Introduction

These case studies were created to give just a small glimpse into the power of the Infinite Banking Concept. They are designed to show the versatility of creating a personal banking system. The first covers the average Canadian family, using the average Canadian household income and the average Canadian household debt. The second is designed for a small business owner, and the third to show an alternative to financial planning for a child’s future.

These case studies are very basic and designed to only introduce the power of controlling the banking function in your life. Each person’s journey through this process will look different, including the amount they allocate towards the policy. The amount you contribute is fully dependent on your goals and will be personalized to you and your situation. Feel free to imagine what this process would look like for each case study if the person in the scenario had contributed more, or less money to capitalize their system.

The tables below are only projections and are not guaranteed values, but they are based off illustrations provided by life carriers. Dividends are not guaranteed, but have continuously been paid since the inception of participating whole life policies. The cash value growth is again a projection as the growth is dependent on the projected dividend rates. The purpose of these tables is to show the growth potential of these policies. The actual performance will likely be very close to these projections.

Case Study 1 – Average Canadian Family

Name: Brenda and Jake

Age:35, 36

Occupation: Teachers

Income: $106,000 / year

Net Income (after taxes and deductions ~ 30%): $74,200 / year

Assets:

Owns their home, value $675,000

·$ 20,000 in savings

Debts:

·$350,000 mortgage, 5 year term, 4.5% (20 years left on amortization)

·$20,000 car loan, 3 years left, 6%

·$10,000 on personal line of credit, 9%

Brenda and Jake are a young family with two children, Lisa aged 3, and Aaron aged 1. Both Brenda and Jake are teachers. Together they know they will both have pensions so they have not invested much in their future. They feel like they have done well in life by listening to popular financial advice. They own a great home in a great area, they have two cars, one of which is paid off. They like to take one vacation a year with their kids, but with the rising cost of living they are not sure they will be able to sustain that lifestyle. They have been feeling lately that what they have been doing financially is not working. Every month they have the same feeling that they make a lot of money, but they have nothing left after each month’s bills to show for it.

Identify The Problem

Brenda and Jake make the Canadian average household income, and, just like the average Canadian, they have a mortgage and a car loan. They also have a balance outstanding on their personal line of credit. Let’s break down each monthly payment they have and isolate the interest.

If we assume that Brenda and Jake’s take home salary is $74,200 (assuming 30% to account for taxes and deductions including their pension), or $6,184 / month, we can then compare how much of their after-tax dollars are going towards paying interest. If we add up the values in the monthly interest column. We can see that across their mortgage, car payment and line of credit, they pay $1,675.00 in interest every single month! This equates to 25.57% of every after-tax dollar going towards paying interest!

If we were to expand their budget to include their entire month’s expenses, we can take a look at how implementing a personal banking system in their lives will change their finances. To simplify this example, I’ve lumped together all of the monthly expenses a young family of 4 would have into one expense item called living expenses. This would include all the groceries, gas, bills, hobbies etc. This budget is based off of the tax home total of $6,184 a month.

This represents a typical Canadian budget. You will notice that the interest portion of each payment is not represented. This again is very typical of people making a budget. The lenders don’t want you to see how much interest you are paying each month because it’s easier to keep someone happy when they don’t see the amount of profit you are making off them with each payment!

Let’s talk a little about the mindset of Brenda and Jake before we talk about how they are going to implement their system. Right now, they have $20,000 in a savings account. They use this account to fund big ticket items in their lives. Could be a new roof for their home, a hot tub, or to fund any emergencies in their family. What’s most important is their mindset behind this pile of money. When they spend a portion of their savings, they immediately start paying it back. This is accounted for in their budget at $500 a month.

Why is this important? It is important because they are already in the habit of putting money aside to finance the things they need in life, and have a system set up to repay it! Sound familiar? The only issue with their current system is, money sitting in a savings account is not doing anything towards building them wealth. If they don’t control the system, that money sitting in a savings account is actively being lent out to create wealth for the bank! If we were to set up a policy for them, they already have the habits in place to fund it, we just need them to re-think about the real problem so they can orient themselves to the solution.

Let’s discuss what their first policy looks like. If we look at their finances and what they are currently doing, we can see that they have $20,000 in capital readily available right now. The only issue is its not doing anything for Jake and Brenda. This is the starting point. We have the start up capital. Next, we need to look at our cash flow and see what is sustainable. With this couple, would $20,000 per year in capitalization be sustainable? I would say that would bring more stress than freedom to their finances. Instead, I’m going to look at what they currently put aside per year in the form of savings, including their vacation fund.

Why target these two items? They are currently being used to build up capital in an account, and then use that money when required. In the case of the vacation, its used once a year. In the terms of the savings for large projects or emergencies, it may not even be used in a given year. What this really means is Brenda and Jake are used to continuously supplying this account with $12,000 a year. We don’t have to change their current habits to get started and make a significant impact right away. Of course, we can choose to capitalize more aggressively if we wanted to, all that means is we shorten the timeline to re-capturing all of their debts and taking full control over all of there expenses. There is no right or wrong answer, as long as you are comfortable with the solution.

So, the proposal to Jake and Brenda will be to take out a policy, or policies, equaling $10,000 a year to start. Why $10,000 a year? We can backdate a policy to allow us to put 2 years’ worth of premium in up front. Why would we do this? We basically get a full year of growth within our system right off the bat. It means that we will have more access to our initial capital right away since we are effectively eliminating a year off the growth scale. Remember that each year a policy is in force, it gets more efficient. We just gave their policy a head start.

This means we can take their full $20,000 and capitalize our system immediately, without adding the burden of a $20,000 a year commitment. A policy designed to work as a banking system will be split into two parts. The required minimum premium to keep the policy in force, and the Excelerator Deposit Option that acts as flexible premium that buys more death benefit. In most cases, a good starting point is to have a policy with 40% of the total premium allocated to the minimum premium, and 60% allocated to the flexible premium. This ratio can be changed within the parameters set out by the life carrier, but this is a good starting point for most policies.

This means with this particular policy, the minimum they must fund every single year to keep the policy in force is $4,000. This is well below the amount they are normally putting aside for savings so this works well.

As discussed previously, the first 4-5 years of a policy is where the life carrier recoups the majority of the costs associated with setting up the policy. This means it will take roughly 4-5 years for this policy to become profitable, meaning you have access to more money than you have put into the system. What this means is out of their initial $20,000 being used to capitalize their system, they will likely only have access to roughly 75% of that capital on day one of the policy.

Even with only having access to 75% of their initial capital, that is enough money to recapture their first item on their budget! They can recapture the balance of their line of credit. What this means is, they can immediately take a policy loan, use the life carrier’s money to pay off that line of credit, and redirect the payment they were making to the bank back to their own system. If they were only servicing the debt, or just paying the interest, that means they have immediately redirected $90 a month towards their system.

Now this may not seem like much, but you must remember that the original $20,000 used to capitalize the policy is continuing to compound and grow every single day. Even with a loan taken out, that money will continue to compound and grow every, single, day. It must.

Another point to consider is that now that each and every dollar used to repay that loan goes towards building their own financial system, they may consider increasing that payment. What effect would this have? Well, if the next target is to recapture their car payment of $608.44 a month, the quicker they rebuild the capital in their system, the quicker they recapture that payment. It is more likely that they recapture that car payment in the second year of their policy, but it is a significant milestone for them.

Lets take a look at our original budget.

What we have managed to do is take our savings and our vacation items from our budget and used those to fund our system. We have taken money that was just sitting idle waiting to be used, and put it to work for us and our wealth generation. By redirecting our savings into our policy where it can compound and grow uninterrupted, we had enough cash value to recapture our first expense in our budget, the line of credit. By doing so, we have recaptured out first payment! We are now redirecting $90 a month back towards our own system rather than the banks! This is just a minimum payment though, if we were to be more aggressive with paying that loan back, we could be more aggressive in recapturing debts in the future.

Let’s take a look at what this policy looks like.

After looking at the illustration of this policy, you can see that at the start of year 3 of the policy, we will have enough Cash Value to recapture our second payment, the car loan. We can then redirect that $608.44 payment to our own system bringing the total repayments up to $698.44 a month!

Now you may be wondering, if we waited until year 3 of the policy, doesn’t that seem like a waste? There was only less than a year left anyways on the loan and then there would be no more payment. You would be correct, but you have not thought long-term about what this allows us to do. Are Jake and Brenda likely to have that one car for the rest of their lives? Highly unlikely. If we assume that most people get a new vehicle every 4 years, then when the time comes to trade their old vehicle in for a new one, they won’t need to finance the vehicle at all from the dealership. They will have enough capital within their system to finance from themselves. What’s more, they are already in the habit of paying $608.44 a month for a vehicle. There are no negotiations required to determine the monthly payment or interest rate. All they need to do is request the loan. This can continue indefinitely. Every 4 years, they get a new vehicle. During those 4 years they repay the loan on their terms. All while the original capital used to “fund” that vehicle is compounding and growing every single day.

After recapturing the car payment, they only have two major items left to recapture, but only one of those items has interest tied to it.

Even though it will take time to build up enough capital to capture their mortgage, they are well on their way to doing so. Once they’ve recaptured that payment, they have effectively cut banks out of their lives except for the convenience of debit. There will no longer be a reason to borrow from any other place except their own personal system. They control their financial future and answer to no one but themselves. That is cash confidence.

If we are to fast forward 30 years into the future, Brenda will be 65, and Jake will be 66. They are both looking at retiring and want to supplement their income from their policy. Due to the fact that the death benefit is guaranteed to be paid out upon the death of the life insured, this policy can be collateralized with a conventional bank and used to draw an income from in retirement. The calculations on how much a bank will give you in income varies depending on the lending institution, but it is proportional to the amount of cash value that exists in the policy. The point is; by taking control of the banking function in their lives, they have simultaneously created a product that can be used to supplement their retirement. This strategy could even be used as the primary source of retirement income if you so choose. The best part about collateralizing a policy as retirement income in Canada is all of the funds you receive as part of that collateralization will be tax free!