When you research the pros and cons of the Infinite Banking Concept (IBC), you’ll often encounter the phrase “buy term and invest the difference.” Critics argue that IBC isn’t worth it, claiming you’ll achieve greater financial success by purchasing a term policy and investing the money you would have allocated to an IBC policy. In this article, we’ll delve into this concept, and as we explore it further, you’ll discover why IBC may be the better long-term strategy—and why you can still invest alongside it!
The Whole Life vs. Term Insurance Debate
A common starting point in conversations about IBC is the claim that whole life insurance isn’t a good use of money. It’s often labeled as expensive, with proponents of term insurance suggesting it’s the more sensible option if you need coverage. The first point to address is that term insurance is a game of probabilities for the insurance carrier. The price is low because only a small fraction of these policies ever pay out to beneficiaries. Term policies, as their name suggests, offer coverage for a limited time. Once the term expires, the policy becomes invalid, and no death benefit is paid out if you pass away afterward.
In contrast, a whole life policy remains in force until the day you die, provided you continue to pay your premiums. As long as the policy is active, a death benefit will be paid to your beneficiaries. Whether whole life or term insurance is the right choice for you is a discussion worth having with one of our advisors. But it’s important to note that you can combine both types of policies to suit your needs.
Understanding the Infinite Banking Concept (IBC)
When you implement the Infinite Banking Concept, you’re not just paying the minimum premium. Part of your premium goes toward purchasing Paid-Up Additions (PUAs). These are fully paid-for life insurance contracts that come with their own death benefit and, in a whole life policy, add to your cash value. The effect this has on your policy is significant: in a whole life policy, the cash value must equal the death benefit at age 100. This means that throughout the life of your policy, your cash value grows daily.
The cash value increases continuously because each passing day brings you closer to age 100, necessitating growth. With each purchase of PUAs, you’re actually increasing your policy’s death benefit. This means that every time you allocate a portion of your premium toward PUAs, you extend the goalpost. The death benefit increases, causing the cash value to rise as well. This creates exponential growth near the end of your policy’s term as your cash value “chases” the death benefit.
Debunking “Buy Term, Invest the Difference”
Now, let’s revisit the original argument: “buy term, invest the difference.” Suppose you buy a Term-100 policy, meaning you have term insurance for the rest of your life and are guaranteed a death benefit. From an insurance standpoint, this might seem comparable to whole life, though it’s highly unlikely you’ll qualify for even a fraction of the death benefit that you could achieve using the Infinite Banking Concept.
Let’s also assume that over your lifetime, you’re disciplined and do indeed invest the difference between the premiums. You may amass a substantial fortune, which is fantastic. Wealth creation is a commendable achievement, and it’s something we need more of in Canada. However, there are drawbacks. Depending on the assets you’ve acquired—let’s say they’re stocks—how can you leverage that money during your lifetime? And what happens to those assets when you die?
In reality, accessing that capital can be challenging unless you sell the stocks, which triggers capital gains and reduces your wealth. Worse, once you withdraw that capital, it can no longer compound and grow. Additionally, when you pass away, the tax law’s “deemed disposition” rule comes into play. This means the government treats all your assets as if they were sold at fair market value, and your estate will owe taxes, which can be substantial.
Leveraging Your Capital with IBC
With an IBC policy, you can leverage the capital you’ve accumulated through your premiums. You can borrow up to 90% of your available cash value, no questions asked. This is considered a private loan in Canada and won’t appear on any credit reports. Better yet, you control the repayment schedule since you function as the banker in this transaction. This borrowing capability is built into the whole life policy contract, and the insurance carrier is obligated to honor it.
So, while you leverage your policy to finance your life’s needs, your capital continues to grow uninterrupted within the policy. You aren’t withdrawing your money; you’re borrowing against it! When the time comes for you to move on, your beneficiaries will receive the death benefit—minus any outstanding loans—tax-free.
The Numbers Game: Guaranteed Growth vs. Investment Risk
When someone advocates for “buy term, invest the difference,” they’re essentially saying, “you can make more money by investing elsewhere.” While this is possible, it comes with inherent risk. There’s no guarantee that your investments will grow at all; in fact, you could lose your entire capital! In contrast, with IBC, your capital will grow. It’s guaranteed by the contract. The cash value must equal the death benefit at age 100. And when a Grade A investment opportunity arises, you can take out a policy loan to capitalize on it while your initial capital continues to compound within the policy.
Conclusion: Why Not Have It All?
When you combine everything, it becomes clear that IBC offers more death benefit potential than term insurance ever could. It helps you create generational wealth by protecting your assets from deemed disposition at death, and it guarantees capital growth, allowing you to invest in opportunities as they arise. So why not use IBC, obtain whole life coverage, and invest at the same time? When you become your own banker, it’s not a choice between one strategy or the other—you can have the coverage you need (and eventually more than you could qualify for with term insurance) while still growing your wealth by investing your capital as you see fit.
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