The Five Rules of Nelson Nash, Plus Three

Most people who read Nelson Nash for the first time remember the insurance. The contract, the cash value, the policy loan. What they forget is that Nash spent most of his short book talking about behaviour: how people think about money, how they pay for things, and how easily a good arrangement is ruined by the person who owns it.

Over the years, teachers of the concept, David Stearns among them, have gathered that behaviour into five rules. David Stearns added a sixth, and this page gives him the credit, with gratitude. This practice adds two more, drawn from what we see when Canadian families actually use their contracts. That makes eight. None of them is a law, a guarantee or a product feature. Each one is a habit of mind, and each one can be checked against the contract you own and the Canadian rules that govern it.

This page sets out the eight rules in plain words: where each one comes from, what it asks of you, where it is easy to misread, and the question to ask before you act on it. It is general information written by a licensed insurance professional who is paid by commission when a policy is issued. The answer for your own situation is in your own contract, and in a conversation with your accountant.

What are the eight rules, in short?

The eight rules are habits for owning a participating whole life contract well. Five are drawn from Nelson Nash's teaching: think long range, capitalize, don't steal the peas, use your own capital before an outside lender, and rethink your thinking. Three are later additions: leave room for windfalls, don't pay cash, and keep the whole picture in view. None is a guarantee.

The rules work as a set. Read one on its own and it can mislead. Rule 7 without rule 3 becomes permission to borrow without repaying. Rule 2 without rule 1 becomes over-funding that an ordinary year cannot sustain. The sections below take each rule in turn and then show how they hold each other in place.

Where do the five rules come from?

The five rules are a summary of Nelson Nash's teaching, not a list he published under that name. Nash set out what is called The Infinite Banking Concept® in his book Becoming Your Own Banker®, published in 2000. The five rules gather ideas that run through the book, the sixth was added by David Stearns, and the seventh and eighth are this practice's own.

Nash worked for about ten years as a forestry consultant and then spent more than thirty-five years as an agent for mutual life insurers in the United States. The book is short, repetitive on purpose, and far more concerned with behaviour than with insurance. He died in 2019. The phrase The Infinite Banking Concept® is a registered trademark of Infinite Banking Concepts, LLC. Neither Jose Salloum nor Canadian Wealth Creation Centre Inc. is affiliated with, sponsored by, or endorsed by that company or the Nelson Nash Institute.

Two things follow for a Canadian reader. First, Nash wrote from American experience, and some of the rules of thumb repeated in his name rest on American tax and insurance law. The behaviour transfers. The tax rules do not. A Canadian contract answers to the Income Tax Act, section 306 of the Income Tax Regulations and, in Quebec, the Civil Code. Second, the rules describe how to own a contract, not whether to buy one. Whether a participating contract suits you is a separate question, answered by your income, your horizon, your need for coverage and the alternatives you have not yet used.

Rule 1: Why does Nash ask you to think long range?

A participating whole life contract is built to last a lifetime, and it behaves badly when judged over a short one. Its costs fall heaviest in the early years, so the guaranteed cash value usually stays below what you have paid in for many years. Thinking long range means judging the contract over decades, and planning for the years when it looks weakest.

Nash's background as a forester shaped this rule. A forester plants trees he may never harvest. He judges his work by what the land will hold in forty years, not by what it looks like next spring. Nash asked his readers to look at their finances the same way: over a working life, and beyond it, to the people who will inherit what they build.

In practice, the rule asks three things of you.

1. Know your break-even year. Ask the insurer for the first year in which the guaranteed cash value equals or exceeds the total premiums paid. The illustrated column, which assumes the current dividend scale continues, will show an earlier year. Dividends are not guaranteed, and scales change.
2. Plan the difficult years in advance. Income drops, health changes and businesses have bad seasons. A long-range owner decides before signing what happens to the contract in a year when the full premium is hard to pay.
3. Judge progress by the right measure. Early on, the right measure is whether the contract is intact and funded as planned, not whether it has "done well".

Where it is easy to misread: long range does not mean "commit to anything, it will work out eventually". A contract abandoned in its early years returns materially less than went into it, and the difference does not come back. The rule is a reason to choose a funding level you can hold for decades, not a reason to hold on to one you cannot.

Ask before you act: "In which year does the guaranteed cash value first exceed the premiums I will have paid, and what are my options if I cannot pay the full premium in year four?"

Rule 2: What does "don't be afraid to capitalize" mean?

To capitalize is to build up capital before you need it. Nash's point was that most people underbuild: they create a small source of funds, then return to outside lenders for everything larger. The rule asks you to build more capacity than your first estimate suggests, within limits your income can carry in an ordinary year and the tax rules allow.

Nash believed the need to finance things over a lifetime is larger than people imagine: cars, a home, equipment, education, a business, help for children. His advice was to build capacity to match that need over time, rather than a single small contract that runs out at the first large purchase.

In a Canadian contract, capital builds in two ways. The base premium is fixed and buys the guaranteed coverage and cash value schedule. Optional deposits, through a paid-up additions rider, buy small blocks of paid-up coverage, each with its own cash value. The rider is what lets accessible value grow faster than the base premium alone would allow.

Three limits keep this rule honest:

• The exempt test. A contract keeps its tax-sheltered status only while it passes the exemption test in section 306 of the Income Tax Regulations. The insurer will refuse, or redirect, money that would push the contract over that ceiling, whatever the rider allows.
• The rider's own rules. Some riders do not carry unused room forward, and some reduce or withdraw the option after skipped years. The page on what a contract can take away if you do not use it sets these out.
• An ordinary year. The deposit level built on your strongest year is the one most likely to be skipped. Capitalize at a level a normal year can sustain, and let windfalls (rule 6) do the rest.

Where it is easy to misread: "don't be afraid" is not "don't be careful". Capitalizing with money you will need in the next few years, or with money borrowed at a high rate, turns a long-range plan into a short-range problem.

Ask before you act: "How much of this design is base premium, how much is optional, and what happens to the optional part if I skip a year?"

Rule 3: What does "don't steal the peas" mean?

"Don't steal the peas" means repay what you borrow from your contract, on a schedule, as seriously as an outside lender would require. Nash compared the owner of a contract to the owner of a grocery store. Taking goods off your own shelves without paying for them feels harmless, and it is how a store slowly empties.

In Nash's telling, the store loses stock through the back door: to employees, to family members, and sometimes to the owner himself. He showed how expensive a small theft is for a business that lives on thin margins: "If your spouse steals one can of peas, you must sell 20 to make up for it." His lesson was that the owner must charge full price, even to his own family, and keep honest records.

The parallel for a contract owner is direct. When you take a policy loan and leave it unpaid, you are taking the peas. The contract does not send a collection notice. Nobody calls. That silence is exactly what makes the habit dangerous.

Here is what actually happens to an unpaid loan under most Canadian contracts:

• The insurer is the lender. A policy loan is an advance from the insurer, secured by the cash value. The interest is owed to the insurer, at a rate the insurer sets and can change under the contract.
• Unpaid interest is added to the loan, usually at each policy anniversary, and then bears interest itself.
• The death benefit shrinks by whatever is owed.
• If the total debt ever exceeds the cash value, the contract can lapse. A lapse with a large loan outstanding can create taxable income at the moment there is no cash value left and no coverage.

There is also a tax rule to know. Under subsection 148(9) of the Income Tax Act, a policy loan is a disposition. The part of a loan above the contract's adjusted cost basis (ACB) is included in income in the year you receive it, under subsection 148(1). Repaying a loan that was partly taxed can allow a deduction in the year you repay, under paragraph 60(s). Your accountant confirms how this applies to you.

Where it is easy to misread: some readers hear "repay more than you owe, as a grocer marks up his goods". You cannot repay more than the loan balance. What you can do, if your rider allows it, is keep paying after the loan is cleared, as an optional deposit. That money is a premium, not a loan repayment, and it counts toward the exempt-test ceiling.

Ask before you act: "What is your loan rate today, how has it changed, and what happens to this contract if I pay no interest for three years?"

Rule 4: Why use your own capital before an outside lender?

Nash put this rule more bluntly, but its meaning is simple: when you need to finance something, ask first whether your own contract can do the job, before you ask an outside lender. A policy loan needs no credit application and no payment schedule. It is still a loan, with interest paid to the insurer.

Nash's reasoning was about control. An outside lender decides whether to lend, on what terms and for how long, and can reduce or call a line of credit when conditions change. A policy loan is a right written into the contract. The insurer does not ask what the money is for and does not assess your income.

That right has limits, and they belong beside the claim:

• The insurer caps the loan, usually at a share of the cash value.
• The rate is the insurer's, and can change under the contract.
• Other people's consent may be needed. If the contract has been assigned to a lender, or names an irrevocable beneficiary, their signature may be required. In Quebec, a married or civil-union spouse named as beneficiary is irrevocable unless the contract says otherwise.
• Early on, there may be little to borrow. A young contract has a small cash value.

The rule also needs a fair comparison. A home equity line of credit is often cheaper than a policy loan. A loan from a lender secured by your policy (a collateral loan) is taxed differently: assigning a policy as security is not a disposition under subsection 148(9), while a policy loan is. Each route has a place. The rule is to look at your own contract first, not to pretend the other routes do not exist.

Where it is easy to misread: "use your own capital" does not mean the money is yours to borrow for free, or that you are paying interest to yourself. You are borrowing the insurer's money, secured by your cash value, and the interest goes to the insurer. What you gain is access and control over the repayment schedule. What it costs is interest.

Ask before you act: "For this purchase, what would a policy loan, my line of credit and a collateral loan each cost, and how is each one taxed?"

Rule 5: What does "rethink your thinking" ask of you?

Rethinking your thinking means questioning the money habits you absorbed without choosing them: that paying cash is always free, that debt is only a bank's product, that saving and financing are opposites. Nash believed the concept fails more often in the owner's mind than in the contract, so the first change has to happen there.

Most people learned about money by watching others, not by examining it. We learned that a car is bought with a car loan, that savings sit in a savings account, and that paying cash is the responsible choice. Each habit makes sense on its own. Nash asked his readers to see them as a system: one that sends a steady stream of interest to outside lenders, and treats the capital you spend as if it cost nothing to give up.

The core of the rethink is a single idea, and this site returns to it often: you finance everything you buy. Either you borrow and pay interest, or you pay cash and give up what that money would otherwise have earned. Only the first cost appears on a statement. That is why paying cash feels free, and is not.

Even the Bible teaches that we need to rethink our thinking. In his letter to the Romans, the apostle Paul wrote:

"I beseech you therefore, brethren, by the mercies of God, that ye present your bodies a living sacrifice, holy, acceptable unto God, which is your reasonable service. And be not conformed to this world: but be ye transformed by the renewing of your mind, that ye may prove what is that good, and acceptable, and perfect, will of God." (Romans 12:1-2)

For a Christian, these verses describe what follows a new life. The old habits of thought are not simply kept; they are examined and renewed, day after day, so that the way a person lives follows from what they now believe. This is a principle of the Christian life, not a financial strategy. But the pattern is the one Nash asked of his readers: stop conforming to habits you absorbed without choosing them, and let a renewed way of thinking change the way you act.

Lasting change in how we act almost always starts with a change in how we think. It is not a quick change. People who adopt this way of thinking often describe a slow shift over several years: first understanding the idea, then noticing it in their own purchases, then acting on it with some confidence. That pace is normal. A decision made in the first week of hearing about the concept is usually made too early.

Rethinking also means questioning the concept itself. The fair case against it is real: early cash values are low, the loan is not free, dividends can be cut, and a household with unused tax-free savings room or high-interest debt usually has better first steps. A rethink that only confirms what a promoter said is not a rethink.

Where it is easy to misread: "rethink your thinking" is sometimes used to dismiss every objection as old thinking. A real objection deserves a real answer. If the answer is not in the contract, the illustration or the tax rules, the objection stands.

Ask before you act: "For my last five large purchases, who did the financing, and what did it cost me in interest paid or in earnings given up?"

Rule 6: Why leave room for windfalls?

Leaving room for windfalls means designing your contract, and your plans, so that unexpected money has somewhere useful to go. A bonus, an inheritance, the sale of a business or a property: large sums arrive irregularly, and without a plan they are often spent within a few years. The rule adds room for them in advance.

This rule comes from David Stearns, and we honour him for it. He set it beside Nash's five rules as a rule of its own: be prepared for windfalls, so that money you did not expect builds your family's future instead of slipping away within a few years. It is his contribution, not Nash's, and it fits Nash's thinking closely. A windfall is capital you did not have to earn from your regular income, and it is easy to lose to a new car, a renovation or a general loosening of habits.

In a Canadian contract, a windfall can go to four places, each with its own limits:

Designing for windfalls means asking at the start how much room the rider leaves above your planned deposits, and how close the design sits to the exempt-test ceiling. A contract funded to its maximum from day one has no room left for the bonus that arrives in year six.

It also means waiting before deciding. A large sum rarely needs to be placed in the first week. The page on an inheritance or a business sale and the case for waiting sets out why a pause is often the better first step. Canada has no inheritance tax paid by the person who inherits, but an estate may owe tax on the deceased's final return before it distributes anything, so the amount you actually receive can differ from what you expect.

Where it is easy to misread: leaving room is not the same as expecting a windfall. Never fund a contract on money you hope will arrive.

Ask before you act: "If I received a lump sum in year six, how much could this contract accept without new medical evidence and without leaving the exempt test?"

Rule 7: Why "don't pay cash"?

"Don't pay cash" is this practice's rule, and it is the one most often misread. It does not mean borrow for everything. It means: once you have built capital in a contract, don't drain that capital to pay for a purchase. Finance the purchase deliberately, with a repayment schedule, and leave the capital in place.

The reasoning comes straight from rule 5. Every purchase is financed. If you withdraw capital to pay cash, you give up what that capital would have gone on earning, and you have to rebuild it from scratch. If you surrender part of a contract to raise cash, you reduce its coverage and its values permanently, and any gain above the ACB is taxable. A policy loan works differently: the cash value stays in the contract, and it goes on being credited with its guaranteed increases and any dividends declared.

That last point needs care. Some insurers use what is called direct recognition: the dividend on the part of the cash value that secures a loan may be adjusted, up or down. Others use non-direct recognition, where it is not. Ask which method your contract uses before you rely on the value continuing untouched.

Knowing this rule is not the same as living it. Plenty of owners understand the concept well, build a contract carefully, and then go on paying for large purchases from a chequing account or through outside lenders out of habit. The contract sits there, funded and unused, and its reason for existing is lost. The page on use it or lose it sets out what can be lost that way. A concept you only admire does nothing for your family. A concept you practise, carefully, is the one that changes the next thirty years.

The limits come with the rule:

• Only for a real need. A purchase you would not have made anyway is not made wiser by financing it through your contract.
• Always with a repayment schedule. Rule 7 without rule 3 is the fastest way to lapse a contract.
• With the interest counted. The policy loan is a debt, and its interest goes to the insurer. Paying cash from ordinary savings may still be the cheaper choice for a small purchase.

Ask before you act: "If I finance this purchase through a policy loan instead of paying cash, what is my repayment schedule, and what will the loan cost me in interest each year?"

Rule 8: What does the bird's-eye view show that one number hides?

Keeping the whole picture in view means judging a decision by its effect on your finances over decades, not by one number on one day. The loan rate is one tree. The forest is your cash flow, the compounding of capital left in place, the dividends applied over many years and the habit of repayment. Don't let one tree hide the forest.

People often fixate on a single figure: "the loan rate is higher than my line of credit", or "the first-year cash value is low". Both statements can be true, and both can still mislead when they are the only thing examined. The bird's-eye view asks three questions at once: what does this cost, what does it keep in place, and what does it change over the long run?

Illustrative example. The numbers below are assumptions chosen to show the arithmetic, not a projection, not insurer illustration values and not a client outcome. You need $30,000 for a vehicle. Two paths:

On these assumptions, the loan costs more in interest than paying cash costs in earnings given up. The bird's-eye view does not hide that. What it adds is the rest of the picture: under path B the cash value remains in the contract, continuing to receive its guaranteed increases and any dividends, and the monthly repayment rebuilds your capacity to borrow again. Under path A, the same monthly amount is needed to rebuild the savings, with no contract values working in the meantime. Which path wins depends on the real loan rate, the real return on your savings, your dividend recognition method, your tax situation and, above all, whether you actually repay.

Dividends deserve a word of their own. In a participating contract, the insurer's board declares dividends each year from its participating account. They are not guaranteed. Many owners direct them to buy paid-up additions, which add coverage and cash value that can earn dividends in later years. Over decades that is where much of the contract's growth comes from, and it is invisible if you only look at this year's loan rate.

Where it is easy to misread: the bird's-eye view is not a way to wave away costs. It is the opposite. It puts every cost on the table, including the ones that do not appear on a statement, and then asks what the whole decision does to your family's position over thirty years.

Ask before you act: "Show me, in the guaranteed column and the alternate-scale column, what this contract looks like in years 10, 20 and 30, with and without the loans I plan to take."

How do the eight rules work together?

The eight rules check each other. Each one, taken alone, can be pushed into a mistake: over-funding, borrowing without repaying, dismissing objections. Read together, they describe a patient owner who builds capital within limits, uses it for real needs, repays it seriously and judges the result over decades.

The thread running through all eight is discipline over time. The contract is neutral: it holds guaranteed values, a loan provision and a dividend entitlement, and it does exactly what its wording says. The owner is not neutral. What the rules describe is the owner.

What should I ask before applying any of this?

1. In which year does the guaranteed cash value first exceed the premiums I will have paid?
2. How much of the design is optional deposits, and what happens if I skip a year?
3. How close is the design to the exempt-test ceiling, and how much room is left for a windfall?
4. What is the loan rate today, who sets it, and has it changed in the past?
5. Does the insurer use direct or non-direct recognition on loans?
6. What happens to the contract if I pay no loan interest for three years?
7. Is the contract assigned to anyone, or does it name an irrevocable beneficiary?
8. How are you paid for arranging this contract, by whom, and how much in the first year?
9. What would make you tell me not to do this?

The last question matters most. An honest answer to it tells you more about the person across the table than any illustration.

What this page will not tell you

It will not tell you what Nash would have said about your contract. The rules are a summary of his teaching and of later additions; they are not his words, and his book reflects American law. It will not tell you your loan rate, your ACB, your break-even year or your exempt-test room. Only the insurer holds those figures.

Details are left out on purpose: contracts owned by a corporation, loans used to pay premiums, the deductibility of loan interest and the ceiling on how much a repayment restores to the ACB. Each can change the answer. The contractual terms of any policy are those of the issuing insurer. Guarantees are the insurer's obligations and not a government's. Dividends are not guaranteed. Participating whole life insurance is insurance, not an investment, and neither this practice nor any insurer is a deposit-taking institution. Nothing here is tax or legal advice; confirm your own situation with your accountant, and with your lawyer or notary.

Who this does not suit

These rules are not an argument for buying a contract. If your income could plausibly miss a year, if you may need the money within the first several years, if you carry high-interest consumer debt, or if you have unused tax-free savings room and no need for permanent coverage, other steps will probably serve you better first.

They also do not suit anyone looking for a shortcut. Every rule on this page asks for patience and repayment. If that sounds like more discipline than you want to take on right now, that is a sound reason to wait. If you already own a contract, pick one rule, the one you practise least, and look at your last year through it. Bring what you find to your annual review, or book a conversation whenever it suits you. There is no deadline.