How Do You Start? The First Steps of the Method, in Order

Most people meet this idea the same way. A friend mentions it, a video makes it sound simple, and within a week someone is offering to run an illustration. That is the wrong place to begin. The policy is the last thing you choose, not the first.

Why does the order matter so much? Because nearly every disappointment with this approach comes from a step taken too early. A premium chosen before the budget was written down. A contract signed before anyone read the guaranteed column. A first loan taken before there was a plan to repay it. Each of those mistakes is easy to avoid when the steps come in the right order, and expensive to undo once the contract is in force. The early years of a specially designed, high-cash-value, participating whole life insurance policy are the years when walking away costs the most.

So this page sets out the sequence, from the first evening of reading to the first policy loan, and then the habit that follows it. It does not tell you to start. For many households the honest answer is not yet, or not this way, and you will find that answer here too. What it gives you is the order, the question to ask at each step and the page on this site that goes deeper into each one.

Here is the short version, and then each step in turn.

What are the first steps, in order?

Learn the method before you look at a policy. Check your foundations. Write down what you would finance. Set a premium your income can carry for decades. Sit down with a licensed insurance professional and your accountant. Go through underwriting. Read both columns of the illustration before you sign. Pay premiums through the early years. Then take a first policy loan with a written repayment plan.

Those are nine steps, and the order is the point. Each one answers a question the next one depends on:

1. Learn how the method works, from the idea to the contract.
2. Check your foundations: protection, an emergency reserve and high-interest debt.
3. Decide what you would actually finance, and write it on one page.
4. Find the premium your income can carry, year after year.
5. Choose the people who will help: a licensed insurance professional, your accountant and, where needed, a lawyer or a notary.
6. Apply, and go through medical and financial underwriting.
7. Read the illustration, both columns, before you sign.
8. Live through the early years: premiums paid, cash value building slowly.
9. Take the first policy loan with a written repayment plan, and review the whole arrangement every year.

None of these steps is complicated. What makes them hard is patience, because steps one to five happen before anything is bought, and step nine may be years away.

Step 1: Why learn the idea before you look at any policy?

Because a contract cannot explain itself. An illustration shows columns of numbers. It does not tell you why anyone would hold capital in a life insurance contract, what the policy loan is for, or what discipline the arrangement asks of you.

The method known as infinite banking was described by Nelson Nash in his book Becoming Your Own Banker®, published in 2000. The idea, in plain words, is about who finances the purchases in your life. Most households pay a lender interest for cars, equipment and other large purchases. Nash asked what would change if a family built up capital first, financed purchases against that capital and repaid on a schedule as disciplined as any lender's.

In Canada the tool he described is a participating whole life policy, and the financing is a policy loan. Two facts belong next to that sentence. A policy loan is an amount the insurer advances to you under the terms of the contract; you do not lend to yourself, and the interest is paid to the insurer. And the contract is life insurance, not an investment, with a death benefit as its first purpose.

Our hub page on the method in Canada explains how it works, what it costs, who it suits and where the case for it is weakest. Read it before step two. If, by the end, the idea does not make sense to you, stop there. That is a good outcome too.

Step 2: Are your foundations in place?

This step is about everything that should come before a permanent policy. Three things in particular.

The first is protection. If someone depends on your income, the amount of life insurance they need may be larger than any permanent policy you could comfortably pay for. Term insurance is often how that need is met first, and a permanent contract is added later, when the budget allows. Whether you need permanent coverage at all is a real question, and this answer on whether you need permanent life insurance is the test that comes before any of the method's other questions.

The second is an emergency reserve. A participating policy is built to be held for decades. Money you may need next month for a lost job, a repair or an illness belongs somewhere you can reach without a loan and without a cost.

The third is high-interest consumer debt. A credit card balance at a high rate is usually cleared before a household commits to a long premium. Paying it off removes a cost you already know, and it frees the cash flow the premium will need. The family finance section of this site covers the budget, reserve and debt questions that come before any policy.

A family with a mortgage and young children often has all three questions at once. Starting with a mortgage and young children walks through that situation, and it is honest about how often the right first step is term insurance and an emergency fund, with the permanent contract later.

Step 3: What would you actually finance?

Before any premium is set, write down the purchases you expect to make over the next ten or fifteen years. Vehicles. Equipment for a business. A roof. Education. Then ask a plain question of each one: should this come from the monthly budget, from a reserve, or from financing that you repay on a schedule?

Not everything belongs in the third column. Small and frequent expenses belong in the budget. Emergencies belong in the reserve. The method is built for larger purchases you would otherwise finance with a lender, and deciding what the system should finance sorts the common cases.

Then put it on one page: the purchases, roughly when, how each would be paid for and how each loan would be repaid. A family financing plan on one page shows the layout. This sheet becomes the brief you bring to step five. A professional who designs a contract without asking what it is meant to finance is designing it for someone else.

Step 4: What premium can your income carry?

This is the step that decides most outcomes.

The premium is not a monthly saving you can pause when a month is tight. It is a contractual payment, and the contract is designed on the assumption that it will be paid for many years. So the right figure is not the largest one you can manage in a good year. It is the one you can keep paying in an ordinary year, and still keep paying in a hard one, without touching your emergency reserve.

Start from your own budget, not from an illustration. Look at what is left after essentials, protection, the reserve and debt repayment. Then take a cautious share of it. If your income is uneven, as it is for many business owners and commissioned workers, plan around the low years rather than the average. How stable does my income need to be covers that question in detail.

Nash also taught that the premium can grow with your income over time, with a second policy added later rather than one large policy bought too early. Premiums that match your income explains that idea and its Canadian limits. The practical lesson for a first start is simple. A premium smaller than the one you think you could manage is usually the wiser beginning. Keep the schedule you set.

Step 5: Who should you sit down with?

Three kinds of professional, each for a different part of the work.

The first is a licensed insurance professional in your province. In Quebec that is a Financial Security Advisor certified by the Autorité des marchés financiers (AMF); in the other provinces it is a licensed life insurance agent. Look for someone who has designed these contracts for years and who will still be there for the yearly reviews, because the arrangement unfolds over decades. A designation on its own tells you someone studied the concept. Years of licensed practice tell you they have seen contracts through good and bad dividend years, loans taken and repaid, and the questions families actually ask at year ten.

The second is your own accountant. The tax rules that matter here are specialised: the exempt test, the adjusted cost basis and the treatment of a policy loan. If your accountant has not worked with participating policies before, that is fine; ask the insurance professional to provide the figures and let the accountant check them.

The third, where ownership, a corporation, a trust or an estate is involved, is a lawyer or a notary. Who owns the policy, who is insured and who is named as beneficiary each have consequences that last as long as the contract does.

Bring your one-page sheet from step three to the first meeting. Ask how the professional is paid; in this field the usual answer is a commission from the insurer, and you are entitled to know that before you go further.

Step 6: What happens when you apply?

The insurance professional proposes a design and, with your agreement, submits an application. The insurer then underwrites it. Medical underwriting looks at the health of the person insured: questions, sometimes tests and sometimes records from your doctor. Financial underwriting looks at whether the amount of coverage makes sense for your income, your net worth and the need it serves.

Two decisions are made at this step and both deserve care. Who owns the contract, and who is the insured person: they are often the same, but not always, and the choice affects taxation, control and what happens at death. And who is the beneficiary.

The insurer may accept the application as proposed, accept it with a different rating, postpone it or decline it. A rating changes the cost, and a changed cost goes back to step four. Do not let the excitement of an approval carry a higher premium past the budget you wrote down.

Step 7: How do you read the illustration before you sign?

An illustration is not the contract. It is a projection prepared under stated assumptions, and it prints at least two sets of numbers. The guaranteed values are what the insurer owes under the contract, provided premiums are paid. The illustrated values add dividends at the insurer's current scale, and dividends are not guaranteed. The insurer's board declares them each year, based on how the participating fund performed. A lower dividend slows future growth but does not reduce cash value already credited.

Read the guaranteed column first. Then find three things in both columns: the cash value at the end of year one, year five and year ten; the year in which the cash value first passes the total premiums paid; and what happens to the contract if you stop paying premiums in year three. Ask for an illustration at a lower dividend scale as well, so you can see the range rather than one line.

Reading the cash value table explains each column in plain words. Take the illustration to your accountant, and ask one more question in writing: will the policy remain an exempt policy as designed? An exempt policy is one the Income Tax Act allows to grow without annual tax on the growth, and a design that ignores that limit can create a tax bill no one expected.

A sound test before signing: can you explain, in your own words, what you are buying, what it costs in the early years and what you would do if your income fell?

Step 8: What do the early years ask of you?

Mostly patience. The first premiums carry most of the contract's costs, so cash value builds slowly at first, and for some years it is below the total premiums you have paid. That is not a loss in value. It is the shape of the contract, and it is why surrendering a policy in its early years usually returns less than was paid in.

This is the stage Nash called capitalization: building up the capital before you use it. Capitalization before use explains why the arrangement is built before it is used, and how long before the system can finance a purchase looks at the stages in more detail.

What helps most in these years is ordinary. Pay every premium on time. Keep the emergency reserve separate. Read the annual statement when it arrives and file it with your one-page sheet. If a paid-up additions rider is part of the design, the page on paid-up additions explains what that rider does and the limits on how much it can receive.

Step 9: When is the first policy loan, and what happens with it?

The first loan should be for a purchase on your one-page sheet, taken when the cash value can support it comfortably and not at the edge of what is available.

Here is what actually happens. You ask the insurer for a policy loan. The insurer advances its own money to you, under the terms of the contract, and holds your cash value as security. Interest is charged at the insurer's rate, and that rate can change. Interest you do not pay is usually added to the loan, often at the policy anniversary. Your net value is the cash value minus what you owe, and an unpaid loan that grows faster than the cash value eats into it. Any loan still owed at death is deducted from the death benefit.

There is also a tax point. Section 148 of the Income Tax Act treats a policy loan as a disposition of an interest in the policy. When the loan is larger than the policy's adjusted cost basis, the excess is included in your income. Ask the insurer for the adjusted cost basis before you borrow, and have your accountant check it.

Then write the repayment plan before the money arrives: the amount each month, the start date and the date the loan should be cleared. The discipline is the same one any lender would ask of you. After the policy loan: the first thirty days sets out what to do once the loan is paid out, and the policy loans page explains the mechanics in full.

What comes after the first loan?

A habit. Once a year, sit down with the annual statement, the one-page sheet and your professional. Look at the loans outstanding and the repayments made. Check that premiums are still comfortable. Note the cash value, the death benefit and the adjusted cost basis. Then look at the purchases ahead and decide which, if any, the arrangement should finance next.

The yearly review gives that meeting a structure. It is also the moment to ask whether a second policy makes sense, if your income has grown, or whether the premium needs attention, if it has not.

Where does a start usually go wrong?

Here is the part nobody likes. Most of the ways a start goes wrong are visible in advance.

A premium set at the edge of the budget is the most common. One hard year and the contract needs a premium it cannot get. The options a contract may offer at that point (using dividends, reducing coverage, an automatic premium loan) each have a cost, and some of them change the arrangement for good.

The second is a first loan taken too soon, or for something that was never on the sheet. A loan with no repayment plan is not financing; it is a slow claim against your own cash value.

The third is reading only the illustrated column. If you ever find yourself relying on a number that depends on dividends, you are relying on something the insurer does not owe.

The fourth is skipping step two. A household without enough protection or without a reserve carries risks that a permanent policy does not solve. The mistakes that stall a family financing system covers these and a few more, with their warning signs.

What this page will not tell you

It will not tell you what premium to pay, which insurer to choose or how to design a contract. Those depend on your age, health, income, family and goals, and they are decided with a licensed insurance professional and your accountant after the first five steps. It gives no figure for cash value or for the year a first loan becomes possible, because both are printed in your own illustration and differ from one contract to the next. It does not give tax or legal advice: the tax points above are general rules from the Income Tax Act, and how they apply to you is a question for your accountant.

Who this does not suit

This approach does not suit someone living outside Canada, since these contracts are issued to residents. It does not suit someone with no stable income, for whom the better first step is building a surplus. It does not suit someone whose horizon is shorter than many years, because early values are lower than the premiums paid. It does not suit someone carrying high-interest consumer debt, which should be cleared first, or someone looking for market returns, because this is insurance and does not behave like an investment. And it does not suit anyone who does not intend to repay what they borrow. If any of those describes you today, the first steps are still worth reading. They are simply the first steps toward something else for now.