The Family Banking System: How to Build Wealth Across Generations

Rethinking How Families Finance Their Lives

Imagine a scenario where your family never has to walk into a bank and request a loan ever again. No lengthy, invasive credit applications. No stress tests for mortgages. No deflating news that you can’t afford that dream house to start your family in. No stress associated with tracking interest rates and balancing budgets to see if you can keep your home if the decisions of others raise interest rates. This could be your reality. It could be the reality of your kids, and their kids as well. You can cut the bank out of your family’s finances for the rest of time just by implementing a family banking system, and more importantly, teaching the next generation how to use and maintain it.

A family banking system is a financial system that spans multiple generations and is designed to keep money flowing back into family coffers rather than lenders, banks and even the tax man. It is a system built to allow the highest earners the ability to provide the majority of the capital, while those that are more financially vulnerable can access the money they need, when they need it, and then be in control of the repayment. Then when a family member passes away, the leftover money from their estate is used to replenish the system.

The theory behind a family banking system is quite simple. A person generally only works to generate income for a defined period of time in their life. Generally speaking, the lowest they can work in Canada is 16 years old, and while there is no mandatory retirement date, most Canadians retire around the age of 65. This means that the average person works for roughly 50 years or so. Before the age of 16, people are unable to financially support themselves and are entirely dependent on their parents or legal guardian. After the age of 65, people are reliant on their investments, pensions, and government support such as the Canadian Pension Plan (CPP) and Old Age Security (OAS). This again becomes a vulnerability because they are no longer actively working to provide an income. If things go wrong in their finances, they become reliant on either their kids or other relatives. For the purpose of this article we are going to assume one generation is equal to 25 years.

For income, people generally make more money later in their careers. If we assume a relatively flat income trajectory, most people will be making the least amount of money when they are 16, and the most when they are closer to 65. This makes sense because when you are young you lack skills and experience, and as you age, you gather more experience and more skills making you more valuable.

How does this relate to a family banking system? If you look at the average person’s life, they tend to have the greatest need for financing earlier in their life, and then try to retire without any debts or liabilities to make their saved money go as far as possible. It is extremely inefficient. The majority of the money you make over the course of your life is going towards paying off debts and liabilities rather than building your wealth. For the majority of your income earning years, you are watching as money flows away from you. A family banking system flips that narrative. Instead of needing to go to a bank to get a loan for a car, or a mortgage, you use the family bank instead.

The family bank can be described as a collection of warehouses of wealth that is owned and operated by a family. The vessel we use in reality is a Participating Whole Life Policy rather than a literal warehouse because it has all of the characteristics we are going to describe in the remainder of this article.

Someone has to start the banking system. Because of that, there will be one generation that does not get to reap the benefits of having a family banking system available to them when they are starting out. For the purposes of this example, we are going to show a family banking system that is well established and has multiple whole life policies (or warehouses) built for this purpose already in use.

What we are doing is simply formalizing the unwritten rules of life. Parents take care of their kids, and in return the kids take care of the parents. What this looks like in reality though, is a family that never needs to use a bank again except for the convenience of debit.

Creating A Family Banking System

Each time that a loan is taken out from the family bank, the amount within their warehouse is reduced. This is logical thinking, but in the family banking system, its not accurate. We are creating a banking system not simply a warehouse to store cash so it must act like a banking system as well. Banks take deposits at the front door, and then lend those same deposits out as loans at the back door. The banks collect interest off the loans, which become the profit of the bank. This is all hidden from the customers of course, but it is how banks function.

A family banking system must work the same way. The deposits are placed in the system where they can compound and grow uninterrupted, and then we take a loan against the value in the warehouse rather than withdrawing it. This allows the money to continue to compound and grow uninterrupted, while we still access capital for the things we need to finance.

Implementing The System

How to put this system in place. When a child is born into the family, a whole life policy is bought for them immediately. This acts as a buy-in into the system. The premium, or deposits, for this policy can be paid by any older generation, but works especially well when the grandparent funds the policy as they are likely in the peak of their income earning in their lifetime. The grandparent can continue to fund this first policy for the remainder of their lives, but they can also hand off ownership to the child once they start making their own money at age 16.

This creates a cascading effect where there is always new and additional inputs being put into the system. As a person’s income grows, so can their system of policies to allow for more and more capital to be put into the family banking system. When that person is no longer earning an income, they still have access to that pool of money that is still continuing to compound and grow. While their need for capital will likely be much less in retirement, they still have access to that source of money. At this point, the next generation is in their prime income earning years so there is no risk of depleting the system.

Now this may not seem like its really all that revolutionary. You must remember however, that if a policy is bought when a child is born, and they continue to expand their system of policies throughout their income earning years, the majority of those policies will be compounding and growing uninterrupted for decades. See, the family banking system isn’t really about the amount of deposits, its about controlling the flow of money and keeping it into the family, all while those deposits continue to compound and grow uninterrupted for life.

Because the vessel for a family banking system is a life insurance product, the leftover death benefit from a given generation is passed on to following generations tax free. This itself is an incredible wealth transfer tool, but coupled with the effect of keeping that money in a family banking system, and it being used to fund the future generation’s finance needs, it ensures that money never leaves the family banking system. There is no leakage. There is no interest paid to outside lenders or banks, and all the money spent on major life purchases is paid for and recaptured by the family banking system.

Imagine you buy a house, pay it off over the next 25 years, and then your kids can use all of the money you repaid to buy their first home. That is the true power of keeping control of your money.