Business Owners: Ready to ‘Be Your Own Bank’?

The information provided in The Kinder Way Podcast is for educational purposes only, and is not intended as a substitute for professional advice from a licensed advisor. The content of each episode is the opinion of the host and interviewees, and does not represent the views of Serenia Life Financial or any of its other subsidiaries or affiliates. Please always consult a licensed insurance advisor for guidance. Serenia Life Financial does not endorse any third-party views referenced in this content.

Episode Transcript

Kathleen O’Hagan (KO): Hello! Today I’m looking forward to chatting with Serenia life advisor, Greig Humphrey, about a topic that may offer a bit of a light bulb moment for some business owners in Canada. But let me briefly introduce him first. Along with being a financial services consultant, Greig is also the dad of two little kids and a major sport enthusiast. Fun fact about Greig: His passion for sport allowed him to travel to parts of the world that he may not have otherwise visited. He’s played lacrosse in the Czech Republic, hockey all over North America, and has been snowboarding in Japan. So cool!

So, before we get started, I should note that Greig will be sharing insight based on his personal and professional experience. However, this episode should not be considered a substitute for tax or financial advice. Always, always consult with a qualified professional for expert guidance that is tailored to your situation.

All right. Welcome to the show, Greig.

Greig Humphrey (GH): Thanks for having me, Kathleen.

KO: Okay, let’s get started. When I think life insurance, I think about a financial safety net for my loved ones. But can you tell me why business owners or entrepreneurs need life insurance, too?

GH: Sure. I just want to start by saying that life insurance for business owners is also a financial safety net for their loved ones. If a business owner has taken out business loans or have significant business-related expenses and something were to happen to them, those obligations don’t disappear and those responsibilities may fall on the immediate family to manage. And that can add significant financial stress for the family while they’re, you know, navigating a significant loss. That’s why both life and critical illness insurance are essential for business owners. In addition to helping the family through challenging times, both of these forms of financial protection help keep businesses running in the event of death or serious illness. By giving access to fast, tax-free cash when they need it most.

KO: So, if an entrepreneur came up to you today and asked what kind of life insurance you’d recommend, what would you say?

GH: Well, everyone’s situation is unique. You need to consider the business dynamics, family dynamics, etc… So, for me, it usually starts with gaining an understanding of their situation. And that process usually starts by asking some simple questions like: Who depends on your income? Is the business just for you? Or do you have other partners? Do you have shareholders or partnership agreements in place? If something were to happen to you, who would step in and how would they be funded? How do you currently manage access cash or additional earnings held in the business? And are you planning to pass that business on to the next generation? Once we have an understanding of those pieces, the right types of insurance and solutions become clearer.

GH: Not exactly, but it’s definitely not one size fits all. The solution really depends on what risk we’re trying to protect against and what opportunities are available to each owner. Each scenario drives the solution. For example, if I’m speaking with a business owner who wants an easy, simple transfer of ownership if one of them were to pass or pass way too soon, I’d likely recommend a buy-sell insurance agreement. In this case, the shares of the business can be bought at a predetermined price by the surviving owner or owners with the life insurance proceeds. If you’re working with an entrepreneur who really relies on the expertise of specific employees, I’d probably recommend something like key person insurance. This sort of coverage provides a financial buffer while the business owners looks to appropriately replace that key person if they were to pass away unexpectedly. If a business owner is looking to create something like their own source of financing, it’s going to bring up a concept called “infinite banking” or “being your own bank.” This is where they’d use participating whole life insurance to build long-term wealth through stable and predictable growth, to have ease of access in terms of cash, and gives them flexibility and the power to access cash on their terms.

KO: Okay. And I’m glad you brought up infinite banking because I’ve previously talked about this concept when it comes to building wealth for my child. But, why is this a helpful concept for business owners specifically?

GH: There’s a reason why the nickname for this concept is “be your own bank”. Traditionally, business owners who are in need of funds or money would have to do one of or more of the following things: They may turn to bank loans, lines of credit, government programs, or even personal guarantees. Each can come with strict financial requirements, restrictions, repayment schedules, and even put their personal assets at risk. With infinite banking, which starts with purchasing a whole life policy, you’re more in control over your own money and have a lot more flexibility. Business owners who choose to access cash value portions through the whole life policy, when they need it, can enjoy cash on demand. They have flexible repayment terms and the ability of borrowing from themselves through slower seasons, through times when there’s high-cash needs, and this might provide a cushion for things like payroll and other expenses.

KO: Okay. And, can you talk about the growth potential a little bit? And is it taxed?

GH: Sure. Growth potential and whole life insurance policies, would probably be best described as slow and steady. It’s a lower risk investment option compared to many other investments out there. That’s because typically whole life insurance comes with guaranteed cash values that grow over the years. Plus, there’s a potential for additional growth through things like dividends, which are not guaranteed. Of course, they’re based on market fluctuations and company performance. But historically here at Serenia Life, they’ve done quite well. And you can use these dividends to increase the growth potential.

There’s an option called Additional Deposit as well. This costs a little bit extra, but it has the potential of almost doubling your growth portion of the policy because it takes advantage of things like compound interest – and essentially means making money on your money, or interest on your interest. In terms of tax, cash values generally grow tax deferred, which is similar to people’s RRSPs, meaning that there’s no annual tax on the growth within the policy. And the good news is, when you are ready to access that money, there’s tax-friendly ways of doing that. And if you never need the cash or you pass away, your beneficiaries still receive that insurance benefit, which is tax free. So, when we get into kind of that tax portion, it’s really important that you speak to a tax professional, your accountants, your tax professionals on your team to figure out what best fits you and your options.

KO: All right, so we’ve gone over some of the pros. Are there any cons to this strategy?

GH: Yeah. The infinite banking strategy is definitely a powerful option, but it’s not perfect. Some of the key cons would be upfront cost. Whole life insurance policies are more expensive than your typical term policies. That’s because they come with an investment component. And the cash value, as I mentioned earlier, allows for that additional growth. And it’s there to cover your life, right? It’s there to give you a tax-free benefit if you were to pass. As I mentioned before, it’s slow and steady in the early years. Cash value takes time to grow. It grows gradually and it takes, you know, a longer period of time to have some serious, meaningful growth in those policies to take advantage of them. And there’s complexity to it. Like, we’ve talked about the differences between different business owners. It requires a lot of careful planning, has to be structured properly. And it’s very important that you work with an experienced advisor who knows how to implement these strategies to make sure it’s a right fit for you. The last thing would be it’s long term. So we talked about slow and low growth, but it works best when you’re committed for decades, and it’s always best within any type of insurance solution to start early, just because it’s more affordable when you’re younger. And it allows you to have that time frame or enough time for that policy to really start growing.

KO: Exactly! I got it for my son when he was five or six years old.

GH: It’s good thinking. He’ll thank you forever.

KO: Hopefully! So, if you could give one simple piece of advice to business owners, what would it be?

GH: Business owners and entrepreneurs typically are really known for their ability to manage risk and build financial stability. It’s essential to their success. Life insurance and critical illness can play a very pivotal role in their business strategy. And just as importantly, it provides protection for the business. Not only the business, but their families as well. And it’s not just about leaving money behind. With things like the infinite banking concept, life insurance can go beyond just your basic protections. By giving business owners different ways to build wealth in unique tax advantaged ways. And it’s really important to have a conversation with your advisor to see how these strategies can fit for you and fit for your own business. And most importantly, it helps protect your family in the long run.

KO: Great! Great advice. Thank you. So, at the end of each interview, I like to ask my guests to sprinkle a little bit of kindness into the episode by sharing an act of kindness that they either observed or participated in. Do you have an example to share?

GH: I do. So, uh, we have family friends who have a daughter who is affected by Angelman Syndrome, which is a very rare condition. And every year, that family and the community puts on a golf tournament to raise funds. Over the last few years, they’ve raised well over one hundred and fifty thousand dollars for this cause. And the best part about it is that because our friends are so tightly tied to this condition and the fundraising for it and the advancements in medical technology and just awareness, we get to see the impact of those funds and that fundraising directly. We get to see their daughter’s, let’s call it, progression. We get to see the awareness – in this community, the awareness has actually gotten really high, especially since starting that tournament. And it becomes more impactful when you actually see the results of the efforts that they put in and you participate in. So that’s probably the, that would be my, my one share.

KO: Yeah, it’s definitely pretty wonderful when you can see the results of your fundraiser with your own eyes. Sounds awesome. Well, thanks so much, Greig, for joining me on the show today. I know I learned a lot and I’m sure our listeners did too. See you all next time!