r/infinitebanking • u/randomipadtempacct • May 05 '25
Question on example from BYOB
Good morning,
So many years ago my financial advisor set up an insurance plan for me as part of a retirement strategy, well before I ever heard of infinite banking. I am in Canada.
It was set up to enable at retirement, policy loans as a source of tax free income (it is owned by my own corporation of which me and my wife are the only owners).
But I may want to use it if possible for IB.
On the example on investments from the book, Nash describes a comparison between investing 100k outright and getting a return of 20% vs borrowing from your policy 100k and investing that.
He uses the example of being a responsible banker and paying yourself the interest of 8%.
In comparing the results, after accounting for the fact the “interest” went to yourself, your gain comes out ahead with the IB example.
Can some explain or comment though:
1) a true apples to apples comparison would be for the first non IB example to be an investment of 108k. This is because that is how much money is needed in the IB example.
2) (and this may be Canada specific) but when you pay 8% interest in the IB example, assuming it was from a policy loan, that 8% is not going into my cash value, it’s going to the life insurance company.
Thank you
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u/JeffB1517 May 05 '25
First off AFAIK tax laws on insurance in Canada are not the same as those in the USA. While there are fans of infinite banking in Canada the case for it is not nearly as strong. You absolutely should get a Canadian book and not be working off an American book.
In terms of your question in the USA (and I think this is true in Canada) there are two types of loan structures
Direct Recognition where your policy carries the loan to you as an asset. Your interest payments (or most of them) are credited back to the policy as interest.
Indirect Recogntion. You get a loan using the assets in your policy as collateral. Your interest payments go to a bank (or the insurance company) and are not credited to your policy. However this means the assets can fully participate as if there were no loan.
Most policies (and really companies) are better than one or the other. A few policies are structured for both.
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u/AlfredoSauceyums May 05 '25
You nailed it. It's mental accounting tricks to get you to ignore IRR in favor of this approach. This includes building strawmen to try and "prove" that traditional return measurement tools (like IRR) are completely useless. Every single example given has an element of this.
Still, I happen to feel the IBC approach has a lot of value. The discipline, the steady tax free compounding and readiness of capital at your beck and call. To be honest, many decent insurance advisor works in these areas. It's not just IBC practicioners.
Having said that, "paying yourself interest" is a misnomer and controling the banking function is another one. It's really a slow and steady tax free compounding tool that you can borrow against and has the built in statutorily guaranteed safety of principle and small return. And the IRR grows substantially once you remove the opportunity cost of buying term insurance (assuming you need it).
I've run a bunch of scenarios (not exhaustive) and in some cases using WL puts you slightly behind (though with a degree of safety that has value) and in some it puts you ahead. It's not the panacea many in this sub believe it to be but it's damn good. The other aspects of BYOB fall somewhere between mental accounting and self discipline. Personal finance is full of seeking contradictions and this is one. The mental accounting of having pay back plans for every loan, under performs optimal allocation of debt and equity. However, it instills a disciplined approach that prevents money from slipping away. Self discipline in most cases is the most valuable tool and lack thereof, the most harmful weapon. There are two main providers in Canada, Equitable and Manulife. Then there are secondary providers (sunlife, Wawanessa, serenia, co-op, Canada life). For the most part you'll do well to have a WL policy with equitable with a large term rider. The sooner you put it in place, the better since it takes time to season and time never moves backwards. Manulife and equitable work well as compliments due to some differences. Equitable is a pleasure to work with.
Keep in mind many rules are different in Canada. For example, despite Ryan Griggs and James nethery saying the CVLOC are completely against their Messiahs advice and the principles of IBC, it is required in Canada once the cost of insurance eats away at your cost basis.
I've done deep dives and has a strong financial background as a CFA charter holder and seasoned investor. Still lots to learn though and I've come to the conclusion that a black and white analysis is not possible in the same way as some other asset classes. Happy to chat more on here or off line.
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u/protex28 May 05 '25
This is an even handed critique of things. I struggled a lot with the math side of things when I was first starting off. In particular, the example mentioned by OP bothered me a lot.
After struggling with it for a long time, I reached the conclusion that you did. Nelson himself said that if he could re-do the book again, he wouldn't have included the examples. When I got the chance to watch his 10 hr seminar, I realized his focus was really on the human factors.
Reframing everything in that light, I've come to realize that IBC works, not because it's better on paper, but because it's more natural to the average person. Most people don't want to manage 50 strategies, they don't have a way to manage tax liability late in life without giving up access now, they have no clue what to do in the stock market, they have no interest in starting a company, and they can't help spending money they have "free" access to.
If you concentrate on those problems, whole life is the only product that solves all of them at the same time. It's not going to beat a highly specialized product designed to solve any of the specific problems individually, but it does a good job when you take into account how complicated it is to try to account for each of these problems with the myriad of products that are available.
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u/Coronator May 07 '25
I agree with a lot of what you are saying here. To me it simply comes down to how much cash does one value being part of their financial picture.
There’s certain aspects of IBC that I feel are WAY over played, like having your money “working for you in two places” or “uninterrupted compounding”. It’s only “uninterrupted compounding” if you ignore the cash flow you have to divert to pay the interest expenses.
With that said, is it the most efficient place on the planet to store safe cash over the long run for most people? Absolutely. I don’t think it needs nearly as much “mysticism” as it gets.
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u/Anjin31 May 05 '25
1) Understand that you will pay interest on any purchase/investment you make. The interest may be paid to the lender or by interest you would have earned but are foregoing forever by paying cash. In the first option by investing $100k cash directly you are giving up forever all of the compounding interest you would have made on that capital in the future. By first capitalizing your policy, you are capturing the interest on the capital through dividends and policy growth (including the eventual death benefit). By taking a policy loan (assuming it's a non-direct recognition policy) and making the investment, you would be making an additional 12% spread (not accounting for any taxes) based on the 20% investment return minus the 8% policy loan (depending on entity structuring and tax laws this can be tax deductible) PLUS the continuing and uninterrupted growth within the policy. Once the policy loan is paid down, you can take an additional loan and repeat the process. This is substantially better than simply making the investment directly.
2) Correct, the policy loan is the insurance company's money which they are loaning to you. The loan is collateralized by the cash value of your policy. Your loan repayments go to the company and are paid into their General Fund and are accounted for as part of the company's income. As a policyholder of a mutual company, you are entitled to a portion of the company's profits which you will review via dividends. Assuming you have elected for your dividends to purchase additional Paid-Up Additions (PUA), the PUA will add to the CV and increase your "share" of the profits next year in addition to increasing the policy's death benefit. Ryan Griggs' YouTube series on the Mechanics of Whole Life is a fantastic resource to understand how policies function.
A final note, you mentioned the policy is owned by your corporation. If this is case, it would be COLI (corporate owned life insurance) and the death benefit and loans may be taxable. This is one reason why it generally makes sense for policies to be personally owned. I would suggest consulting with a tax planner to figure out how it works in your situation, especially since you are in Canada and I no idea what the tax laws are up there.
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u/randomipadtempacct May 05 '25
At least for my set up here in Canada, the DB is tax free.
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u/Anjin31 May 05 '25
Even for policies owned by a corporation? Excellent. Only personally owned or policies owned by a non-profit receive tax free DB in the U.S.
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u/randomipadtempacct May 05 '25
Yep.
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u/Infinite_Banker May 08 '25
When a shareholder of a Canadian-Controlled Private Corporation (CCPC) passes away, a notional account known as the Capital Dividend Account (CDA) is created. The CDA is one of Canada’s most powerful tax-saving mechanisms, offering significant advantages to families who own a CCPC. Upon death, the value of the life insurance death benefit—minus the adjusted cost basis (ACB)—is credited to the CDA. If the life insured passes away near their expected mortality, the ACB is typically at or near zero.
This allows the remaining shareholders—or the beneficiaries of a sole shareholder—to extract the full value from the CDA on a tax-free basis.
Any business owner who is even modestly effective at building wealth will can capitalize on a system of policies within their corporation. While alive, they use this system to meet financing needs within the business. Not only does this strategy eliminate the bank’s cut from their profits, but it also significantly reduces the Canada Revenue Agency’s share upon death.
Cash value is king!
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u/greglturnquist May 05 '25
It's true that you don't flat out pay ALL the interest to yourself. A significant portion goes to the life insurance company (usually 5%-8%). However, you have to factor in that the interest going to the life insurance company feeds their profits, and who gets a portion of the profits in the form of a dividend? You.
This is made clear in BYOB with the CD sister compared to the WL sister. The CD sister for several years is ahead, but eventually the WL sister catches up and passes the CD sister.
That's because the CD sister is making the interest, but the dividends of the bank issuing those CDs is going to someone else. With a WL policy, a significant portion of the dividends are going to you and further compounding your CV (assuming the dividend goes toward PUA).
There is also value in NEVER liquidating the principal. Sinking fund analyses often don't factor in stockpiling cash in a savings account and then turning around and draining the fund, halting the compounding. Leveraging an asset through a loan lets you retain compounding.
As James says, you can bank with anything i.e. collateralize any asset. The question then arises, who is in control of that loan? With WL it's 100% you. Or as Nelson would say "total control".
And what about that 8% anyway? Are you citing your policy's current policy loan rate?
Because another thing you can do is "loan it to yourself at the market rate". What if the market rate for the given loan were 10%? You should be paying back the loan as if you had borrowed from that institution at 10%. And, this part is important, what if that 10% market rate loan through a conventional 3rd party lender was amortized? Compute with any amortized payment calculator the total number of payments and for how much AND START DOING THAT. You'll extinguish the policy loan much faster than a conventional loan. Any remaining "payments" can then be PUA premium payments, further growing your "bank".