death Benefit and your CSV as you pay your premiums, so your Death Benefit always exceeds your CSV. So on that note, your CSV is "forfeited" upon death. How it was explained to me is that you wouldn't get both CSV and Death Benefit, otherwise you're getting free money. What products out there would pay both Death Benefit and CSV?
Depends on the life insurance contract. Whole Life often doesn't pay it out, this is how it can provide higher dividend yields. UL policies, you select the payout you want and in general, you can elect to go with one vs the other.
As an example, Equitable Life' Generation IV Universal Life Account Value Protector vs Level Protector (see pg 7 of this PDF)
https://cdn.equitable.ca/forms/unsecure ... e/1155.pdf

However, if you do elect to protect your cash value, that also means the cost of insurance goes up higher for that privilege. Remember, it really depends what you want the life insurance policy to do for you. If all an annuitant wants to do is to maintain the death benefit for their beneficiary, going level protection is cheaper and makes it easier to maintain the policy's cash value to cover for the entire life of the annuitant.
raxen wrote: Thanks. I figured this was the case where policy loans have much higher interest rates. In theory though, would it be easier to borrow against an insurance policy versus getting a HELOC? The bank is going to collect their money, regardless if you live or if you die, through the CSV or Death Benefit.
Impossible to answer. HELOCs are much more common, there are many more options and competition is high. Therefore it may be easier to get a HELOC. From a bank's perspective though, cash value and death benefit payout is likely to be more guaranteed and easier to receive. But there are not many places that offer it.
The bigger issue is your own credit quality, and the credit market in general in the future. The problem is, if credit markets become rigid in the future, or interest rates are much higher, it might not be worthwhile to borrow against it. This is the risk someone takes utilizing this strategy.
raxen wrote: I assume you do so to access a higher LTV by reducing risk to your CSV? Doesn't that kind of defeat the purpose of the strategy to continue recognizing set returns at a rate that is higher than your loan interest rate?

Thanks!
Depends what you want and how old you are at the time. If you are 80 years old, do you really care that much of continued growth of your funds? If you want to borrow a ton of money for a last shebang, you may want to change the portfolio (this is mostly Universal Life I am talking about here) to bonds or cash savings so the lending bank will let you borrow further against your cash value.
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