How should a family decide what its financing system should finance?

Why does the financing decision come before the insurance policy?

The purchase, its purpose and the way the family will repay it should be settled before the family chooses a source of financing.

Nelson Nash set out The Infinite Banking Concept® in Becoming Your Own Banker® (2000). His premise was that a family’s need for financing throughout life is greater than its need for life insurance protection. That does not make protection unimportant. It means that vehicles, repairs, equipment and other purchases repeatedly raise the same question: who supplies the money, and what does using it cost the household? Financing is the purpose; a policy, where one is suitable, is only the tool.

When a family uses an outside lender, it pays that lender interest. When it pays cash, it avoids loan interest, but gives up what the cash might otherwise have earned or done. That foregone possibility is an opportunity cost, not an interest bill, and its amount cannot be assumed. Paying cash may still be the sensible choice. Nash’s point is to notice that every purchase uses financing capacity in one form or another.

The long-term aim is self-financing: build a family financing system over years, use it for suitable purchases, restore its capacity through repayment and reduce interest paid to outside lenders. Over time, a family may aim to reduce and eventually end its reliance on them for ordinary purchases. Canadian Wealth Creation Centre Inc., the firm that provides the service and publishes the educational website IBC Financial, calls that destination Infinite Financial Sovereignty®, a registered trademark of Jose Salloum. It is a goal, never a promised outcome. Circumstances and purchase costs can still make outside credit appropriate.

Thinking like a lender is the habit behind the goal. A lender does not advance money merely because someone asks for it. The lender examines purpose, amount, repayment and risk. A family can apply that discipline to its own purchases without treating every available dollar as permission to spend.

In Canada, a participating whole life policy is the usual tool used with this concept. The policy cannot decide whether a renovation matters more than a vehicle, whether this year’s income is dependable or whether a payment fits beside groceries and premiums. Those remain household decisions. A family can practise the screening habit even if it never buys a policy.

Which purchases belong in the system, the budget or somewhere else?

Put planned, repayable purchases on the system’s shortlist; use the budget or emergency reserve for their intended jobs, and leave other purchases to an outside lender or make no purchase.

A shortlist is not an approval list. A planned purchase still needs to pass the repayment and capacity tests. Likewise, “outside lender” does not mean the family should accept any offer. It means comparing actual terms with the other choices, including waiting.

The table describes usual sources, not fixed rules. A vehicle needed immediately to keep someone working may be an urgent problem, not a comfortable planned purchase. A repair called urgent may contain optional upgrades that can wait. Separating the essential work from the optional work can change both the amount and the financing choice.

The emergency reserve has a distinct purpose: helping the household respond when timing is not under its control. Preserving that reserve is worth considering even when a policy loan is available. Similarly, a budget category for predictable bills prevents a series of small advances from becoming an outstanding loan that is hard to track.

For every purchase, compare four possibilities: pay from available cash, request a policy loan if the contract permits one, use an outside lender, or wait. Include the effect on reserves and the next purchase, not just this month’s payment. The system earns its place when its use supports a repeatable household plan, rather than turning every expense into a reason to borrow.

What questions should a family ask before any advance?

Ask what the money is for, how much is needed, which ordinary income will repay it, when repayments will happen and what changes if income falls.

Start with purpose. Is the purchase necessary, planned or optional? What problem does it solve, and for how long? A clear purpose helps the family decide whether to buy now, buy less or wait. “We have capacity available” describes a financing possibility, not a reason for a purchase.

Next establish the amount. Get a price or written quote where possible, and distinguish the essential cost from additions that can wait. A family considering home work, for example, can price the repair separately from improvements it would like to make at the same time. Include taxes, delivery and other purchase costs before deciding how much to request.

Then name the repayment source. Use normal income left after essentials, existing debt payments, planned savings and policy premiums. Do not build the schedule around an uncertain bonus, future dividends or a projected increase in cash value. Participating policy dividends are possible but never guaranteed. A sound schedule should be understandable without any of those hopes coming true.

Write down the schedule before asking for the advance. State when payments begin, how much will go toward the loan and when the family expects the balance to be cleared. Check with the insurer how interest is charged and how payments are applied. The owner may set a repayment pace under the contract’s terms; that flexibility makes a written household commitment more important, not less.

Finally, test what happens if income drops. Could the family continue premiums and essential spending? Could it reduce optional spending while still paying loan interest? How much reserve would remain? If a purchase works only while every paycheque arrives in full, delay or reduce it rather than treating an emergency reserve as a planned repayment source.

These questions also apply to outside credit and cash purchases. With an outside loan, compare the full repayment obligation and its terms. With cash, ask what useful capacity will be unavailable afterward. Thinking like a lender does not require choosing a loan. It requires being able to explain why a particular source fits this particular purchase.

How would a family sort its next three purchases?

A useful screening exercise gives each purchase a different answer when its purpose, timing and repayment demands differ.

Illustrative example only: The following household, purchases and figures are invented to show the decision process. They are not a client story, an insurer quotation or a prediction of policy values.

Assume a family has a participating whole life policy with $45,000 of cash value. Its insurer has confirmed $24,000 of currently available policy loan capacity under the contract, after accounting for an existing $8,000 policy loan and the insurer’s lending limits. Cash value and available loan capacity are different figures; the family uses the insurer’s confirmation, not the $45,000 figure, to plan an advance.

The family has a separate $9,000 emergency reserve and $700 a month of normal budget room after essentials and policy premiums. It already plans to repay $200 of principal each month on its existing loan. For this exercise alone, assume loan interest is calculated at 6% annually, or 0.5% a month, on the outstanding balance. Real contract terms and interest charges must be confirmed with the insurer.

Its next three possible purchases are:

1. A planned $6,000 vehicle to replace an ageing one. The family needs the vehicle but can choose its timing. A $6,000 insurer advance would leave $18,000 of the currently confirmed loan capacity before subsequent policy changes and interest. The family proposes to repay $200 of new loan principal each month for 30 months, alongside the $200 planned for its existing loan. Under the example’s simplified interest assumption, the first month’s interest on the combined $14,000 balance is $70. The first month would therefore use $470 of budget room for principal and interest. The family can consider this purchase for its system, after comparing it with paying cash and an actual outside loan offer, the same comparison described in paying for a vehicle.
2. A $600 school expense due in six months. This is predictable and small enough to plan within the household budget. Setting aside $100 a month for six months adds $100 to the example’s first-month commitments, bringing them to $570 and leaving $130 of the stated $700 room. The family does not need to take another policy loan to make a budget category work. If other bills already claim that $130, it should revise the vehicle plan rather than assume the arithmetic creates spare money.
3. An optional $18,000 kitchen update. After the proposed vehicle advance, $18,000 is the simple difference between the previously confirmed $24,000 capacity and the $6,000 advance. That does not establish that another $18,000 advance will be available later: the insurer must confirm capacity again. More importantly, the family has no repayment amount it can fit into the $130 of remaining monthly room. It decides not to make the purchase now. It can revisit the work when income, priorities or the outstanding loan balance change, and compare outside financing then if appropriate.

The family does not use its $9,000 emergency reserve for the kitchen or the predictable school bill. The example’s figures make the vehicle plausible, not automatically wise. A real decision would also check the insurer’s current adjusted cost basis information, possible tax consequences, actual loan interest terms and whether the remaining budget room is enough for this household’s setbacks.

How does an outstanding policy loan affect the next decision?

An outstanding loan uses borrowing capacity, adds interest cost and can make the next otherwise sensible purchase unsuitable.

A Canadian policy loan is an advance from the insurer to the policyholder under the policy’s terms, secured by the policy’s cash value. It is not a withdrawal of the policyholder’s own money. The owner can generally request a loan against available value without a credit application, and interest is paid to the insurer. The contract continues to be administered under its own terms while the balance is outstanding.

The contract has guaranteed cash values set out in its schedule. A participating policy may also receive dividends, but dividends are not guaranteed. Continued administration of the contract does not erase borrowing costs or mean every policy figure is unaffected by a loan. Ask the insurer how its particular contract treats loans, interest and dividends, rather than assuming that the cash value shown on a statement is fully available for another advance.

Before agreeing to a second purchase, get the current loan balance, accrued interest and available loan capacity from the insurer. Then put the proposed new advance beside existing repayment commitments. A family that can handle one repayment may not be able to handle two. Using all remaining capacity also leaves less flexibility if an important purchase appears later.

Repayment helps restore capacity, subject to the contract’s terms and the policy’s changing values. It is not a payment of interest to the household: the insurer receives the interest. If the owner pays little or nothing toward the loan, interest continues to accrue. An outstanding balance can reduce the amount payable to beneficiaries or received on surrender. If debt becomes too large in relation to the policy’s value, the policy may be at risk of lapsing, with possible tax consequences.

This is why the next decision cannot be made from the original policy illustration or last year’s statement. The family needs today’s insurer figures and its own record of promised repayments. It also needs to protect the policy’s continuing premiums. A purchase that is affordable only by skipping them may threaten the tool the family intended to use over many years.

When is cash or an outside lender the better choice?

Cash, outside credit or waiting can be preferable when a policy loan would strain repayments, reserves or the policy itself.

Cash can be appropriate for a small predictable purchase already provided for in the budget. There is no loan interest to pay. The family should still consider what spending that cash gives up, especially if it would leave essential bills or an emergency reserve exposed. Opportunity cost is a question for comparison, not a reason to borrow automatically.

An emergency reserve is generally the first place to look for an urgent expense it was built to cover. If the cost is too large for the reserve, separate the work that must happen now from work that can wait. Obtain quotes, check any available insurance coverage and consider outside financing on terms the budget can support. Urgency should prompt careful choices, not make a flexible policy loan the default.

Outside credit may suit a large purchase when the policy lacks capacity, when its loan interest or other consequences make it unattractive, or when the outside lender offers more suitable terms. Compare the total cost and repayment schedule, not just an advertised monthly amount. A fixed payment can also provide useful discipline for a household that finds self-set repayments difficult. Using an outside lender for one purchase does not cancel the long-term goal of reducing reliance on outside lenders for ordinary purchases.

Waiting is a financing decision too. It can allow the family to repay an earlier advance, save through its budget, obtain firmer quotes or decide that an optional purchase is not worth its cost. Sometimes the right response is to buy a less costly version rather than find a way to borrow the full price.

No source makes unaffordable spending affordable. Recurring bills that exceed ordinary income call for changes to the household budget. A policy loan taken to cover the same shortfall month after month creates an additional balance and interest charge. The lender’s screening habit is most valuable when it helps a family decline an advance it could request but cannot responsibly repay.

What costs, tax rules and risks belong in the screening test?

Screen the proposed purchase against the policy’s early costs, loan interest, repayment risk and Canadian tax rules before treating an advance as available spending money.

Building a participating whole life policy takes years and steady funding, which is why capitalization comes before use. The contract provides permanent life insurance protection and scheduled guaranteed cash values, but accessible value can be substantially below premiums paid in the early years. Ending the contract early may therefore be costly. Dividends can add to policy values when declared, but they are never guaranteed. A household should separate contractual values from dividend-dependent figures in any illustration.

Loan interest is an additional cost charged by the insurer. Flexible repayments can be helpful when income varies, but they also make postponement easy. A growing balance can reduce the death benefit or surrender proceeds and may put coverage at risk. Premiums still need to fit the household budget. The cost of one purchase should not be measured solely by the interest on its advance; the family also needs to understand the policy commitment it is maintaining.

Canadian tax treatment matters at the time of each proposed loan. Under section 148 of the Income Tax Act, a policy loan is a disposition. The portion of its proceeds above the policy’s adjusted cost basis is included in income, as explained in when a policy loan becomes taxable. That basis changes over time, so an earlier loan’s tax result does not establish the result of the next one. Ask the insurer for current figures and obtain individual tax advice before a significant advance.

If a policy loan previously caused an income inclusion, repayment of the amount previously taxed can qualify for a deduction within the limits of paragraph 60(s) of the Income Tax Act. Increases in cash value inside the policy remain sheltered from annual taxation only while it is an exempt policy under section 306 of the Income Tax Regulations. Exempt status does not make every policy loan tax-free. Do not assume interest on a loan used for personal purchases is deductible.

There is also insurer risk. Assuris protects eligible Canadian policyholders within its limits if a member insurer fails, and explains that protection is calculated using policy values after outstanding policy loans. Assuris is not a government guarantee. Its protection does not replace checking the contract or keeping an emergency reserve.

Who should use this screening habit, and who should avoid a policy-based system?

Every household can use the screening questions, but a policy-based system does not suit a family without a lasting insurance need, steady funding capacity and a long repayment horizon.

The habit can begin with paper. List expected purchases, the date each might arise, its likely purpose and the sources that could pay for it. Beside each, record the income available for repayment, existing obligations and the reserve that must remain protected. Update the list when a real price or change in income replaces an estimate.

A family considering the policy tool should first want and understand permanent life insurance protection. It should be able to fund premiums consistently without neglecting essentials, existing debt or an emergency reserve. It should be prepared to build cash value over years and follow its own repayment schedule even when the insurer does not demand a monthly instalment. When reviewing a proposed contract, ask to see guaranteed values separately from dividend-dependent illustrations and to understand the consequences of stopping funding early.

This approach is poorly suited to money the family may need back soon, to a household already struggling with expensive debt, or to someone who does not want permanent coverage. It is also a poor match for a family likely to treat flexible repayments as optional. Such families can still use the concept’s purchase-screening discipline while choosing cash, different insurance coverage or outside financing where appropriate.

Review the rules together before each advance: Is this a planned purchase? What is its full cost? Which ordinary income repays it, on what schedule? What happens if income falls? What remains for the next need? A “no” can protect the system as much as a well-chosen “yes.” The author is paid commissions by insurers when a policy is bought; readers should consider that commercial interest when deciding whether a policy suits their household.