Episode Transcript
Speaker 0 00:00:00 You are listening to the Wealth Without Bay Street Podcast, a Canadian guide to Building Dependable Wealth. Join your host, Richard Canfield and Jason Lowe as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on.
Speaker 1 00:00:17 Well, in this podcast episode, I'm joined by my good friend Roman Pushkar. We are here talking about some conversation that's happened recently, which is the differences between I b C, the infinite banking concept in USA versus in Canada. And so we put our heads together and we thought about those differences and we came up with 10 of them. Now we have a bonus one, number 11, it really doesn't have anything to do with I B C, but we're gonna throw it in anyway just for good measure. So we're gonna talk through these differences, give you some perspective. And before we go deep diving into that, Roman, what I want our listeners to really recognize and understand the differences and things that we're gonna talk about here are, are more so I, I think things that are discussed in the marketplace, and really primarily they're discussed actually by advisors.
Speaker 1 00:00:58 And because advisors talk about it, well then their clients end up thinking about it. But ultimately, a lot of these things don't intrinsically matter because the fundamental principles that Nelson Nash outlaid for us in his book, becoming Your Own Banker, they are completely applicable regardless of the country that you're in. So the, the process of becoming your own banker doesn't change. The tool that we use fundamentally doesn't change. What does change is some of the minutia in the background for the user, the policy owner, to understand as they embrace the concept and move deeper and further down the process in their own life. So I just wanna quantify that before we get into these differences, because n n no single one of these things would have any impact on a Canadian or an American choosing to implement this process in their life. So I hope that makes sense. Did I, do you think I covered that well enough, Roman?
Speaker 2 00:01:47 Yeah, it was great. Richard
Speaker 1 00:01:50 <laugh>. Awesome. So why don't, why don't you kick us off with the first one we've got on the list. I think this is a, this is a really important one and I, I think people will, this will be probably the most common one that people talk. Yeah,
Speaker 2 00:01:58 Yeah. Correct. So first thing you, you think about is the mech line. So in America there's something called meline, which stands for modified endowment contract. So we have something similar to Canada, but it doesn't work exactly like, like the ME line in United States. So entire line stands for maximum tax actuarial reserve. It refers to the tax exempt value of the policy at any point of time. So do you wanna maybe expand more about like what's the difference between how the mech works and how the entire entire line works in, in Canada region?
Speaker 1 00:02:33 Yeah, yeah. And so, you know, having discussions with our colleagues down in states, of course, or, or even you watch any other videos on YouTube, you'll, you're hill keep losing their brains over the mech line and you know, are we gonna make a modified endowment contract as we're funding the policy, et cetera. So it is obviously something important when you're looking at designing the policy that you, you want to, I guess, avoid this. It's not something that you want to see happen in Canada. Similarly, we don't want to go beyond the maximum tax actuarial reserve. So they are very similar nature, different names, but fundamentally they're ultimately kind of doing the same thing. It just, there there is some subtleties in the background. So what does it really mean? In its simplest form, what we're talking about here is you have an insurance contract, an insurance contract has to be an insurance contract.
Speaker 1 00:03:22 Cuz if it's not an insurance contract, well then what is it? Well, if it's accumulating cash values, then in the eyes of whether it's the I r s or the C R A, then really if it's not an insurance contract, it must be something else. Maybe an investment. And so they want to tax it as one. And so there's limitations placed on a given policy, a given amount of death benefit that says there's a maximum amount of capital of accumulating cash value that can build inside of this contract to maintain tax exempt status. So it has to do with the accrual and accumulation of the, of the policy values staying underneath the line or the radar of what's allowable to make sure it maintains itself as an insurance contract. And it's not something else. As soon as you go past that limit or past that line.
Speaker 1 00:04:13 So whether it's the me line or the mt a r line, as we would say in Canada, as soon as you go past that, well then you have a contract that is no longer tax exempt and all that accumulated value from the beginning of the contract and on a go forward basis for the rest of the life of the contract could now be taxable. Now the way that that's handled in the US and Canada, I think there's also some difference, and I, I can't speak to United States to degree, but in Canada, if a policy were to cross that, that barrier of, of tax where you go past the tax exempt limit, then the insurance company, their goal and their objective is to maintain tax exempt status. So what they will do is they will refund or they'll kick back an amount of money and then reduce the size of the policy and, and you know, whether it's a death benefit in the cash in, in retro, you know, in combination, they will shrink it to make sure it comes back below that line and the excess amount of money gets kicked back to the policy owner as a taxable event.
Speaker 1 00:05:13 So it has to be reported as tax blink income. So it's still a very definitely some, it's a definitely something we don't wanna see happen. Okay. Yep. So make sure, making sure that the policy maintains tax exempt status is very important now in, in Canada versus in the states. I think going on this line, one of those differences is that the insurance carriers in Canada being, I think in general more conservative, they tend to design policy contracts in such a way that it is very difficult for you to have that event happen. So it's in right for the most part, it's highly unlikely to see that transpire when it comes to a dividend paying, participating whole life contract in Canada. That doesn't mean it's impossible. And with certain carriers, I thi I'm thinking of one in particular, the possibility of that happening is much higher than it is with all the other carriers that, that we presently deal with. So there is something to be aware of and, and a and an authorized infinite banking practitioner should help a person understand that. But for the most part in Canada, I would say on a very rare circumstance, do you have to really be concerned about that, that event actually taking place?
Speaker 2 00:06:22 Right. Yeah. So you're, you're absolutely right, Richard. So the, the, the main difference between the Canadian policy design and US policy design is that in Canada the policy should not endow am am I correct?
Speaker 1 00:06:38 Well, yeah, so meline modified endowment contract, meaning that if you cross that mech line, you have modified the endowment contract, right? Yeah. So, so the, the, you know, in in Canada the policy still endows because it is based on an endowment idea. But that, that brings us to one of our, you know, we'll get to that section in a minute cause we have a different differentiator between US and Canada, which has to do with mortalities. We'll talk about that one in a moment. But the key thing is that in the, in the states, there is a little bit more, I think from, at least from my understanding, the ability to mod, you know, adjust or tweak or for lack of better terms, we'll say manipulate the policy design at the timeframe of setting up the policy with the advisor or the coach can create certain environments where if the policy owner, again, the risk is always on the policy owner and the responsibility is always on the policy owner of potentially putting too much capital in or putting too much capital in, in a short enough period of time.
Speaker 1 00:07:39 So it's not just a matter of putting too much in, it's also relevant to how, how many years you're putting it in for. So the, the exempt test rules for a policy to maintain exempt status in the US versus the exempt testing rules in Canada are slightly different. They're similar, but they're different. And every once in a while those exempt tests can modify. So that's another thing too by here, and again, it's, it's in general, this isn't a hard fasts rule, but in general, when a policy started or initiated, typically the exempt testing that was in place at the time the policy was initiated right, is usually the exempt testing that maintains for the life of that policy. Again, I can't speak to the US on that, that's my understanding, but I, I could be wrong. But in in general in Canada, that seems to be the case.
Speaker 1 00:08:31 That doesn't mean exclusively it has been the case or will be the case all the time, but that seems to be the case. So as an example, we had a, a big adjustment in Canada that took effect as of January 1st, 2017, where policies that were, were, you know, sold and, and started prior to 2017, they fall under what we would refer to today in the industry as a G2 status. G2 meaning grandfathered, and now any new policy of grandfather, sorry, generation, I should say generation two and any new policy today is in G three or generation three. And so it has a different exempt test looking at it. And it also correlates to some mortality adjustments that they did with that exempt testing. So again, these things do modify from time to time, but that change that happened in 2017, that was the first major change in Canada since I believe 1982. So there was like a 32, 34 year period of time between those adjustments. So I, I wouldn't say it's something that happens all too frequently, at least not in Canada.
Speaker 2 00:09:33 Sounds good. Awesome. So let's talk about the second one. So the second differe differentiation between US and Canadian policy designs is a popa population size. We know that Canada has only one 10th, maybe even even less than American population. And that brings us to the choice of life carriers. So in, in Canada we have, how many do we have in Canada research altogether?
Speaker 1 00:10:00 Well, I mean as far as you know, mutual companies that I'm aware of, there's, there's really only two main mutual insurance carriers, which is what Nelson recommends in his book. And, and, and for the most part we do the bulk of our business with mutual carrier. But as far as just total insurance companies in Canada that have an offer, a, a cash value participating, dividend paying whole life policy, I I think there's maybe eight companies that kind of offer that, right? Roughly speaking, yeah. So there's, there's definitely not a lot of them. And out of those, you know, which ones you would actually choose to have, we will, we won't really go down that road here today, but, you know, yeah. So we have one 10th the population and we have I would say about a 10th or so or less, you know, uh, we have a lot less choice of options as far as insurance companies are concerned, and that's relevant to the population density.
Speaker 2 00:10:52 Yeah. But it doesn't mean that the, those companies are, you know, a less reliable than us companies or they are newer, doesn't, doesn't necessarily mean that, but yeah. So having less companies to choose from it makes, makes it easier actually to choose on which company to go with and the design your policy with. Right. Would you agree?
Speaker 1 00:11:14 I, I would agree. And so, you know, further to that, you know, a lot of the colleagues that we have in the states and we, we know some just amazing people down there that teach this process and, and you know, we're, we're students of Nelson spent time with Nelson, brought Nelson out to do seminars for them, et cetera. You know, most often an advisor or advisor shop will have, you know, say, say three or four main companies that they work with and they will have selected working with those companies based on a variety of factors. Now, it doesn't mean that if you go to shop, you know, advisor, you know, advisor A, and then you go to advisor B, they have the exact same core companies. Okay, that's not what I'm getting at. But they, they will be picking those companies based on things like policy design, certain functionality, their loan request process, how simple and easy it is to get loans, how fast can you get loan.
Speaker 1 00:12:03 Like, there's a whole number of things that go into that versus just looking at their dividend history or whatever. So they're, so they're looking at a, you know, a stackable rank of different factors and saying, you know what, based on all these circumstances, this company makes it very easy to do business with them both for, for us as the advisor and for our client. And, and because they offer the right, you know, they're checking the boxes that we need to check off for the client, you know, we're gonna do probably a lot of our business with them versus with this company over here. Maybe they're an okay company, but they're an okay company for other products, not necessarily for products designed for the I B C mindset as effectively. So, and in Canada it's no different. Other than that we have less companies to choose from. And so because of that, you know, especially in, in the states, I mean there's a lot of insurance companies in the states, but as far as mutual carriers, you know, they have more than 20, more than 25 mutual insurance companies. Now outta that 25, would all of those companies be good for I b C
Speaker 2 00:12:59 Answers? Not necessarily,
Speaker 1 00:13:01 Yeah. Most exclusively, probably not. There's probably maybe 10 or maybe 12 that are probably reasonable. So there's, there's again, there's a, there's a much wider level of overall choice, but when you have too many options in front of you, you know, sometimes like you go to the buffet and you're gonna go eat at the buffet, but you just dunno what to choose,
Speaker 2 00:13:21 Right? You wanna choose, uh, from, from each, each dish basically,
Speaker 1 00:13:25 Right? And, and so if you go to the buffet and they have like steak, let's say that's there, yeah, well you're probably not gonna get the steak because if you want a really high quality steak, you're gonna go to the steakhouse.
Speaker 2 00:13:35 Oh yeah.
Speaker 1 00:13:35 Right. So again, just cause you have a buffet, you might have more choice, but that doesn't mean you're gonna get the best, you know, the best product, the best end result because of that. So I think actually in Canada, the, the advan to my degree, I think we have an advantage because we have less, it's not the having less choices and advantage, but because there's less overall choices in the marketplace, we could be much more specific and directive on what policies are gonna match the best fit for a client's circumstance. So that's just my perspective and it's an opinion and people can take the opinion and throw it away if they want. But that's, that's my opinion.
Speaker 2 00:14:13 <laugh>. Sounds good. So yeah, let's, let's talk about the third one, which is how policy loans work in the life insurance company. So let's talk about the differences between the just cost basis, how you take out a policy loan in Canada from a, from a life insurance company, and also if it is different in, in, in the United States.
Speaker 1 00:14:35 Yeah, I mean, I, I I, we've listed this as number three, it, it's probably tied for like number one cuz it, it ties into like this me line conversation that we had earlier. And so in, in the states, the a policy loan is, does not trigger a taxable event. And in Canada that is true as long as that policy loan is underneath or lower than the a c b or what's known as the adjusted cost basis of the contract. Now in US they have an adjusted cost basis as well. And in Canada we have one, the difference is the calculation is different. And in Canada that calculation changed, I believe back in like 1982, there was some tax reform and they adjusted that, that calculation. Now we go into a much deeper dive on this. We actually explain this and I draw it out and I have some visuals to go over on our podcast episode 100.
Speaker 1 00:15:28 So if, if you wanna really dig into that and really understand how this, you know, taxable environment on policy loans comes, shows up how it, how it rears its head in the Canadian marketplace. We, we really mapped that out very clearly on episode 100. So I'd encourage our listeners to go back and, and check out that episode. But, but fundamentally in Canada, because of that change in the adjusted cost basis calculation and in the income tax act of Canada, a policy loan is not considered a commercial loan in the sense of when you go to a regular brick and mortar bank and you get a loan from them, that's a commercial loan instrument. So it's actually considered in Canada a disposition of the policy. And so therefore at some future point policy loan can be, and, and in fact most likely as you get to the much later stages of a policy as you age on, we'll, we'll create a taxable event in Canada. Now that is perfectly fine if you know what to do. And so that's why education is so important. So again, with episode 100, we walk you through the education necessary to know what can be done and how you can mitigate those tax consequences either mitigate or eliminate. Yep. And so Nelson used to say Roman banking wasn't a tax plan, it wasn't a function of the tax code.
Speaker 2 00:16:40 Okay.
Speaker 1 00:16:40 No. It's about how you, how money flows through your life and how much of it you control. So if you get any tax benefits, that's just a big fat bonus. So of course we want to be able to have those, one of the tax benefits that every policy is getting in Canada and in the US is the ability to grow on a tax exempt basis as long as you don't mess up the meck line or the MTA line in Canada as we've already identified.
Speaker 2 00:17:05 So, or if you, if you don't, if you don't, as long as you don't cancel your policy and then trigger whatever taxable event. Right.
Speaker 1 00:17:13 That's a great, a great point. I'm glad you mentioned that and I I didn't even think to, to identify that Dave. Really good point. Yeah. If you've got a big, a big policy that you've built up, the reason is the reason that cash value that's accumulating gross tax exempt is because it is a representation of the future death benefit. So as soon as you cancel the policy, well it's no longer representing that future death benefit, which means, oh, that's a taxable event. So you have to be anyone who has a policy be very, very mindful about, you know, cons canceling a policy, because that would probably be one of the, you know, again, a good well designed policy that was probably one of the worst financial decisions I think that person should probably make. Right.
Speaker 2 00:17:53 So, awesome. So let's, uh, continue talking about policy loans. And point number four is we, we decided to, to talk about this separately from anything else is how insurance companies treat outstanding policy loans and how it may affect potentially dividend dividend scale or dividend ree receiving dividend in, in a policy, basically. So let's talk about direct versus non-direct recognition on outstanding policy loans. What, what, what does direct and non-direct Meaning, meaning what, what does it, what what does it say?
Speaker 1 00:18:25 Yeah, this is, uh, really interesting because, you know, since, since going down to attend my very first think tank conference in Alabama for our, you know, infinite banking think tank, which was in 2012. Wow. That was like over almost like 10 and a half years ago. That's amazing. Anyhow, so, so, you know, this, this topic is, when I first learned about this terminology and then, and hearing people, it's, it's something that seemingly, like, especially in the advisor community, people kind of bicker back and forth over. Yeah. And you know, there's like, there's like the keyboard warriors on the online forums and all the chat, the chat, you know, people yell, basically yelling at people because it's so weird. People will yell at, yell at one another through a keyboard and say things that you wouldn't say to someone face-to-face. Isn't that something strange? Yeah. So, and, and all for no real seemingly important reason, basically what direct versus non-direct recognition means, it means does the life company, the life carrier, do they directly recognize that a policy loan is outstanding on the, on a given policy? Okay. Yep. And they're looking at that when it's time to attribute the annual dividend. And so in, in some companies or in many companies, they may say, oh, well because you have an outstanding policy loan, we're going to reduce the potential dividend that you might receive versus a same, the same policy with the same company that did not have an outstanding policy. One,
Speaker 2 00:19:54 Correct me if I'm wrong, Richard, these companies may potentially charge a lower interest on policy loan.
Speaker 1 00:20:01 That is correct. Yeah. So again, every company is different. So you may have, so it, it, there's a, there's a saying, and I, I learned this from Todd Langford, I he learned it from someone else, but the saying is, there are no deals in the insurance industry. Yeah. Ev everything comes at some form of trade off. And so you're just choosing which trade off do you want? Correct. So again, you may, maybe you can have a, let's say a lower loan interest rate and therefore you have a lower, you know, dividend Yep. That you would receive as well. So, and that's not exclusive, that's gonna be up to the company and the time, you know, based on when that policy was sold and the rules at that time. But those are the kind of things that an authorized practitioner would walk you through. Now, again, in Canada, you know, giving up the reference point between our, our, our colleagues down south, this is, is a real seemingly at least, at least it seems like it's a real issue.
Speaker 1 00:20:50 I I think it's less of an issue than it's made out to be. But in Canada, we don't really have, at least to my knowledge today, and, and, and I would imagine Roman, you haven't heard of one where a life car carrier in Canada does directly recognize a policy loan. So all policy loans and, and companies that we deal with presently are what would be referred to as non-direct recognition. It doesn't really state it anywhere because it's not common terminology or discussion in Canada like it is down in the States. Mm-hmm. <affirmative>. So, so they, you know, but a policy loan is not, uh, taken into consideration relative to any dividends that might be paid on the anniversary of a policy. Now here's something I wanna, I wanna tie into though, and I wanna tell a little story, and I'm, hopefully I won't butcher it, but Nelson Nash, I asked him about this.
Speaker 1 00:21:39 I I was at a think tank conference one year and he did, he had a long career with two major life companies. One of those was the Equitable, equitable Life Insurance of New York, which hasn't, has since become a company called aa. They were bought out and as well, he spent a long timeframe with Guardian Life. And my, my understanding here is that Guardian Life is a direct recognition company. Now, Nelson had policies from Guardian Life and Policy Loans, and even though at that time there were direct recognition, it didn't bother him one bit because he understood, and he talked about something which we have mentioned on our podcast and things before is called the Contribution principle. Yep. So from his vantage point, it was one of those minutia topics that really just didn't matter. It was, you know, getting, trying to see the forest, you know, through the, you know, the trees through the forest, sort of a analogy.
Speaker 1 00:22:33 Like he just said, it wasn't something worth really discussing a great deal, but he found that in his experience, that the dividend performance actually was enhanced with when he had outstanding policy loans versus when he did not have outstanding policy loans. Right. On those policies. Now that was his experience. I can't quantify that. I don't have a recording of Nelson's story. I can only share my recollection of, of that conversation with him. So I, you know, I, I don't wanna overstep my bounds and hopefully Nelson, you know, looking down, you'll, you'll, you'll, you'll give me some free from some free will here to just identify what I remember from our conversation. But I ultimately, I think in general terms, it's probably better overall if you have a non-direct recognition policy in Canada, we have that. That's f that's, that's very simple. So for us, again, it's very easy, but it is one of the big differences. So the, all this conversation, we have people that reach out to us, Roman, and they want to say, oh, hey, I learned about this and I'm watching these videos and I learned about this, and, and they're, they're, which one should they pick? Yeah. All these questions that just have no bearing or relevance really to Canadian marketplace. So that's part of what we're going through this conversation is to give people like some context that this really isn't the biggest deal overall.
Speaker 2 00:23:41 Correct. Yeah. So it doesn't matter which one you pick or you deal with, the process is exactly the same and it works in, in both scenarios. Awesome. So talking about, uh, different companies in Canada and us, sometimes clients or prospects would ask, ask questions like, oh, how long has this company been in business? Or How reliable is this company? What, so what is the track record, track track record for this company of paying dividends and stuff like that. So may maybe let's speak, speak to that Richard A. Little bit, which companies we have, what is the oldest company in, in Canada versus oldest company has and stuff like that.
Speaker 1 00:24:18 Yeah, so I think the big difference again is length of timer history. I mean, Canada is a younger nation than the United States. Yep. The, and so they've had insurance companies longer than we have now. I don't know offhand what the life carrier in United States is, and or the oldest one that paid dividends. Like, I don't know those, those details. I do know of one I know which is the largest, uh, mutual carrier, uh, at least according to their website, <laugh> is, is New York Life. And, you know, just recently I saw posting that they, uh, they declared, so for 2022, they declared their hundred and 69th year of consecutive dividends. So they paid a dividend on participating policies to their par owners every single year since 1854. I mean, that's really, really impressive.
Speaker 2 00:25:02 That's significant. Oh yeah,
Speaker 1 00:25:03 Yeah. They're, they're, they're the largest mutual in the United States. Again, that's according to their website. I don't know why they would put that on there if it wasn't the truth. Mm-hmm. <affirmative>, but who
Speaker 2 00:25:11 Knows, they have to be compliant. Must be the truth,
Speaker 1 00:25:14 Must be the truth. And so, whereas, and so again, I, I assume, and I don't, but I don't know, I have, I haven't validated this, so maybe on some of our American colleagues will comment on the chatbox and let us know. But the, the policies, I believe that there's probably older companies still yet that have been consistent paying dividends in the United States. Mm-hmm. <affirmative>. Yep. Whereas in Canada, the oldest insurance carrier that's offered consistently offered participating whole life and is still around today, uh, has been paying dividends every single year since 1848. So they actually just are just announced paying their 174th consecutive wow. Dividend as of 2022. So we're comparing now again, timeframes in, in this instance we have actually a Canadian company that's been doing it longer. But again, I, I suspect that there may be a company in the States that's actually has done it even longer than that.
Speaker 1 00:26:02 I just don't know which one it would be. So the history is very robust in both companies, at both countries I should say. I mean, we're talking about one in three quarters of a century <laugh> of consistency. That's pretty unbelievable, especially given what's transpired in the markets since that timeframe. And then again before the tax code, before World Wars, all of those different, you know, mega events that have happened over that historic timeframe and they're still consistently paying dividends. And so, uh, the, the company that pays di has been paying dividends since 1848 is, well, it's Canada Life. And I mean, uh, anyone can kind of Google that. They are no longer a mutual company. However, they de mutualized, I believe it was back in 1999 or 2000 and 2001, something to that effect. Whereas the largest mutual in Canada has been paying dividends every single year since 1936. Now they launched their first power power contract in 1935, which means their very first year in offering participating insurance, they paid a dividend and they have paid a dividend consistently every year. There's, so, again, history here is very, very robust in both countries.
Speaker 2 00:27:08 That's quite significant. Richard. Hey, I recall how, you know, Nelson Nash is always talking about, you know, creating multi-generational wealth transfer. So how many, how many generations is, is 160, 74 years?
Speaker 1 00:27:22 Wow.
Speaker 2 00:27:23 That's three, four generations, I guess.
Speaker 1 00:27:25 Yeah. I would, I would think that we're looking at like at least four because, and probably even five in many circumstances. Cuz a lot of people just didn't live as long. Yeah. If you were
Speaker 2 00:27:34 Oh yeah. You know, that's,
Speaker 1 00:27:36 You know, and, and people in 1948 that were buying those policies had to be old enough to get them. So they had to probably be at least, you know, say 20 years old. Yeah. So, yeah, I mean we're, you know, it's, that's a, yeah, that's a really interesting way of looking at it. Roman, I love, I love your thought process there.
Speaker 2 00:27:48 Yeah. Imagine someone buying a policy in like in the 19th century and then, you know, and then doing this process of banking, had they known about it. So how significant would be the wealth transfer over generation, over generation to the next, to the next one, to our days where, you know, we live in a, in a, in a situation where this could have been, you know, increased significantly and compounded like for so many, many years, o o over time, and with the consecutive dividends received in, in, into the policies for, for, for this family.
Speaker 1 00:28:23 Well, well, I like your thought process on imagine if that happened. And so if you're imagining if that happened, well now just imagine if you are the one that started that and take yourself out 175 years from now and think about your family line.
Speaker 2 00:28:35 Absolutely. That's the goal, that's the goal, to teach your family to do this and never, you know, stop this process. Absolutely love it. Awesome. So talking about mortality, talking about the longevity of human life. So policy designs in candidates, this is point number one, policy design in Canada usually goes to age 100 based on the mortality table that Canadian companies use versus American companies, they're using it a little bit different. So what is, what is the, uh, what is the other one that Americans use?
Speaker 1 00:29:06 So yeah, so the, the, the actuarial design that the, that they used to engineer the policy is based on a lifespan, you know, a theoretical lifespan. So that for the many years it's been to age 100. The United States used to operate on that and they made a change. I don't, I don't know when exactly I believe it was in the last, you know, 15 years or so, they modified their, their life expectancy table, their mortality table to age 1 21 mm-hmm. <affirmative>. So now if you go get a whole life contract in the United States, it's based on a, what's called an L 1 21 or a life to age 1 21 contract. Right. Whereas in Canada, we still operate on a life to 100 contract. So the mortality table is still based on age 100. Now, they did make an adjustment on, on the exempt test around the mortality table back that's, that, that 2017 January 1st, 2017 adjustment. So that allowed for some modifications to policy design be based on the exempt testing in that same, you know, you know, fictional life period. But, uh, yeah, the, the actual mortality age that all contracts are based on, as of today is still age 100 in Canada.
Speaker 2 00:30:12 Right. So the policy basically becomes paid up at age 100 in Canada and it becomes paid up at age 121 in us. Is is that that true?
Speaker 1 00:30:21 That's correct. So if you live past either, either of those dates, yeah. You don't have to pay any more premium. And the policy is, because it's a whole life contract, the policy's still enforced and it still continues to earn basically dividends. And it's just that now the cash and the death benefit will have matched. So the, so the design, fundamental design of the contract is that the cash value must grow to equal the whole life, whatever the whole life death benefit is at that age. So 100 in Canada, 1 21 in the States. So a lot of people, obviously the states would say, well, this is even better because it means I can, I can get more money to the contract over that period. So there's, there's, there's no advantage or disadvantage either way. I don't, I don't think they're both fundamentally great. But, uh, you know, I'm personally, you know, moving towards a longevity mindset. So hopefully I make it a real long way and I'd like to go a long way past 100 and if that's the case. Right. I'll, I I'll be happy either way. And I suspect eventually if that continues to happen, Canada will follow suit with changing the age at some time, but there's been no indication that they, they had tend to do that at, at any time present.
Speaker 2 00:31:19 Yep. Sounds good. So number seven, stock versus mutual companies or mutual holding companies in Canada and United States. So, so what, what exactly like is the difference between United States and Canada?
Speaker 1 00:31:34 Well, I don't know intrinsically all the differences. I I, I know that there's definitely some fundamental differences in how we regulate the insurance industry between the United States and in Canada, Canada where mm-hmm. <affirmative>, probably anyone listening realizes that we're pretty well regulated here. So in the, both countries have stock companies stock, meaning that they, they are, you can, they're listed on a stock exchange. You can go buy stock in the company. Yeah. So you can go become an owner of the company and you could own stock in, you know, x, y, Z company, but you could choose not to buy insurance with them. Whereas if you own participating insurance, you're an owner in their participating account, but you don't also own stock. So that's kind of the fundamental difference. And in a mutual insurance carrier, they don't, they're not publicly traded, so they, they don't have stockholders or stock owners.
Speaker 1 00:32:26 You can't be an investor in them. The only thing you can do to be an owner is to own participating whole life. By owning the whole life. You now participate in the profits that is the ownership mechanism by which they would Yeah. That people basically become an owner. There is no other owners than the pol the policy owners. So mutual holding companies in the states that the Nelson Nash Institute did an article, I believe Carlos Lara wrote an article about this probably back in 2014, which will be available on the infinite banking.org org website. And it was in the Larry Lara Murphy report, and they talk about mutual holding companies, which is kind of like where, where a company got like purchased and then they took the, the, the existing park pool or company and they kind of segmented it. So it was like its own little miniature company.
Speaker 1 00:33:12 Mm-hmm. <affirmative> was like an umbrella company around it. Right. Something to that effect. And so my, and this is my personal perspective, my take in, in reading Carlos's article and, and understanding a little bit more about these mutual holding companies, I, I think fundamentally the stock companies in Canada are more, more closely aligned to that environment. What, what they would refer to as a mutual holding company in the us. Now, I, I'm not a, I can't validate that, it's just my opinion again mm-hmm. <affirmative>, but I think if you, you know, if anyone were to read that article, they might, they might come to a similar conclusion because in Canada, the stock companies, they, the participating account is segmented. It's not really part of the, it's it's under the asset base of the whole company, but it's a segmented pool and the investments and the things and the money going into that pool is all for what happens in that pool.
Speaker 1 00:34:05 So that it's, it's almost like it's a separate entity within a larger entity. And the dividends that are paid are now based a hundred percent on what that participating account does. And when a dividend is declared in a stock company that the dividends, you know, go to the participating owners. Yep. There's a small amount of what's called dilution, where a little bit of that money can be trickled out to this company, to the, to the parent company. Right. However, in Canada, it's very well regulated. Now, I did a video on this where I explained it more with Verne on the Baker's Vault channel, and that, that as a, that sliver of Del Dilution is very well regulated. So in Canada, it's not like the stock companies could just all of a sudden vote and say, ha, instead of paying dividends to all those participant owners just send all the dividends to us. And those guys are, you know, screw those guys. Like they can't do that. They're not allowed. It's not, it's not possible. So there's a very small sliver that is limited, that can be exited out of the participating pool a pool, and go to the stock ownership side of the company. So that, that's part of where Awesome. The limitation, I think is with the, I would, I would almost place it as an advantage in Canada on the difference between stock versus mutual
Speaker 2 00:35:14 Companies. Right. So the, but the process of becoming a mutual participating policy, sorry, company co-owner is pretty much, it's pretty much the same, like similar with the United States and Canada. You just need to buy a par power policy, basically. Right.
Speaker 1 00:35:28 You just need a power policy. And, and that's as simple as that. And then ideally you're looking for a good company that has, again, the right features and benefits that allow for policy loans and all the things that we've kind of talked about already.
Speaker 2 00:35:41 Awesome. Yeah. Let's, let's move on. Let's, uh, talk about preferred ratings. That's point number one. Preferred ratings on whole life portion of insurance in Canada and the United States. So what is the difference between looking at preferred ratings? Let's maybe talk about what is rating in the first, in the first place is?
Speaker 1 00:35:57 Yeah, so a rating in an insurance contract is typically they start with the, the, the, the primary rating or the base rating is what would be standard. Standard meaning that you're in good health, there's no negative health things in your, that they're worried about. You're not a, you're not a smoker, you're a standard non-smoker, et cetera. And, and then if you have now a health concerns or considerations or something like that, then you move into what would be referred to as sub-standard ratings. And those vary up to, you know, a pretty high degree with a life company up to the point where they just decline you and they say, we're not gonna give you any coverage. Mm-hmm. <affirmative>. And then there's also a potential of what's called a preferred rating. So a preferred rating is better than standard. Now in Canada, you can get preferred ratings on term insurance in Right.
Speaker 1 00:36:41 With, with many companies, they usually have some limitations, like you have to be getting a certain amount of insurance in order to qualify for that. But they don't yet have preferred ratings available on whole life contracts. And I don't know if they ever will, whereas in the states as possible for someone with many of the insurance carriers to actually qualify health-wise for a preferred or even what they refer to as preferred plus, uh, rating on the actual whole life portion of the insurance itself. So in Canada, we, we don't have that option. It's just never been available.
Speaker 2 00:37:15 Awesome. Sounds good. So, and then point number one, let's talk about something that is not necessarily talking about whole life policy, but in Nelson's book he's talking about something that, that's called CD or certificate of deposit. What, what is that and what is the, what is the equivalent in Canada?
Speaker 1 00:37:35 Yeah, so you see this primarily in the twin Sisters example. Yep. In Nelson's book, which is, you know, on page 45, there's a chart on page 45, A fantastic chart. I always, always love the twin sister example. And Nelson's talking about, you know, both these two twins are going into doing something similar. One of them, instead of getting a policy is getting a cd. The CD certificate deposit is basically, it's the equivalent of A G I C in Canada. So G I C is a guaranteed investment certificate. Yep. Versus the CD being a certificate deposit. They basically do the exact same thing and you know, pretty simple yoani other than just language differences.
Speaker 2 00:38:10 Yeah. Yoani is locked up basically for a certain period of time and it is making a specific return.
Speaker 1 00:38:17 Yeah.
Speaker 2 00:38:18 If you will. Ho And so what is the, what is the what what is the 10th one?
Speaker 1 00:38:24 10th one. So the, the last one in our, on our big top 10 list of differences between US and Canada here. And we were trying to stretch to get the 10, I think when we put this in. So
Speaker 2 00:38:32 We came up with 11th.
Speaker 1 00:38:34 Yeah. We then, then we added a bonus as well. So the, the, this really ties into corporate own insurance. Now a corporation structures in US and Canada are slightly different as well. I'm, again, I'm not a tax professional, but coincidentally, I was actually in Vancouver having dinner with a tax professional yesterday from the States down in California. And, uh, I explained this, this very same thing that we're gonna talk about, which is in Canada we have a pretty amazing advantage when it comes to corporate owner insurance mm-hmm. <affirmative>, and that is something called the CDA account or the capital dividend account. It is not something that is available in the United States. And so I actually was kind of a, a fun experience to be having dinner with, with a CPA who works for one of the, one of the major firms in the United States mm-hmm. <affirmative> and explaining what the c d A was cuz she was unfamiliar with it.
Speaker 1 00:39:18 So we had a little bit of a conversation about that and, and how, how life insurance often plays a role in one thing that triggers one of the most common things that triggers capital dividend account value being created inside of a Canadian privately controlled corporation. So it is, it is a really powerful way to be able to extract capital at a tax-free basis out of a Canadian controlled private corporation, um, by having the c d a account. So we have a great podcast episode that we did with, uh, Henry Wong, episode one 17 on the Wealth Del Bay Street podcast, I think it was called The Business Owners Avoiding Paying Tax Legally in Canada <laugh>. And, and so there's many things that Henry walks through in that example and he kind of phases people through different, different items of, of the tax realm as you go through stages. And in that he did discuss the capital dividend account. So that's a great resource for people. Again, it's a phenomenal thing that's available to the Canadian business owner that is just not available. You know, our friends down south of the border in the United States.
Speaker 2 00:40:15 Perfect. Awesome. And the bonus one, thank you so much for listening us to this point. The bonus 11th point is we often talk about, you know, mortgages and about how we can effectively, you know, help homeowners to, you know, pay down the mortgages with the infinite banking concept. And one of the things that, that comes up all the time is that the mortgage is a tax deductible in, in the United States and it is not in Canada. So how, so how do we, is is there a way to make a mortgage tax deductible in Canada, Richard, and how, and, and what can we and what can we talk about? What can we say about it?
Speaker 1 00:40:56 So in, and it is a, I think, I think when a lot of, you know, Americans find out that we can't do that in Canada, we get this weird look like, what? You're not allowed to do this. So yeah, I mean we we're very similar countries and similar in so many ways, but then we're different in so many ways as well. So your primary residents, you, you know, the advantage again is with the primary residents that you can sell it tax free. Whereas I think that is not always the case in the States, but you're, you can write off interest on a primary residence mortgage in the states, whereas in Canada you cannot. So again, it always comes back to a give and take. You know, there's, there's, you're giving up something to get something else. There's some kind of a, a advantage that you're creating or a disadvantage on the other, other side when you have rental properties or other types of things, you, you can write off the interest on that because the purpose of owning that rental property was to generate a profit.
Speaker 1 00:41:40 Yeah. So that's an area where interest right off is, is is considered fine now in order to convert your primary residence, mortgage or loan or debt into a tax deductible method. The program that's referred to as a Smith Maneuver and many of our clients are familiar with it and many Canadians I think are becoming increasingly more familiar with it. In fact, we did a podcast episode with Monty Batia, who's a Smith certified advisor, that was episode 135 of the Wealth Belt Bay Street podcast. So we kind of talk about what the Smith Maneuver is and then also a way to integrate it into the process of becoming your own banker in your life. Monty was gracious enough to spend some time with us because he himself, as Bo thinks he's, he uses the Smith maneuver in his own life as well as the infinite banking concept.
Speaker 1 00:42:22 So there's some great dovetailing in those two environments that can be created as long as we have the right mindset. And again, if it's, if it's a strategy that makes sense to you, it's not something that will be applicable to everyone in Canada. And certainly it's something that needs to be looked at and understood. No different than anything else you might choose to do with your financial life. So it's a great little bonus item because, you know, it's a common question that we get, but it doesn't really have anything to do with I B C, but I'm glad we threw it in anyway, Roben. So I'm glad, thanks for giving us the idea to, to make sure we added the, the 11th number, the bonus 11 in here. Cause I think it's good for people to be familiar with as many of the differences between how we think about our financial life, especially surrounding topics related to I B C, between both countries.
Speaker 2 00:43:07 Yeah. I, I just wanted to maybe add one more little thing pertaining to the 10th item is that if someone has a dual citizenship or US citizenship living in Canada, they need to be very cautious about dealing with insurance and dealing with corporate insurance. In, in particular where there may be you, you may need to have a good conversation with a infinite banking practitioner as well as a C P E understands how to avoid problems with c d a count for a US citizen.
Speaker 1 00:43:42 Yeah. You, you could unknowingly trigger extra tax. So that, and now, you know, as a globalized world, as people move to and from countries, no different than you yourself, did Roman joining us here as a mm-hmm. <affirmative> as a Canadian and we're so glad to have you, but you know, people are becoming, becoming more mobile. They're shifting, even just with the employed workforce, they're moving to jobs in the United States and, and vice versa. So as you cross borders, you, you tend to create, you might create a lot of opportunity, but you might create a lot of chaos too, especially with your tax life, right? Yeah. So having good counsel when it comes to those things is extremely important and, uh, very, very well said. So thank you for identifying that. Now again, we covered a lot of cool things here. Our top 10 list of differences between United States and Canada when it comes to the infinite banking concept. We added a little bonus in there. And we really wanna thank everyone for tuning in today and stay tuned for next week's episode. Thanks Richard.
Speaker 3 00:44:34 Thanks for listening to The Wealth Without Bay Street podcast, where your wealth matters. Be sure to check out our social media channels for more great content. Hit subscribe on your favorite podcast player and be sure to rate the show. We definitely appreciate it. And don't forget to share this episode with someone you care about. Join us on the next episode where we continue to uncover the financial tools, strategies, and the mindsets that maximize your wealth.
