Are you intending to utilize your infinite banking insurance policy as proposed by Nelson Nash in Canada, but wish you had the information concerning the ins and outs of how loan interest works in the Infinite Banking Concept before you proceed? In this article, you’ll get answers to your questions. For instance, let’s say you want to borrow 1k, is there an interest rate?

So, in case you want to get an idea of how whole life insurance policy interest rates function, keep reading!

What is the Infinite Banking Concept

There is a saying that. “if you understand the concepts, the details don’t matter, and if you don’t understand the concepts, then the details don’t matter.”

In other words, the saying means that in the end, you must have an idea of the big picture of the manner and reason the Infinite Banking Concept accomplishes what it does. If you lack conceptual comprehension, there is no need to worry about the rest. Therefore, this article will first highlight infinite banking, which others call personal banking or becoming your own banker in Canada from a conceptual perspective before we can dive into the weeds.

The Infinite Banking Concept is an alternative way of banking as proposed by Nelson Nash in Canada. The common practice that many are familiar with when it comes to banking is that banks pay and charge their clients interest. This is exactly how whole life insurance companies operate. If you own a whole life insurance policy, you will earn interest from your insurance company but they will also charge you interest.

The benefit of opting for a life insurance company for becoming your own banker in Canada lies in the rates, the level of control, as well as the leverage. To access your whole life insurance’s cash value, you can go for a policy loan. The private system is hassle-free since you don’t have to seek approval or permission.

Why Leveraging Matters

The Infinite Banking in Canada operates in a way that is way above conventional banks due to its power of leverage. Insurance companies often pay interest and dividends at a greater rate compared to regular banks. This creates room for enhanced accumulation. Then, you can leverage the cash to make it work for you in various ways.

This means you could borrow a policy loan at 5 percent and invest the money in real estate at a rate that is even more improved. You can then dedicate the monthly cash flow to repaying the loan and in the long run, offer your cash an enhanced rate or return. And since you have leveraged the insurance company’s cash (by utilizing the cash value as collateral), the policy keeps on accumulating interest with a maximum compounding ability.

The advantage is that apart from just having your funds in a vehicle with enhanced safety, growth, and liquidity, you also get an asset that enables you to acquire additional assets with compound interest that is uninterrupted.

The Infinite Banking in Canada is not magic. Nonetheless, it’s a mechanism you can adopt to increase the efficiency of your banking and have it operate to your advantage.

Do Whole Life Insurance Companies Charge Policy Loans Interest?

Definitely, whole life insurance companies will charge you interest on a policy loan. When you borrow from the insurance company, you don’t take cash directly from your policy’s cash value but you borrow from the insurance company. That’s why they charge you interest. Since you don’t touch your cash value, it can keep on multiplying without interruption.

Your cash value is your collateral. So, your death benefit will be reduced up until the moment you would have repaid your entire loan. A common misconception is that when you borrow a policy loan, you are borrowing your own money and paying yourself interest. This is not the case.

The Power of Compounding Interest

Maybe you’re asking yourself why you should pay interest when you have the freedom to withdraw from a regular savings account. Your answer lies in compounding. Whenever you withdraw cash from your bank account, it reduces the money to earn interest on. It’s common knowledge that interest accumulates efficiently on huge sums of cash – 1 percent of $1,000 is just ten dollars. Comparatively, 1 percent of $10,000 is $100. At the maximum balance, apart from earning more cash, you’re also earning additional cash on your money.  Meaning that the following year, you will earn an interest worth $110, and it will keep on compounding and get highly efficient.

However, if you withdraw 10,000 dollars in the subsequent year, leaving your account with a balance of $100, you’ll only earn a dollar. You have reduced your interest’s velocity.

A policy loan offer remedy for this problem. Therefore, even though you may be paying interest, the $10,000 will still be in your policy and will continue growing. And, you will be earning interest at an enhanced rate compared to the 1% in the banks.

Fixed and Variable Interest

In simple terms, a fixed rate interest refers to interest that remains constant throughout the time you make your loan repayment. On the other hand, a variable interest will change. However, the insurance company only changes the rate once a year.

What brings the difference is that at a fixed rate, your insurance company will usually pay a rate that is different for cash value that is collateralized. This is referred to as Direct Recognition. Upon paying your premium, a portion of the premium contributes to the cash value, which accumulates with interest as well as dividends. As part of your interest contract, the interest is guaranteed, while dividends are not (however there is a high possibility).

The part of cash value you can borrow against can either be directly recognized and earns you a different rate compared to the non-directly recognized or non-collateralized cash value. Non-direct implies that your whole cash value will earn the same rate from your insurer whether you have a pending policy loan or not.

This eventually narrows down to the saying, “There are no deals in the insurance industry.” Everything balances out since first and foremost, insurance is an actuarial product. Its main aim is to insure an individual’s life and these exchanges enhance the ability of the company to accomplish its guarantees as stipulated in the contract.

Nevertheless, the bottom line is that these features always balance out one another. In other words, there is a very slight difference between Direct and Non-direct recognition companies.

 Variable Interest Rates Nuances

The perception of many people towards variable interest is that it’s a scary thing, though it’s not as bad as many view it. The first thing you need to know is how often insurance companies change their rates. Insurance companies hardly change their rates. They can only change them once a year, and simply because they can do so does not mean that will always happen.

Factors that drive insurance companies to change their rates are also worth knowing. There are two factors that have an impact on interest rates charged by insurance companies. The first one is in bond yields – as they take an upward or downward trajectory, the insurance companies will align with them through proper adjustments. The Bank of Canada and Federal Reserve rate is the other factor.

Insurance firms utilize the two rates not as a blueprint but as a reference for their rates. This means that the rates will not be the same always, even though on many occasions they will take the same trajectory (upward or downward).

The best thing about this is that the interest you get also reflects the rates. Therefore, historically an increase in loan interest rate also increases the dividend rates.