How to get ahead of 90% of Canadians with your TFSA

Problem with paying off the mortgage so quickly is that you're basically giving the bank more money than they're asking for. And they're going, hey, thanks a lot. We don't need to go find a new borrower because you're giving us more money than we're asking for. You're trapping all that money into the property and you're really only achieving one objective. You're going to pay less interest, you're going to pay for less time, but all of your money is now flowing away and it's trapped inside the property.

So we're going to be talking about a case that just recently I was working on, and I wanted to share the problem that we have, and we will discuss the possible solution, what we can do, and how this family can be helped and how we can implement this strategy, as well as something else that just recently came up for them. So I was working on this case. It's a couple. They have been working for government for quite a bit of time. They're in their 60s. And we came to a solution that they're applying for a policy for the husband for about $12,000 per year. And then the wife also has a $12,000 approximate policy, but it is being converted with a different company. The solution is that they have a sizable amount of savings in TFSA and they wanted to use that TFSA account to fund the two policies.

So, Roman, just so I heard, again, heard you said they're putting 12k per year. That would be. What's the maximum premium for those policies, the way that you've designed them. But the way that we structure a policy for the process of becoming your own bank, or the infinite banking concept is we know that there's flexibility in that premium. So they a minimum or a base premium, and then they have a maximum premium that they can, you know, when things are really good, they can put more in, but they're not contractually bound to do that. Is that. Is that correct?

Correct. Yeah. So the goal was to fund the policies with the savings for about 10 years, put as much as they possibly can up to the maximum, and then they can drop it to the minimum and use their income, which is going to be pension income at that point, to fund the minimum payments. And that is the plan to use the policies for retirement later on when the policies have compounded sufficiently. And that's the plan. The initial plan for them was.

I love what you just said. You said eventually they're going to use their savings to fuel the policy early on. So they're just taking the capital from somebody else's warehouse, some other bank, they're just flowing it over to their own policy system and they'll do that over a number of years and then the policy will have good momentum in it and then they'll start taking pension income eventually. And Canada, isn't it true that your all of your income has to flow through the books of someone else's bank anyway? So what they're going to do is they're going to flow that pension income out and it's going to flow into the policy as premium to, as more fuel to make that system work harder so that eventually they can get a heck of a lot more out of the policy than what they ever dreamed of putting into the policy. And there's one last thing I wanted to point out, Roman, that you said that was like super critically important information for you to know. Canada, you said that we're going to start a new policy on husband and I believe you said it was the wife who is going to do a conversion. What that means is that she already had some existing insurance in place, likely what's called term insurance. Generally speaking, when you have a term insurance in place, you have the contractual ability to convert. So term insurance, if you think of that as like being a renter, it's temporary insurance, it doesn't stay with you forever and it becomes more and more expensive over time. But when you have term insurance, it has benefits and one of them is obviously the death benefit. So you got to die to win. The good news is you have the contractual authority, again generally speaking, up to age 70, where you can convert that over and go from a renter to an owner with no medical evidence. So even if you're not insurable, you can convert and you can add a whole life policy, assuming that the company you're working with actually have whole life policy options. So it doesn't mean that any random term insurance policy, you can convert it and become your own banker with a whole life policy structure correctly, because that company might not have that option. But luckily in this case they might not be our ideal company. We're not going to mention any names, but the good news is they do have term insurance and they have the right type of policy. Yeah, we need to convert to whole life.

So here's this story. They are renting a house from their daughter and a son in law. They're paying some rent now they said they actually approached us to help us buy a nicer house, which we're so grateful for. Them. The idea is to use our savings of $100,000 as a down payment. The house is worth about $400,000. Our part is our down payment. We're putting 100,000 down and then they're paying the mortgage. Because the sizable down payment, the mortgage will only plan to do for 15 years and that's it. And the daughter and her husband will be paying the mortgage. So the parents will not be paying anything other than the down payment. Because of this change of the plans, they say we only are left with less money now to put into our policies. Right. Instead of having 150k that we initially planned to fund the policies for up to 10 years, and also using our savings and our income, we're now only left with 50k left. So what do we do? We haven't started the system, doesn't have loan that we can borrow from. I feel like they want to do it now or they want to do it anytime soon. How can we do that? How can we achieve both objectives? How can we open policies and at the same time, how can we buy this nicer home and blow our money this way? So we just wanted to discuss this with Vern and see what possible solutions. What comes up to you, Vern, when.

You hear this, first of all, I think it's absolutely fascinating because in an indirect way, what this family's already talking about is the family banking process. They're working together because obviously that couple is younger, they're working, they're still earning income, they have great economic growth potential. And they see mom and dad, hey, we've worked for many, many years. We've got this pension income. Things are pretty reliable and consistent for mom and dad. And they say, let's kind of treat this as an investment and almost sounds like slash and inheritance, right? Because let me take mom and dad's 100 grand and put it into this house. Mom and dad will live there and the kids will actually pay the mortgage as like an investment so that when mom and dad pass, they'll leave the house behind as, as an inheritance. It's really kind of a fascinating scenario when you think about the value that life insurance brings in, in this situation. So, man, my, my brain is going to work. And then now that you've kind of spoken it out again, I'm even looking, thinking about other ways that it could be done. It's pretty straightforward to know that this system is meant to be built incrementally over time. Nelson left us some really important golden rules to follow. And one of them is don't be afraid to capitalize because your capital has to reside somewhere. And the thing that I'm really struggling with in this scenario is they're going to take all that capital, they got about $150,000 of liquid savings and they're going to take 100 grand that they worked for, trap it into a prison called a house. So they're capitalizing someone else's bank, essentially. Right. And then they have less money left over to continue to fund their own policies, which they could fund them for. If it's 12,000 each, that's two years worth of premium. And then maybe they either reduce the prem and start bringing in the pension income and they can fund the policy, but they could use it for other purposes, other objectives. It doesn't necessarily help with this thing, with this situation. And it's like they're accentuating the problem. And the problem is, is that money's leaving, it's working for other people and we don't have control, we don't have access to that capital. So I said to Roman, I said, why don't we just talk to them about, hey, you know, interest rates aren't real great right now when it comes to buying properties and maybe they can just press the pause button for a little bit, maybe a couple of years and maybe even accelerate the growth of the policies, maybe fund them a little bit strongly and eventually they could borrow from the policy and then put the down payment in. Correct me if I'm wrong, I'm not sure if you shared this, but you were saying earlier that the kids were thinking, hey, let's do a 15 year mortgage instead of a 30 year mortgage. Even more money, right? I totally get it. Canada. From a conventional thinking perspective, we all think, oh, I want to pay off my mortgage, I want to pay off my mortgage, I want to pay off my mortgage. Because we don't, we understand that we have to pay it forever and it's a lot of money. Problem with paying off the mortgage so quickly is that you're basically giving the bank more money than they're asking for and they're going, hey, thanks a lot, we don't need to go find a new borrower work because you're giving us more money than we're asking for. You're trapping all that money into the property and you're really only achieving one objective. You're going to pay less interest, you're going to pay for less time. But all of your money is now flowing away and it's trapped inside the property again. Now that I'm thinking out loud, maybe it could still work. It would obviously take some rethinking your thinking. And that's the key about this whole process, Canada, you got to rethink your thinking. Yeah. If they would delay it and press pause for maybe a couple of years and maybe interest rates are a little better. Yeah. Then they found they could funnel that money into the policies and they could use the loan, a policy loan, to put the down payment in. And let's say in that example where the kids want to accelerate the mortgage payment, instead of shrinking the mortgage to 15 years, maybe they could stretch it out to 30 years. And then what would that do? Well, that would create more cash flow. If they were budgeting, you know, they're going to be paying significantly higher for a 15 year mortgage than a 30 year mortgage. So any excess cash that the kids would have paid for the mortgage on a 15 year mortgage versus 30, that excess cash flow could go back into the policies to replenish the loan. The parents are going to continue to fund their death benefits and then the kids are going to pay the mortgage, but they'll pay less. Remind me again, what are the approximate ages of mom and dad?

About 16.

So now we don't know. We don't have a crystal ball. Nobody has a lease on life, but estimated age of mortality is somewhere between ages 84 and 86. In this case, we don't know. We don't want mom and dad to die, but that's going to be less than 30 years. So when mom and dad pass away now more cash was freed up by the family to continue to fund the system. So mom and dad have cash available to finance things or offset their retirement or if expenses get really high and they don't have enough pension income, so it gives them a bit more options. They still own the home, they still could potentially sell it at some point, they could refinance it. They have all those options that still exist. But now what could happen is that when mom and dad pass away, that big windfall of capital from the death benefits could obviously wipe out the mortgage of the home. And then the kids own the house free and clear and they also get an additional windfall from the death benefit. To me, an absolute no brainer. They might not want to delay it. Do a combination where you maybe delay it or you do it right up front like so. Now this might not be perfect, but I'm thinking, oh, by the way, something else I would point out is the whole time that the mortgage balance is coming down as they're paying it, the policy values are increasing.

The more money you put into one asset, the less money you will put into the other asset. You select which asset you're building. So right now the goal is to actually buy this home and then put all the money into this asset, which may or may not appreciate in value. At the same time, they're actually compromising the other asset, which is a cash value in a policy. And future death benefits, which can be actually a resource to pay off the mortgage. Yes, pay off the mortgage and be debt free, but pay off with the debt benefit rather than with your savings of cash. Right.

That is bang on. That's why we have the death benefit. It gives you the ability to have more control over the flow of the money and also the ability to spend down on other assets like pension. They don't need to necessarily worry about leaving anything behind. They can spend that money and have the peace of mind and know when the death benefits there. And on top of that, the cash value is growing while the liability is decreasing. Now they could potentially fund those policies for a number of years and if it made sense for the family, they could borrow the money from the policy, accelerate the mortgage pay down and now the debt that is with someone else, the other bank, that's their asset. If we pay off the mortgage sooner with the cash values from the policy, using a policy loan, now the entire mortgage payment that was flowing away from the family and being trapped in the home can actually flow back to mom and dad to offset their retirement income. It would be cash flow. They could use a portion of that cash flow to replenish some of the loan and some of it to live with. And then the kids, because they're going to have the house and then they're going to get the death benefits anyway.

The biggest takeaway for me is that if you want to use the cash value to recapture all mortgage, then your policy must be bigger than your house equity. If your policy is very small, instead of 12,000 each, if they only do like 5,000 each, then the policy will not be big enough to actually take over this mortgage. Would you agree?

Absolutely. You know what I'm thinking, Roman? Would be really, really fun and interesting. Canada, can we get you to play along with us here? I have some other thoughts in terms of if they, let's say they like, no, we got to get the house now, then, then there are some options in terms of how they might be able to fund the policy in a way and still make this whole deal work. I would like to have some more time to work. You know what I would love to do, Roman, is a. I would love to do a part two of this where we can provide an update and we can provide another option in terms of how they could go about doing it if they absolutely must get the house today. I've got some ideas in mind that I'd love to share. Let's hold each other accountable, Roman. We can expand on another option to go forward, and maybe we can provide a bit of an update of what actually occurred with this case. You got to focus on education, right? Go to watchibc.com so you can learn more about how the infinite banking process works and how it can work for you and your family.