A private family bank can essentially allow wealthy Canadian families to preserve their wealth and grow it. A private family bank ultimately helps with succession planning. As per a report by Family Enterprise, nearly 50 percent of the GDP in Canada is generated by family-owned businesses, year on year.
Clearly, planning is necessary to pass on the wealth and legacy. Read ahead as we introduce you to the various benefits, risks, and other aspects of private family banks.
A private family bank is a financial strategy that helps any kind of family to create their own banking system. A private family bank can be created using whole life insurance policies. As James Chen of Investopedia states in his article titled “What is Private Banking? Definition and How It Works”, private banking can give you a lot of perks, privileges, and personalized service.
It’s important to note that this ‘private family bank’ is not a chartered bank; rather, it’s a wealth-building approach using specially designed participating whole life policies.
The idea of a private family banking system is to design family wealth across generations. It will help you reduce your reliance on a traditional bank and even provide a means to borrow against the cash value of your life policy.
Our team of experts at IBC Financial is keen on guiding you through the private family banking concept. This can help you handle your personal finances with ease.
A private family bank works as a structured financial system. A private family bank works by allowing families to manage their wealth and also offer financial assistance. As per Cynthia Bowman in her article titled ‘What is Infinite Banking: What Is It and How Does It Work?’ for NASDAQ, it helps you become your own bank by taking loans against your permanent life insurance plan.
The foundation of private family banking is whole life insurance policies, here’s how:
You have to purchase a whole life insurance policy that will accumulate cash value over time. This way, you can access this cash value with the help of loans without affecting the growth potential of the policy.
Once enough cash value has been accumulated, you can borrow against it. Also, since this is a private agreement between you and an insurance company, you will have flexible repayment terms.
You can fund your investments using the cash value you accumulate and use it for emergency purposes.
There are several benefits of a private family bank. The benefits of a private family bank include financial flexibility, tax benefits, and wealth preservation. According to Clayton Jarvis’s article ‘Infinite banking, or how to keep your money and spend it too’ for Financial Post, getting loans from your insurance provider is much smoother as compared to other lenders.
Here are the benefits of family banking.
With IBC Financial, you can understand the ins and outs of private family banking before diving in.
There are some risks in using a private family bank. Risks of using a private family bank include higher premiums. As per Darius Britt, in his article titled “The Ultimate Private Banking Guide” on Wealth Nation, usually with private family banking, the starting death benefits are lower.
Risks like unpaid loans can reduce the death benefit for beneficiaries and can even impact future financial security. Here are some of the other common risks:
Despite having lower starting death benefits, private family banking contracts tend to accumulate more wealth. Paid-up additions can help you speed up the process. But be careful while overfunding.
Beyond a certain limit, you may experience some issues. To avoid such problems, you can use the expertise of the IBC Financial team.
You can qualify for private family banking by keeping in mind a few considerations. You can qualify for private family banking by establishing financial readiness. According to a Forbes article titled “Tips For Setting Up Your Own Family Banking” by Garrett Gunderson, the specifics of setting up a family bank depend on your particular goals.
Here is how you can qualify for private family banking:
At IBC Financial, we aim to guide you through the complexities of insurance policies.
Private family banking, compared to traditional banking, offers you more flexibility. Private family banking is compared to traditional banking, usually in terms of structure and control. As Sylwia Malowska of Netguru has pointed out in her article titled “Private Banking versus Family Office,” both approaches have a common goal, that is, wealth preservation.
Here are some of the ways they compare and differ from each other:
The role of whole life insurance in a private family bank includes serving as a foundational asset. Whole life insurance plays a big role in a private family bank for cash accumulation.
Further, according to Jonathan Chevreau’s article ‘Infinite banking in Canada: Should you borrow from your life insurance policy?’ for Money Sense.ca, Private family banking is gaining traction among Canadian retirees.
That’s because it provides liquidity and a source for borrowing funds without disturbing growth. Additionally, the accumulated cash value helps pay for expenses like education and health emergencies. You can also use it for real estate investments.
Whole life insurance policies provide a death benefit. The cash value grows tax-deferred and through compound interest. This helps to improve the financial position of the family. Funding your bank with a mutual Canadian insurance company is often preferred by those practicing the Infinite Banking Concept. Your family can then reduce their reliance on traditional banks for loans and financial services.
Starting a private family bank requires a few simple steps. You can start a private family bank based on research and analysis. As per an article titled ‘What is the infinite banking life insurance concept?’ by Allstate Insurance Company, you must consult a qualified legal or tax advisor to determine a strategy.
The IBC Financial team can help you familiarize yourself with the local Canadian laws. Here are some basics to get started:
You need to first establish a whole life insurance policy from a reputed mutual life insurance company. Then, understand the financial health of your family. This includes income, assets, expenses, and even liabilities.
It’s important to determine who in your family will get to be involved in the private family bank. This is best to avoid any kind of disharmony later on. Further, you can hire a financial advisor or wealth strategist to help with the complexities and setting up the system.
After that, execute your plan and create a financial legacy through contributions to the whole life policy. For overall financial management, maintain communication.
The setup costs include the initial premiums. They can vary based on factors like age, health, gender, etc. Other than that, there are also administrative fees. Moreover, if you seek financial consultation, there will be professional fees for that involved.
There are several tax advantages that a private family bank offers. The tax advantages that a private family bank offers pertain to cash value, loans, etc.
However, as Warner King Babcock says in the article titled “The Power of the Family Bank” in Family Business Magazine, you must work with experienced tax advisors and be mindful of legal and tax consequences.
Here are the tax advantages you get to experience with a family bank:
Yes, you should consult a financial advisor to set up a private family bank. A financial advisor should help you completely to set up a private family bank. In the Investopedia article titled “Do I Need a Financial Advisor?” by John Egan, a financial advisor can help you manage your money and map out a plan for your future.
But here are a couple of things you need to evaluate first:
Yes, a private family bank uses the infinite banking concept. A private family bank uses the infinite banking concept as a foundational principle.
Katia Iervasi of Nerdwallet states in an article titled “Infinite Banking: Using Life Insurance as a Source of Liquidity” that policyholders can treat whole life insurance as a personal bank.
There are a few benefits you get when you combine the infinite banking concept, by Nelson Nash, with that of private family banking:
Nelson Nash founded the concept of the Infinite Banking Concept, and the two are closely related. Nash is credited with founding a modern interpretation of a private family bank through the concept of IBC by laying the groundwork for this financial strategy.
The private family bank concept was introduced in 2000. It was found in the writings of Nelson Nash, who introduced the infinite banking concept in his book ‘Becoming Your Own Banker’ in 2000. The book talks about how you can use whole life insurance policies to create a personal banking system.
Private family banking helps to build general wealth in many ways. Private family banking helps build general wealth by creating a self-sustaining financial ecosystem.
As Halsey Schreier of Forbes wrote in an article titled “How Can Private Banking Complement Your Family’s Wealth Plan?” private family banking can be a less expensive way to enhance wealth-building opportunities.
Since the cash value growth is tax-deferred and continues growing, you will witness continuous financial growth. This way, you can facilitate wealth transfer, preservation, and expansion across generations.
Here’s how it will help you create a legacy for generations:
If you would like more information about private family banking, contact IBC Financial today.
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