Just because it comes south of the border doesn't mean it works - Pay heed to the Infinite Banking Concept …
A new insurance planning concept from south of the border is making its way to Canada. The Infinite Banking Concept is being marketed to Canadian advisors as a life insurance-based retirement strategy that provides personal financing opportunities more efficiently than traditional loans from a bank.
With this strategy, a client purchases a participating whole life insurance policy. Maximum deposits are paid for a period of time (they recommend 5 to 7 years) in order to create significant cash value in the policy. The cash value is positioned as a finance vehicle that can be used to meet cash flow needs in the future. The concept recommends policy loans as an effective way to access the cash value as opposed to borrowing money from a bank or other lending institution. The materials outline a number of reasons why this is prudent planning including:
After the premium payment period the policy is self-supporting and policy returns are sufficient to cover future premiums.
Life insurance is a low risk investment with guaranteed returns.
Paying policy loan charges can supercharge returns in the policy.
Policy owners are able to borrow up to 100% of the cash value of their policy tax free.
Paying policy loan interest charges is paying yourself compared to bank interest charges that are an out of pocket expense.
If structured properly the concept offers no exposure to taxation.
Insurance policies are safe from exposure to litigation and creditors.
Although this strategy may have broad appeal in the United States, advisors should consider the following issues in Canada before marketing the strategy:
Participating whole life insurance policies do not offer 100% guaranteed solutions.
Quick pay participating whole life insurance solutions may or may not be sufficient to cover future premium requirements. They are not guaranteed.
Policy loans in excess of the Adjusted Cost Basis (ACB) of a policy are treated as a taxable policy gain. There is no guarantee that 100% of all policy loans will be received tax-free.
Payment of policy loan interest and repayment of policy loans does not increase the return to the specific policy; it merely ensures what will be received at death is not diminished by these liabilities.
Paying policy loans and bank loan interest is a cost to the policy owner. Often policy loan interest rates exceed bank loan rates.
Note: Canadian participating whole life policies typically operate independent of policy loans. Dividends and all other policy values are the same whether or not a policy loan exits. The loan acts as a lien against the surrender value or death benefit generated by the policy, but otherwise has no impact on policy performance. Thus, any interest paid on a policy loan is an expense to the owner of the policy and in no way improves the returns in the policy.
Creditor protection is only available where certain beneficiaries are named and can have limitations based on competing legal rights.
Policy loans, policy withdrawals and collateral loans are different ways for clients to access the cash value of their life insurance policy. Each option has potential tax, fee and transaction issues that must be considered from a Canadian perspective.
There is a lot of chatter in the marketplace regarding the Infinite Banking Concept. It is attracting attention of many advisors. In as much as it feels like an exciting new insurance concept with nothing but upside for clients, it is clear the benefits under the concept are significantly different in Canada and to suggest otherwise is a potential problem for everyone.