We all need the use of a banking system. Its an important foundation of our cash flow system. Is there more than one option? Yes! And as you will read there is a better banking system and its available to you now! Before we get to it, let’s look at the Canadian Banking System we use now.
Canadian Banking System
- The Bank of Canada was created March 1935, copied from England. Its purpose was to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of the Dominion.
- Uses “fiat money”. Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies are fiat currencies. This allows them to create money out of thin air and can destroy it just as quickly. However, printing money adds to inflation. Inflation is tax created by our current banking system. This magical ability also gives rise to the familiar boom-bust cycle in developed economies. Most bankers probably have no idea our entire financial system rests on quicksand.
- The Bank of Canada has a complete monopoly on our money, and this is mandated by our federal government. It is accountable to no one. The effects of this monopoly is the prime reason why the value of our money has fallen more than 95% since its founding.
- Fractional reserve system – banks in Canada only have to keep as low as only 0 to 10% of each deposit made to them (0% during Covid) and can use the remaining money for loans.
- Depositors, despite supplying the capital for them to loan, do not share in the profitability of these loans.
- Restrictions are placed on how much of your money you can access.
- Legally can delay withdrawal requests for up to 90 days.
- Users pay for Canadian Deposit Insurance Corporation (CDIC) protection through lower interest rates on deposit accounts.
- Users pay fees to use the banking system.
- Even though you may have significant assets as collateral for a loan, they will not loan you money unless your credit is good, and you can prove sufficient income to make loan payments.
- During the 2008 financial crisis, some big banks in the United States, such as Citigroup and Wells Fargo, had to be bailed out by the federal government. In Canada, the biggest Canadian banks received a $114-billion “secret bailout”.
We’re not suggesting we don’t need this banking system. It does provide us with some conveniences and value. Households and businesses do have the ability to secede from this chaotic financial system – a privatized banking system.
Privatized Banking System
What is a Privatized Banking System? It’s a system where you’re in control, and it can be implemented immediately and virtually by anyone.
A move away from the government-regulated banking system does require a way to take control of the banking function in your lives, to allow you to manage your cash flow.
Enter the Be Your Own Banker (BYOB) concept, also known as the Infinite Banking Concept (IBC), a creation of Nelson Nash.
BYOB is a system, not a financial product, but it does require the use of a financial product to control, hold and allow you to access your working capital.
This financial product is not new. It’s something many parents and grandparents used. It’s something many have labeled a bad investment.
It never was intended to be an investment, although its historical performance compares favorably with other investments and is immune to market losses. It also includes other desired features. But again, its role is to act as holding account for your working capital to deploy it as needed or wanted. What is it?
It’s a properly designed tax-exempt dividend-paying cash value whole life (permanent) insurance policy.
Through this policy, policyowners, individuals and businesses, can turn to traditional life insurance companies rather than commercial banks and Bay Street, to hold their working capital and deploy it to acquire other assets. For the reasons you will read below, it is the best vehicle available to provide the capital to run your own privatized banking system.
It is the perfect warehouse, reservoir, and headquarters to stockpile your working capital to deploy it when opportunities present themselves.
Individuals and businesses can build up large “cash surrender values” in one or more whole life policies. This cash creates you with the foundation of your own privatized banking system, a system that provides you with control.
Life insurance cash surrender value is something like the equity you build in a house, as you pay down the mortgage. With life insurance, the “mortgage” is your stream of contractually specified premium payments, and the “house” is the death benefit payment (either when you die, or when the policy matures). With each “mortgage” payment, the insurance company’s lien against your “house” shrinks, which is why your “equity” in the policy grows.
When you have a large purchase to make, such as a new car, new appliances, new equipment, renovation, funding a wedding, even buying property, people and businesses practicing BYOB will call the insurance company and take out a policy loan. This is a side loan from the insurance company, with the cash surrender value of the life insurance policy acting as collateral. Since the cash value is an asset, it is used as collateral, allowing the cash value to continue to compound undisturbed.
The terms of loans from a life insurance company are much more flexible than from a traditional lender. There is no credit check. There is no income verification.
Unlike the bank, if the new car buyer hits a tough patch and can’t make his “car payment” for a few months, you don’t start to receive mail and phone calls from the bank, and nobody shows up to repossess the vehicle.
The key to the BYOB system is discipline in consistently allocating funds to build your working capital and to replace the funds you access as you would have to with the Canadian banking system. If not, the BYOB system is not for you.
How much should you allocate to start your own BYOB system?
While there is no definite number, for individuals, 10 to 20% of your income is suggested (the amount you should be saving already). Many also reallocate their tax-infected investments and other surplus savings. The key is to start, not the number!
For businesses we suggest allocating surplus liquid assets/retained earnings.
Even if you don’t use life insurance to finance the acquisition of other assets it is still a better bank account to hold your working capital meaning everyone will benefit from acquiring a dividend-paying whole life insurance policy as an asset.
Why Life Insurance is a better Working Capital Account than your bank accounts.
In addition to providing the above, life insurance also provides some key features making it the best vehicle to implement BYOB:
- Life insurance cash values are an asset, another asset class to diversify assets and provides greater safety than many other asset classes. Successful people like Walt Disney and Ted Rogers owned dividend-paying whole life insurance. As you will see below its an asset that provides passive tax-exempt income greater than your current chequing and savings accounts.
- The Office of the Superintendent of Financial Institutions of Canada (OSFI) requires life insurance companies to maintain 55 to 90% capital reserves, far greater than the 0 to 10% fractional reserve bank requirements. Based on this, holding your working capital with life insurance companies is far safer than the banks.
- Has contractual guarantees on the cash value build up and once dividends and interest are earned, they are added to the guarantees.
- Immune to taxes. Under section 148(3) of the federal Income Tax Act, assets accumulate within a tax-exempt life insurance contract free of annual accrual taxation. When you pass away, any proceeds of the policy are distributed to your beneficiaries on a tax-free basis outside the scope of your estate, bypassing its associated costs. This tax savings is like the government paying for your life insurance costs.
- Immune to government income claw backs
- Guaranteed growth – the guaranteed cash value portion is as it name implies is guaranteed
- Dividend-paying – in addition to the guaranteed growth it pays an annual dividend. A dividend has been paid EVERY YEAR as far back as the late eighteen-hundreds despite world wars and pandemics. It currently is paying a 5 to 6% annual dividend in a 2% world (depending on insurer, subject to change)
- Immune to stock market losses and totally protected from the next economic tsunami
- Compensates you as the depositor, when money is loaned out.
- Uninterrupted compounding – this is the difference-maker in this working capital system – significantly better than a “save and withdraw” system.
- Guaranteed access – no credit approvals, you determine terms including interest only or to capitalize interest – this flexibility creates more working capital.
- Preferred protection from claims of creditors when personally owned.
- Significant enhancement on death of your cash value payable to your beneficiary tax-free
- Private distribution of proceeds to beneficiary on death – not of public record
- No probate without the risk of joint ownership and their potential creditor problems which are then your problems
- Expedited payment of proceeds on death in weeks – not months or years as with the bank.
- During the great depression in the 1930’s people ran to the life insurance companies after the banks collapsed.
- Canadian life insurance companies have never needed a government bailout.
If we agree that the true definition of inflation is the erosion of our currency’s purchasing policy through the increase in our money supply, then building your own Privatized Banking System will allow you to insulate your wealth from the impact of inflation! This protection is possible because you have access to your money now while the opportunity cost to use your money (policy loan interest) can be paid in the future (when your dollar is less valuable). The whole time all of your money is working for you because of how it is built.
Are all life insurance licensed advisors an expert on BYOB?
No. The BYOB system does go beyond the general life insurance licensing requirements. I learned and started my BYOB in the 1980’s from Bob Shiels who learned it from Nelson Nash. Advisors who have attained a Chartered Life Underwriter® (CLU®) designation, like me, will generally have the most technical expertise with BYOB, but not all CLU®’s practice BYOB. Do your research.
Time for something better!
Many are aware of the definition of insanity “doing things the same way and expect different results.” People are willing to be educated on alternative solutions because the “status quo” is not adding any value.
If you neglect to seriously investigate the privatized banking system for you, your children and grandchildren, you are derelict in your duty to yourself, your family, and the future generations to come.
The next 30 years in our economy is going to be very different that the last 30 years. The place we store our savings and how our money works for us needs to change because right now savers are being punished while borrowers are being encouraged to consume more and save less!
People and businesses need to think differently to protect one’s personal/business economies. BYOB strategy is a major tool that will help people take control of their financial picture.
Let’s discuss how much better life would be with BYOB.
Book a BYOB Intro Call with us here.
Life insurance is a horrible investment.
Life insurance was never intended to be an investment however it stands up well compared to most investments. Dividend-paying life insurance is both a place to store your safe money, get a better return and also allocate money to an alternative asset class instead of bonds and cash. Comparing BYOB to an investment tied to the stock market is both misleading and the wrong mindset. A properly built BYOB is designed to protect the money you contribute to your privatized banking system from risk.
Whole Life insurance is expensive. I should just buy term and invest the difference.
BYOB is a strategy that prioritizes utilization of your money over the life insurance protection. Repositioning excess cash flow or assets into a properly built BYOB will reduce the cost of insurance and cause you to have access to more of your money sooner in a highly tax-efficient manner. Plus, you will end up with a lot of permanent life insurance when you finally pass away – which is normally when someone wants to own life insurance.
Consider that only about 3% of all term policies end up paying a death claim. This means 97% of all term policies never pay a penny. In our minds, that makes term a lot more expensive. And the idea that most people should “invest the difference” confuses the purpose of these dollars. We are not talking about investing. We are talking about a way to store your safe money in a place where it works like your own privatized banking system.
Why does the life insurance company charges interest to use own money?
That’s because they are continuing to increase your guaranteed cash value and pay dividends (asset) even though you have accessed some it and they do not have that money to invest for you. Its only responsible. But what many do not know, is the loan interest charged on this loan contributes to the dividend it receives annually. As such, the dividend offsets the loan interest.
Why would I borrow my own money? Aren’t interest rates low enough today where it makes sense to borrow from a bank instead?
We ran the numbers researching the differences of borrowing from a bank versus taking a policy loan from a life policy. Here are some FACTS about loans from a traditional bank:
- Every bank has a loan qualification process. The bank asks for a lot of financial information and ultimately tells you whether or not you qualify to borrow a certain amount of money.
- When you borrow from a bank, they control the terms of the loan.
- Loan payments to a bank are amortized in the bank’s benefit as more interest is paid upfront and less money is applied to principal.
- Banks can make more money with less risk during periods of low interest rates.
- Borrowing from a bank defeats the benefits of BYOB because you do not recapture the interest on the loan
When you borrow from a life insurance company:
- There is no qualification process.
- The policy holder controls the terms of the loan.
- Loan payments are amortized in the policy owner’s best interest as the principal is the biggest part of the payment. Some apply 100% of a loan repayment to the principal of the loan. This means those funds are immediately available to be used again.
- When you set up a policy loan, you are borrowing money from the lifeco’s general assets. The money in your policy remains intact and continues to earn dividends and interest with no interruptions. The lifeco uses your cash value (while you are alive) and the death benefit (when you die) as collateral.
- The lifeco allows the policy owner to decide when a policy loan is paid back, how much is paid back, the frequency of payments, and the control to change things at any time (start, stop, increase, or decrease payments)
- The lifeco is comfortable waiting for the interest on a policy loan and the balance of any loan principal not paid back because they are also responsible for paying out the death benefit in the future. The lifeco is just matching up their assets (i.e. a policy loan) with their liabilities (i.e. death benefit) on their balance sheet.
This sounds too good to be true. Why haven’t I heard of this strategy before?
As a society, we strive to find ways to evolve and do things better. New and different is not always better. When cigarettes came out the medical experts endorsed smoking as good for your breathing. And then there was the new “Coca-Cola” fiasco.
Whole Life insurance was already good. We simply didn’t know how to use it in this way until recently. The ability to fly has always been here. It just took the Wright brothers time to figure it out.
Most looked at life insurance as an investment and as we already have discussed it’s not really an investment. Just as with certain medication that were created to treat one condition, they have realized it may help with other conditions. Life insurance is no different.
Which life insurance company?
There are mutual and stock life insurance companies. It is recommended that specifically designed BYOB policies should be acquired from a mutual life company, meaning the dividend paying participating policy holders actually own the company.
There are many demutualized companies in Canada who provide the correct anatomy of participating policy designs for someone to properly implement the process.
In a stock company, management control rests with the stockholders; they elect a board of directors who, in turn, select executives to run the company. The participating policy holders participate in the divisible surplus generated by the participating account.
In a mutual company, the policy holders own the company and participate in the election of the board of directors who, in turn, select the executives that run that company. The participating policy holders participate in the divisible surplus generated by every line of business the insurer operates in. There are no stockholders to share the profits with.
The divisible surplus is distributed in the form of dividends. In a mutual company, the sole beneficiaries are the participating policy owners. In a demutualized (or stock) company, the beneficiaries also include stockholders.
Many mutual insurers have demutualized over the years, Demutualization is the process by which policyholders became stockholders and the company’s shares begin trading on a public stock exchange. By becoming a stock company, insurers are able to unlock value and access capital, allowing for more rapid growth by expanding their domestic and international markets.
The distribution of participating fund profits is legislated according to the company’s size. The largest companies must distribute 97.5% of their surplus profits to par policy owners. The remaining 2.5% is kept by shareholders as a management fee. So a question for those wanting to do BYOB, is it worth 2.5% to be with an insurer who can access additional capital for business operations and innovation? There is no right or wrong answer, just another consideration.
Are all insurers financially strong?
There can be some differences between mutual and stock companies based on what you’re looking for.
Most Canadian life insurance companies are financially strong, with some stronger than others. Check out their balance sheets, income statements, debt levels and level of capitalization.
Some left the par business and have returned. You may wish to research why they left and why they returned.
Level playing field?
Not all insurers offer the same. For example, policy loan interest rates do vary by as much as 0.25%, the rate for dividends on deposit by 2.25%.
Another difference is the illustrated dividend scale interest rate (DSIR) participating life insurance companies are displaying.
Many are illustrating a a DSIR above 6% annual. Others are under 6%. Obviously the insurers illustrating higher DSIR’s will show higher values. Insurers illustrating above 6% do turn around and recommend they be illustrated at 1% and 2% less.
To further complicate deciding which life insurance insurer and policy offers the best value is some stock life insurance companies offer better growth than some mutual life insurance companies regardless of their DSIR. Building up working capital fast is important. The faster, the more capital you have available. So owning a mutual life insurance policy may not be as important.
Those trying to find the best BYOB policy will naturally want to choose a policy that will provide the greatest growth. However, as Nelson Nash said, its not about numbers. The system itself is more valuable than getting an extra point or two in growth. A DSIR is not a guarantee and is not an indication one insurer is better than another. The ultimate number will be higher or lower than illustrated.
Participating funds historically have been fixed income assets. In order to offset the loss of maturing high yield long term bond holdings, insurers are increasing their exposure to equities, some significantly. Its more important to research what their target participating fund holdings are than selecting an insurer that is illustrating a higher DSIR.
I am not insurable
If you’re not insurable then insure someone who is insurable.
What are downsides to this strategy?
Every financial strategy has its benefits and opportunity costs. BYOB is no different. If you do not have good habits with money or desire to protect the purpose of your money, and replace the working capital you access, BYOB will not be a good fit for your financial picture.
Also, it takes some time to build your cash value (your working capital account), meaning you cannot access all the money you deposit immediately. This is the opportunity cost that must also be factored into your situation. The nice thing about newer whole life policies is the ability to over-fund them now to ramp up cash value earlier.
When you compare setting up your own privatized banking system using life insurance to hold your working capital to the traditional banking model, it does seem too good to be true!
Contact us and let’s discuss how much better life would be with BYOB.
Book a BYOB Intro Call with us here.