The Usual Pros and Cons of the Method, Checked One by One Under Canadian Rules

Type the phrase "infinite banking pros and cons" into Google and the answer arrives before you click anything. A summary at the top lists five advantages and five drawbacks. Below it come American videos, forum threads and blog posts, most of them with the same two lists in a different order. A Canadian reader is left with a reasonable question: which of these points are true here?

That question matters because the lists are written for one country and read in another. Several of the advantages depend on American tax rules that do not apply in Canada. One summary even ties the tax treatment of a policy to a tax-free savings account, which has nothing to do with it. And some of the drawbacks, the ones that cost real households real money, are given a single line.

This page takes each point in turn. It explains what the claim says, what Canadian law and the contract actually provide, and gives a plain verdict: it holds, it holds with conditions, or it overstates. Then it sets the whole ledger in one table. It is general information from a licensed insurance professional, not tax, legal or investment advice.

Begin with the lists themselves.

What do the usual lists of pros and cons say?

They agree with each other more than you might expect. The advantages most often listed are these: the cash value keeps growing while a loan is outstanding, no credit check is needed, there are tax advantages, you set your own repayment schedule, the cash value is protected from creditors, the values are guaranteed, and the interest you pay comes back to you. The drawbacks most often listed are high early costs, a slow break-even, interest that is still interest, the discipline the method demands, the risk of a lapse with a tax bill, and the complexity of the policy design.

Almost every list describes the same contract. It is a specially designed, high-cash-value, participating whole life insurance policy. You pay premiums for years, the cash value builds under the contract, and the insurer may pay dividends, although they are not guaranteed. Once the cash value is large enough, you can borrow from the insurer against it. The approach is known as The Infinite Banking Concept®, the name Nelson Nash gave it in his book Becoming Your Own Banker®, published in 2000. The phrase overstates what happens. What you own is a contract with an insurer, administered by the insurer under its terms, and every loan comes from the insurer.

Before checking them, it helps to know where most of these lists come from.

Why do so many of the lists come from the United States?

Because most of the people who write about the method publish there. On the results page for this search, the videos, the forum threads and many of the articles are American, and one of the most detailed lists cites a section of the United States tax code as the reason the loans are favourable. A Canadian reader cannot tell that from a summary, because the summary blends sources from both countries into one confident paragraph.

That blending produces small errors with large effects. A rule about American policies becomes a rule about all policies. A protection from creditors that exists in one state becomes a protection that exists everywhere. And a tax point gets attached to the wrong account, as when a summary links a policy's tax treatment to a tax-free savings account.

So before you rely on any list, check three things about its source: the country it was written for, the date it was written, and how its author is paid. A list can be honest and still be wrong for you, simply because it was written for someone else's law.

With that settled, the advantages can be checked one at a time.

Does the cash value keep growing while a loan is outstanding?

The claim is that your money works in two places at once. You borrow and spend, and the cash value keeps compounding as if you had never touched it.

Part of that is accurate. A policy loan does not take money out of the policy. The insurer advances its own funds to you, and the cash value stays where it was, as security for the loan. The contract keeps its guaranteed values, and the policy can keep earning dividends if the insurer declares them.

The part the lists leave out is the interest. From the day you borrow, interest is charged on the loan, at a rate the insurer sets under the contract, and unpaid interest is usually added to what you owe. So the honest picture has two lines moving at once: the cash value, and a loan balance that grows unless you pay it. Whether a loan changes the dividend your policy receives depends on the insurer's contract and dividend practice, and that varies.

Verdict: it holds with conditions. The cash value is not withdrawn, but the loan costs interest the whole time. Why the loan rate and the dividend cannot simply be subtracted from each other is explained on policy loan interest against dividends.

Is it true that no credit check is needed?

Yes, in the sense the lists mean. Subsection 148(9) of the Income Tax Act defines a policy loan as an amount advanced by an insurer to a policyholder in accordance with the terms and conditions of the life insurance policy. The right to borrow comes from the contract. The cash value secures the loan, so the insurer does not need to review your income or your credit file before it lends.

Two conditions keep this from being the open door some videos describe. The first is the limit. You can borrow only up to an amount the contract sets against the cash value, and in the early years that value is small next to what you have paid. The second is time. The value that makes the loan possible is built by years of premiums, so the freedom from a credit application is something you pay for in advance.

Verdict: it holds. The right is real and contractual. How long it usually takes before the cash value can finance a purchase is set out on how long before a policy can finance a purchase.

What are the real tax advantages in Canada?

This is where the American lists go most wrong for a Canadian reader. Many of them cite section 7702 of the United States Internal Revenue Code. That rule does not apply to a Canadian policy. Canadian policies are governed by the Income Tax Act, and three rules do most of the work.

The first is the rule on yearly growth. Subsection 12.2(1) of the Act requires a policyholder to include in income, each year, the growth of the policy's accumulating fund over its adjusted cost basis. That rule does not apply to an exempt policy, which is the status a policy keeps while its design stays within limits set by regulation. So while the policy stays exempt, its growth is not taxed year by year. That is a real advantage, and it depends on the design and on the policy staying within the limits.

The second is the rule on dispositions. Subsection 148(9) lists a policy loan among the dispositions of an interest in a policy, along with a surrender. Under subsection 148(1), income arises when the proceeds of a disposition exceed the adjusted cost basis, which is roughly what you have paid in, adjusted by the rules. So a loan is not tax-free by nature. A loan that stays within the adjusted cost basis creates no income when it is taken. A larger one can.

The third is the rule on death. A payment under a life insurance policy because the person insured has died is not a disposition. The death benefit reaches the beneficiary without being taxed as income. That is an advantage of life insurance itself, and it is reduced by any loan still owing.

None of this involves a tax-free savings account. A policy's tax treatment comes from these sections of the Income Tax Act, not from the rules for registered accounts.

Verdict: it holds with conditions. The advantages are real, they rest on exempt status and on the adjusted cost basis, and they are narrower than the phrase "tax-free loans" suggests. The sentence that matters most is on when a policy loan becomes taxable, and what American videos get wrong about Canadian rules is on American videos and Canadian law.

How flexible is the repayment?

Very flexible, and the flexibility cuts both ways. There is usually no fixed schedule. You decide when to repay and how much, and you can repay in one payment, in instalments, or not at all while the policy stays in force.

The cost of that freedom is that nobody forces the loan down. Unpaid interest is usually added to the balance, so a loan left alone grows. If the loan and the interest ever reach the value securing them, the contract can end. When a policy ends with a loan outstanding, the coverage ends with it, and the Income Tax Act can treat the end as a disposition. Income can arise even though no cash reaches you. There is one narrow exception for a lapse caused by unpaid premiums: it is not a disposition if the policy is reinstated not later than 60 days after the end of the calendar year in which it lapsed.

Here is the discipline. A schedule you set for yourself only works if you keep it.

Verdict: it holds with conditions. The flexibility is real, and it is also the most common way these contracts fail. The ways a policy goes wrong are set out on how policies fail.

Is the cash value protected from creditors?

Sometimes, and the lists rarely say when. In Canada, protection from creditors comes from provincial law, not from the policy itself. Each province decides which beneficiaries make the rights under a contract exempt from seizure, and the lists differ. In general the protection attaches while a close family member, such as a spouse, a child or a parent, is the designated beneficiary, or while a designation is irrevocable. It is a protection of a designation, not of a type of asset.

That has two practical consequences. A policy owned by a corporation, or one that names the estate as beneficiary, usually has no such protection. And a change of beneficiary made when debts are already pressing can be challenged in a bankruptcy. The details, province by province, are on the designation and what a creditor can reach.

Verdict: it holds with conditions. The protection can be real, and it depends on the province, the owner and the beneficiary on file. A lawyer in your province is the person to confirm it for your contract.

What is actually guaranteed?

Some lists say the growth itself is guaranteed, by the contract and the dividends alike. That sentence mixes two different things.

What is guaranteed is written into the contract by the insurer: the guaranteed cash values for each year, and the guaranteed death benefit, as long as the premiums are paid. Those numbers appear in the guaranteed column of the illustration. What is not guaranteed is the dividend. The insurer's board declares dividends each year from the results of the participating account, and they can go up or down. The projected column of an illustration assumes a dividend scale that may not hold.

There is a third layer the lists rarely mention. The guarantees are those of one insurer, so they depend on that insurer's financial strength. If a life insurer fails, Assuris protects its policyholders. For whole life, it lists protection of up to $100,000 or 90% of the cash value, whichever is higher, and up to $1,000,000 or 90% of the death benefit, whichever is higher. That is a different protection from deposit insurance, because a premium is not a deposit. The difference is explained on what makes a bank a bank in Canada.

Verdict: it overstates. The contract has real guarantees. The growth beyond them is not guaranteed, and a list that says otherwise is describing something no Canadian contract promises.

Do you really recapture the interest you pay?

The claim is that the interest you pay on a policy loan comes back to you, because you are borrowing from your own money. The loan is not made from your own money. The insurer advances it, your cash value secures it, and the interest is paid to the insurer.

What can be true is narrower. If you would otherwise borrow from an outside lender, paying the insurer instead changes who receives the interest. It does not send the interest back to you, dollar for dollar or otherwise.

Verdict: it overstates. What the phrase can and cannot mean is set out on what recapturing interest means.

The whole ledger in one table

Read across the table and a pattern shows. The advantages are mostly real and almost always conditional. The drawbacks are mostly accurate and almost always understated.

What should you ask before relying on any list?

Ask the insurer for the adjusted cost basis of the policy on the date you plan to borrow, and for the cash surrender value on the same date. Then ask what the loan rate is, how it is set and how often it can change. Those three numbers answer most of the tax and cost questions the lists raise.

Ask for the illustration with the guaranteed column beside the projected one, and read the guaranteed column first. Ask how a policy loan affects the dividends on that particular contract. Take the illustration to your own accountant before you sign, and ask a lawyer in your province whether the beneficiary you plan to name gives any protection from creditors.

And ask the person who presents the method how they are paid. A licensed insurance professional who arranges a policy is usually paid a commission by the insurer, and that should be said before anything else. It is said here: the practice that publishes this page is paid that way.

Who does this method not suit?

It does not suit a household that may need the money in the next few years, because the early cash value is low and an early surrender locks in a loss. It does not suit income that cannot carry the premiums for many years, including in a bad year. It does not suit someone with no need for life insurance, because the insurance is the product and its cost is real.

It does not suit someone who expects a loan to cost nothing, or who finds it hard to leave borrowed money alone. Nor does it suit someone who wants to know today exactly what the policy will be worth in twenty years, because the dividends that drive the projected values are not guaranteed. The wider case against it, with the points that are correct, is on the objections and risks page. Whether only high earners can carry it is answered on is it only for high earners.

It can suit a household with steady income, a need for permanent coverage and the patience to keep paying premiums through the slow years. For that household, the lists are a starting point. The contract is the answer.

What this page will not tell you

It will not tell you whether to buy a policy, borrow against one or choose another way to save. That depends on your income, your health, your family, your other plans and your tax situation. It will not quote an insurer's loan rate or dividend scale, because each belongs to one company on one date and each changes. And it will not tell you what your own beneficiary designation protects, because that is a question for a lawyer who has read your contract and knows your province.

What it can leave you with is a way of reading the next list you see. For each advantage, ask what condition it depends on. For each drawback, ask whether the list gave it a full sentence. Then ask the insurer for the numbers that settle it. Take from this only what applies to you.