What Your Policy Is For: Financing Purchases First, Everyday Costs Much Later, Stage by Stage From the First Year to Age 100

A client called me recently with a plan. He wanted to use his policy to pay for his daily life: food, clothing, the ordinary bills of the month. He had read that the cash value was his, that he could borrow it whenever he liked, and that no one would ask him why. All three statements are close enough to true to be dangerous.

I told him what I tell every family who asks the same question. What is known as the Infinite Banking approach is not built, first, for groceries. It is built to finance the things you would otherwise finance with someone else: the car, the furniture, the renovation, the large purchase you pay off over months or years while a lender collects interest from you. And as we talked, it became clear that he had not seen the part that matters most. When you borrow against your policy, there is a debt on it. The insurer advances the money with your cash value as security. That debt carries interest, it comes off the death benefit, it can become taxable above the adjusted cost basis, and if it grows past the value that secures it, the policy can lapse.

He was thinking about putting money in and taking money out. He was not thinking about putting it back.

That is why this page exists. Not to tell you that you may never use your policy for everyday costs. You may, later, in a limited way, with a plan. It is here to show you the order: what the policy is for at each stage of its life, from the first premium to age 100, and why the order protects the capital you are building.

If you own a participating whole life policy, or you are thinking about buying one, the most expensive misunderstanding is not about the dividend or the rate. It is about the purpose. Get the purpose right and almost every other decision becomes clearer.

Let me walk you through it.

What did Nelson Nash say a policy is for?

R. Nelson Nash, who first described the concept behind this practice, taught that your need for finance over a lifetime is much greater than your need for protection. You finance everything you buy: either you pay interest to a lender, or you give up the interest your own money could have earned. The policy is a way to perform that financing function yourself, inside a contract you own.

The publisher's summary of his book puts the first idea plainly: a person's need for finance, during a lifetime, is much greater than the need for protection. Nash's point was not that life insurance is an investment. He warned against reading his work through the eyes of investing. His point was about financing. Every car, every appliance, every renovation is paid for one of two ways. You borrow and pay interest to someone else, or you pay cash and give up what that cash could have earned while it waited.

That is the principle, and it explains the purpose. A specially designed, high-cash-value, participating whole life insurance policy is a life insurance contract first. Its primary purpose is the death benefit. But because it builds a cash value you can borrow against, it can also become the place where your family's financing happens: you finance a purchase through a policy loan, you repay it on a schedule, and the capital is there again for the next purchase.

Notice the shape of that sentence. Finance, repay, use again. The repayment is not an afterthought. It is the whole system.

Nash also taught patience. He said people want to use the policy before they have put enough into it. A policy is not a pool you dip into the month after you open it. It is capital you build first, so that it can carry the financing of a lifetime.

What is the difference between financing a purchase and funding everyday life?

A purchase you would otherwise finance is a lump sum, usually for something that lasts, repaid over a defined period from income that was already going to a lender. Everyday costs come back every month and leave nothing behind. A loan for them is repaid from the same income that was not enough to cover them, so it tends to grow instead of shrinking.

Think about the two kinds of spending side by side.

The first column is what the approach was designed for. You were going to make a car payment anyway. Instead of sending it to a lender, you repay your policy loan, and the capital is available again when the next car comes.

The second column is different in kind, not only in amount. If your income does not cover your groceries today, a loan does not change that. It moves the shortfall into a debt that bears interest. Next month, the shortfall is there again, plus the interest on last month's loan. Nothing in that pattern repays itself.

This is what my client had not seen. He thought of the cash value as a spending account. It is closer to a reserve that you lend against and refill.

What actually happens when you take a policy loan?

The insurer advances you money under the terms of the contract, using the cash value as security. The policy stays in force and the cash value stays in the contract, but you now owe the insurer the loan plus interest at its rate. Whatever is owing at death is subtracted from the death benefit, and the loan is a disposition for tax purposes.

The words matter here, so let me be precise.

• It is an advance from the insurer. The Income Tax Act defines a policy loan as an amount advanced by the insurer to the policyholder under the terms of the policy (subsection 148(9)). You are not taking your own money out of a box. You are borrowing from the insurance company, and your cash value is the collateral.
• The cash value stays in the contract. That is why the guaranteed values and any dividends continue under the contract's rules while the loan is outstanding. How a loan affects the dividend depends on the contract and the insurer, so ask how yours works.
• Interest accrues at the insurer's rate. The rate is set by the insurer under the contract and can change. Unpaid interest is commonly added to the loan and then bears interest itself.
• It must eventually be repaid, one way or another. The Autorité des marchés financiers puts it simply: a policy loan uses the cash surrender value as collateral and must eventually be repaid with interest. If the insured person dies first, the amount owed with accrued interest is subtracted from the insurance payable.
• It is a disposition for tax. Paragraph (b) of the definition of disposition in subsection 148(9) includes a policy loan. Usually nothing is taxable when you borrow, but the part of a loan above the policy's adjusted cost basis is included in your income for that year under subsection 148(1). Repayments are added back to the adjusted cost basis within a limit. The details are on Is My Policy Loan Over My ACB? and When a Policy Loan Becomes Taxable.

The mechanics of the loan itself, the insurer's process and the effect on the death benefit are covered in full on Policy Loans in Canada. What this page adds is the question underneath: what you use the loan for, and when.

Why is an unpaid loan the real danger?

Because it grows. Interest is added to the balance every year, the death benefit your family receives shrinks by the amount owing, and if the balance, interest included, grows past the cash surrender value securing it, the policy can lapse. A lapse ends the coverage, and a lapse with a loan outstanding can create a tax bill in the same year.

This is the part I most want you to understand, because it is where good intentions fail.

One Canadian insurer's advisor guide on accessing cash value states it without softening: any unpaid loan balance and unpaid interest reduce the cash value available, and if the unpaid balance, interest included, exceeds the cash value, the policy lapses and no longer provides insurance. The same guide notes that the death benefit is reduced by any unpaid loan and interest. Your own contract may word it differently, and some insurers send notices before a lapse, so read your policy's loan clause and ask the insurer to explain it in writing.

Put the three consequences together.

1. Your family receives less. Every dollar owing at death, plus its interest, comes off the death benefit. The protection you bought for the people you love quietly becomes smaller.
2. The policy can end. If the debt outgrows the value securing it, the contract can lapse. At that point you have neither the coverage nor the capital you spent years building, and you may be older and harder to insure than when you began.
3. The tax can arrive at the worst moment. A lapse or surrender with a loan outstanding is a disposition. If the amount you have taken out exceeds the adjusted cost basis, the difference can be included in your income, in a year when the policy has just stopped protecting you.

None of this happens because you borrowed. It happens because you borrowed and did not plan the return. That is the difference between using the policy and draining it.

What does "don't steal the peas" mean for a policyowner?

It is Nelson Nash's grocery store lesson. A grocer who takes food from his own shelves without paying is, in Nash's words, committing theft against his own business, and each can taken has to be made up by selling many more. For a policyowner, stealing the peas means borrowing and not repaying, repaying at less than a lender would have charged, or paying premiums with new loans.

Nash told it as a story about a family that owns a grocery store. The family shops at its own store, and the temptation is to carry goods out the back door without paying, because, after all, it is their store. Nash called that what it is. On a thin margin, one can of peas taken without paying has to be recovered by selling many more cans at full price. And the habit spreads, because people who work for an owner tend to copy what the owner does.

His lesson fits in nine words: "If you own the store don't steal the peas."

Now bring it home to your policy. You built a reserve of capital. You own the contract. And the temptation is exactly the grocer's: it is mine, so why should I pay it back, and why should I pay it back at a full rate?

Here is what stealing the peas looks like in practice.

• Borrowing without a repayment plan. The loan is taken, life moves on, and the balance is still there five years later, larger than when it began.
• Repaying at less than a lender would have charged. If a lender would have charged you 8% on a car loan and you repay your policy loan only at the insurer's rate, or slower, you are giving yourself a discount that your own capital pays for. Nash's advice was the opposite: repay on terms at least as demanding as an outside lender's, and send the difference into the policy.
• Paying premiums with new loans. Some contracts allow premiums to be paid by an automatic loan. As a safety net for a month of trouble it can save a policy. As a habit it builds a debt against the contract that feeds on itself.
• Using the reserve for consumption before it is built. Taking the early cash value for everyday spending is the grocer eating the inventory before the store has opened its doors.

The capital you build is a warehouse of wealth for your family. It works only if what goes out comes back.

Why not use the policy for everyday costs in the early years?

Because in the early years the cash value is small compared with what you have paid, and the policy has not yet built the capacity to carry a debt. A large share of the first premiums pays for the protection and for putting the contract in place. Borrowing then for recurring spending uses up the capital before it can grow, and leaves nothing for the purchases the policy was meant to finance.

Every participating whole life policy has a filling phase. How long it lasts depends on how the policy was designed: a policy built mainly on base premium has little loan value in its first years, while a policy designed with a larger share going to paid-up additions builds cash value faster. Even then, the first years are for building.

Three things happen during that phase that everyday borrowing would undo.

• The cash value is catching up to what you paid. Early on, the cash surrender value is usually below the total premiums paid. A loan taken then is a large debt against a small base.
• The adjusted cost basis is still settling. The tax result of a loan depends on the adjusted cost basis at the moment you borrow. A loan taken without knowing it can produce income you did not expect.
• The habit is forming. The first years teach you how you will treat the policy for the next fifty. If the first lesson is that the cash value is spending money, it rarely becomes capital again.

Use It or Lose It explains what a participating contract can take away when its options are ignored, and The First Twelve Months of a Participating Whole Life Policy shows how a contract begins. Both point to the same truth: build first.

What are the stages of a policy, from the first year to age 100?

There are five broad stages: building the reserve, financing purchases and repaying them, a limited and planned use for some everyday costs once the policy is mature, drawing on it with care in retirement, and the late years when the death benefit settles what is owed. The years below are a guide. Your own policy's statement and illustration decide the real timing.

Here is the order I suggest to the families I work with. The ages assume, as a hypothetical illustration only, a person who buys a policy at 35. If you start earlier or later, move the ages and keep the order.

Let me take each stage in turn.

Stage 1: Build the reserve (years 1 to 5)

Pay the premiums, add to the policy where you can, and do not borrow for everyday spending. This is the season of sowing.

The base premium keeps the contract in force and pays for the guaranteed values. Paid-up additions, where your policy has them, buy small amounts of fully paid insurance with their own cash value, which is why they build cash value faster than the base premium alone. Some contracts also offer an additional premium option that lets you pay more than the required premium within set limits. The details are on Paid-Up Additions.

How much you can add is not unlimited. The exempt test in section 306 of the Income Tax Regulations limits how much value a policy can accumulate relative to its death benefit and still keep its tax-exempt status, and each contract sets its own room for extra premiums. Your insurance professional should show you both limits before you plan around them.

Keep an emergency fund outside the policy in these years. If the first unexpected bill sends you to the policy loan, you have learned the wrong lesson at the most expensive moment.

Stage 2: Finance purchases and repay them (years 5 to 15)

Use the policy for what it was designed for: the purchases you would otherwise finance with a lender. One at a time, each with a repayment schedule you keep.

This is where the principle comes to life. Say you need a $40,000 vehicle. As a hypothetical illustration only, assume a policy loan rate of 6% and a lender who would charge 8% on a 48-month car loan.

Here is where Nash's discipline enters. If you repay the policy loan at $939 a month, you have paid the insurer's interest and the loan is gone in four years. If you repay at $977 a month, the payment the lender would have required, the extra $37 a month, about $1,782 over the four years, can go into the policy as an extra premium where your contract allows it. You treated your own capital at least as seriously as a lender would have. That is the opposite of stealing the peas.

The rates in this example are assumptions, not quotes. Policy loan rates are set by each insurer and change, and a lender's rate depends on your credit and the market. The comparison is not the point. The point is the schedule: a purchase financed, and repaid, on terms you would accept from a stranger.

Then the next purchase. And the next. Paying for a Vehicle and Paying for Travel, Vacations and Children's Sports walk through the sequence in detail, and the story of Nash's twin sisters shows how the result depends on where the payments go.

Stage 3: Mature use, in a limited way (years 15 to 20 and after)

Once a well-funded policy has carried premiums, extra premiums and repaid loans for 15 to 20 years, its cash value is usually large enough that a limited, planned use for some everyday costs no longer threatens the contract. It is still a loan, and it still needs a plan.

This is the stage my client wanted to start with. He was not wrong that a policy can help with everyday life. He was wrong about when.

By this point, several things have changed. The cash value is typically well above the premiums paid. The adjusted cost basis is known and can be tracked each year. You have a record of loans taken and repaid. And you have built the habit that protects the policy.

Here is one way some families use a mature policy, which I discuss with clients case by case. Take groceries. Instead of paying the grocery bill from your chequing account, a modest policy loan covers part of it for a period. The money you would have spent on groceries goes into the policy as an extra premium, through paid-up additions or an additional premium option, where your contract allows it and within the exempt limits.

Be clear about what this does and does not do.

• It changes where the money flows, not how much you owe. The loan still grows with interest unless you repay it. As a hypothetical illustration only, $12,000 a year borrowed at an assumed 6%, with nothing repaid and interest compounding annually, would reach about $12,720 after one year, about $71,704 after five years and about $167,660 after ten.
• It only helps if the policy's growth on the added value exceeds the loan's cost. The guaranteed values on the added premium are known. Dividends are not guaranteed, and the insurer's board decides them each year. If dividends fall, the arithmetic changes.
• It is limited by room. The contract's extra premium room and the exempt test cap how much you can add. If there is no room, the swap is only a loan.
• It is limited in scale. A part of one category of spending, for a defined period, is a tool. All of your living costs, open-ended, is the pattern this page exists to prevent.

Used this way, with your insurance professional and your accountant looking at your own policy's numbers, a mature policy can carry some of the weight of everyday life. Used without a plan, it is the same debt my client was about to create, only later.

Stage 4: Retirement (often age 65 to 85)

Many owners use policy loans for part of their retirement spending after decades of building cash value. The rules do not change at retirement: interest accrues, the balance must stay well below the cash surrender value for the rest of your life, the part above the adjusted cost basis can be taxable, and whatever is owing at death comes off the death benefit.

Retirement is where the long-term picture meets the short-term temptation. A policy loan in retirement is usually not repaid from employment income, because there is none. That makes the planning more important, not less.

• Plan the balance for a long life. The question is not whether the loan is comfortable at 70, but whether it is still comfortably below the cash value at 95.
• Do not assume dividends stay where they are. Build the plan on the guaranteed values and treat any dividend as a margin, not a promise.
• Know the tax position each year. Ask the insurer for the adjusted cost basis before each loan, and have your accountant confirm the result.
• Coordinate with everything else. Government benefits, registered plans, other savings and the estate all interact with how and when you draw on the policy. That is work for your accountant and, for the estate, a lawyer or, in Quebec, a notary.

Stage 5: The late years, to age 100

Keep the contract in force, keep the loan within a margin a long life cannot erase, and let the death benefit settle what is owed and pass the rest to the people you chose.

What a participating whole life policy does at very advanced ages depends on the contract. Some require no further premiums from a stated age, and the treatment as the insured approaches 100 varies by product and insurer. Read the clause in your own policy and ask the insurer to confirm it in writing. Whatever the contract says, an outstanding loan is still owed and is settled out of what the policy pays.

At the end, the purpose comes full circle. The policy was life insurance first. If you built it, used it and repaid it with discipline, it financed a lifetime of purchases and still leaves your family a death benefit. If you drained it, it may leave them a smaller one, or none.

How should you think about borrowing and repaying?

Treat every policy loan the way a careful lender would treat a loan to a stranger: a purpose, an amount, a repayment schedule and a date by which it will be gone. Repay at least what an outside lender would have required, and send any difference into the policy where the contract allows.

Here is the contrast I come back to with families.

Spending from the policy asks, "How much can I take?" Financing from the policy asks, "How will this come back?"

The first question has no end. The second has a date.

When you think like a lender with your own capital, four habits follow naturally.

1. Every loan has a purpose you could defend to a stranger. A car you would have financed anyway passes. A month of groceries in the second year of the policy does not.
2. Every loan has a schedule. Written, monthly, with an end date. Many contracts do not impose one, which is exactly why you must.
3. Repayment comes before the next loan. One purchase at a time, until the policy is large enough to carry more without strain.
4. The balance is checked every year against the cash value. Your annual statement shows both. The yearly review of a family financing system and a family financing plan on one page give you the structure.

These are not rules I invented to make the policy harder to use. They are what makes the policy last.

What steps should you take before using the policy for everyday costs?

Before any loan for everyday costs, confirm that the policy is mature, that the loan fits a written plan, that its tax result is known and that the balance will stay well below the cash value. If any of those cannot be confirmed, the answer for now is no.

Use this as a checklist, in this order.

1. Look at the current statement. Note the cash surrender value, any loan already outstanding with its interest, and the death benefit.
2. Ask the insurer for the adjusted cost basis. It decides whether part of the loan would be taxable this year.
3. Ask how the loan affects the dividend. Contracts and insurers differ, and you should know before you borrow.
4. Write down the purpose, the amount and the period. A part of one category of spending, for a defined time, not all living costs.
5. Decide how it comes back. A monthly repayment, or, where the plan is to carry the loan, the redirected money going into the policy as an extra premium within the contract's room and the exempt limits.
6. Test the plan against lower dividends. Ask your insurance professional to show the balance and the cash value if dividends fall below today's scale.
7. Have your accountant confirm the tax. Before the request, not after.
8. Set a review date. At least once a year, and whenever your income or health changes.

If a step cannot be completed, stop there. A loan you cannot plan is a loan you should not take.

What can go wrong?

Most failures come from the same three habits: borrowing before the policy is built, borrowing for recurring spending with no repayment, and assuming dividends will carry the debt. Each one grows quietly until the balance meets the cash value.

• The balance outgrows the value. Unpaid interest compounds, dividends fall, or both, and the loan approaches the cash surrender value. If it passes it, the policy can lapse.
• The family receives less than they expected. A death benefit planned at one amount pays a smaller one, because a loan nobody tracked was subtracted first.
• An unexpected tax bill. A loan above the adjusted cost basis, or a lapse with a loan outstanding, adds income in a year you did not plan for.
• Premiums slide. Premiums paid by automatic loans, year after year, turn the contract into a debt that pays for itself with more debt.
• The habit hardens. Once the cash value is treated as spending money, it is rarely rebuilt.

The full picture of how participating policies fail, and how to prevent it, is on Risks and Failure Modes.

Who should help you plan this?

A licensed insurance professional with years of hands-on experience designing and servicing participating whole life policies used this way, an accountant who understands how policy loans interact with the Income Tax Act, and, for the estate, a lawyer or, in Quebec, a notary. Each answers a different question.

The product without the understanding is just an insurance policy. The understanding without experience is just theory. What families need is someone who has watched policies through many years of loans, repayments and dividend changes, and who will tell you not yet when the answer is not yet.

• Your insurance professional designs the policy, explains its loan clause and its extra premium room, runs illustrations at lower dividend scales and reviews the policy with you each year. In Quebec, that professional is a Financial Security Advisor (conseiller en sécurité financière); in other provinces, a licensed life insurance agent. Verify the licence in your province.
• Your accountant confirms the adjusted cost basis and the tax result of each loan and repayment, and how the policy fits with your other income in retirement.
• Your lawyer or notary makes sure the policy, its beneficiaries and any loan fit the estate plan.

I should be plain about my own position too: I am paid by insurer commissions when a policy is bought. That is one more reason to ask every question on this page before you buy or borrow.

How should you read the figures on this page?

Every figure on this page is a hypothetical illustration built on stated assumptions: an assumed 6% policy loan rate, an assumed 8% lender rate, a $40,000 vehicle and $12,000 a year of borrowing. None is a quote, a rate offered by any insurer or lender, or a projection of any policy.

Policy loan rates are set by each insurer under its contracts and can change. Dividends are not guaranteed and are declared each year by the insurer's board based on the performance of its participating account. The ages in the stages table assume a purchase at 35 for illustration only. Your own policy's statement and an illustration prepared by the insurer are the only sources for your real numbers. Amounts are in Canadian dollars, and tax references are to the Income Tax Act as consolidated on 30 September 2026.

What this page will not tell you

This page explains the order of use and the risks of a policy loan in general terms. It does not tell you whether your own policy can carry a particular loan, what your adjusted cost basis is, how a loan will affect your dividend, or whether a loan for a given purpose is wise for your household. Those answers depend on your contract, your figures and your whole financial situation, and they come from your insurance professional, your accountant and the insurer itself.

Who this does not suit

The approach described here does not suit you if your income does not cover your living costs today, if you carry consumer debt you cannot pay down, if you have no emergency fund outside the policy, or if you could not keep premiums going for many years. It does not suit you if you want to use the policy for everyday spending in its first years, or if, being honest with yourself, you would not repay a loan that no one forces you to repay.

It can suit you if you need permanent life insurance, already finance purchases you would rather finance through capital you own, are willing to build the policy patiently before using it, and are prepared to repay every loan on terms you would accept from a lender. If that is you, Infinite Financial Sovereignty® begins with the order on this page: build, finance and repay, and only then, with a plan, let a mature policy carry some of the weight of everyday life.

The policy is not a spending account. It is the capital you build so your family can finance a lifetime, and still leave a legacy.