What is an Insured Retirement Plan (IRP) in Canada?

The Insured Retirement Plan is a strategy where you buy a permanent life insurance policy (either a whole life insurance policy or a universal life insurance policy) to take advantage of its different tax-advantaged benefits.  A permanent life insurance policy provides life insurance coverage that lasts a lifetime and can build cash inside of the policy on a tax-deferred basis. The built up cash value can be accessed later in life in the form of withdrawals. These withdrawals can be made tax-free with the use of a loan. 

However, like with any investment strategy, there are pros and cons that need to be weighed and considered before you set up this strategy for yourself. Although this strategy can be very advantageous as it can provide you more income, you should also be aware of the potential risks and drawbacks.

In this article:

• How does an Insured Retirement Plan Work in Canada?
• Pros and Cons of an Insured Retirement Plan (IRP)
• Considerations Before You Invest in an IRP
• Case Study
• Frequently Asked Questions (FAQs) About Insured Retirement Plans in Canada

How Does an Insured Retirement Plan (IRP) Work in Canada?

An insurance retirement plan (IRP) is a tax beneficial strategy that takes advantage of two common tax benefits of life insurance: 

1. Cash value growth inside a policy is generally tax deferred
2. Death benefits are not normally taxed

It’s important to note that the IRP works best if your other tax advantages strategies (ie. RRSP’s, TFSA’s, etc) are already maxed out. These strategies in most cases are better than an IRP, but if those are maxed out, then looking at implementing an IRP would be the next step.

Here’s how an IRP works:

1) Accumulation/Saving phase: You buy a permanent life insurance policy, usually a whole life or universal life policy, with an investing option or a cash surrender value. You pay the insurance payments throughout your earning years with a goal to maximize your investments. The money in the policy grows tax-deferred over that period, just like in an RRSP or TFSA.

2) Withdrawal phase: You now have a life insurance policy with a large investment component once you retire. You would be liable for taxes if you took the funds out to utilize for retirement. Therefore, we want to access that money without taking it out.  A yearly bank loan is used for this. Your retirement income is provided by the yearly bank loan, which is secured by the policy. You are not required to make loan payments; interest and yearly installments are recapitalized back into the loan.

3) Repayment phase: Upon your death, the loan is repaid using the death benefit from your life insurance. The accumulating loan is paid off with tax-sheltered funds because investments in life insurance plans are paid out as a death benefit upon death, and death benefits are not subject to taxes.

In summary, your retirement income is tax-free, your investments are tax-sheltered throughout your earning years, and the loan is repaid with your investments tax-free.

The Insured Retirement Plan might be the right solution for you if you:

• Are at least 10 to 15 years away from retirement and looking to accumulate tax-free wealth to increase cash flow at retirement.
  • You should have excess discretionary income, existing coverage or a need for insurance, and you should be in good health
• Have maximized your RRSPs and pension contributions, unless these registered vehicles are not appropriate strategies for you.
• Want to minimize tax today and accumulate funds to supplement income at retirement.
• Need life insurance protection.

Pros and Cons of an Insured Retirement Plan (IRP)

Pros

Cons

Considerations Before You Invest in an IRP

• Type of policy and company:  You can implement this strategy with either a whole life or universal life insurance policy. But depending on the policy type and company, you may be able to use different percentages of the policy as collateral (typically either 75% or 95%).
• Cost of insurance: Level for life (higher at first, but level) and annually growing (very inexpensive at first, but rising with time) are the two main choices. Annual increments are typically used to optimize initial investment deposits; nevertheless, you should weigh the growth of insurance costs against the expectations of investment growth.
• Risk: There are a variety of risks in this strategy, and you should only invest in an IRP if you have the financial resources to bear these negative consequences. Risks include: the regular investment risk, the possibility of your policy lapsing (if future investments are not enough to cover future insurance payments), potential changes to tax legislation, and future modifications to banking regulations are among the risks.

Case Study

Nick, a 45 year old male, non-smoker, is looking for more tax-saving growth opportunities outside of his existing RRSP. He applies for and purchases a $1 million Universal Life policy and makes annual deposits of $25,000 for 15 years. The annual insurance costs are $7,636 and has a 6% annual rate of return (ROR) within the policy.

In the 20th year, when the client is 65, there is $614,794 of investments in the plan. The policy is then collaterally assigned to the bank. We’ll assume an 8% loan rate (2% above our ROR) at which the interest is capitalized until death. This results in annual, tax-free loans of $36,740 for the next 20 years (age 85).

After 40 years, when the client is 85, The account value is worth $2.42 million, and, assuming the client has passed on, the total death benefit is $3.42 million (account value + death benefit). 

The outstanding loan is paid to the bank and the assignment is lifted, while the rest of the death benefit and any remaining account value is paid to the named beneficiaries of the policy.

Frequently Asked Questions (FAQs) About Insured Retirement Plans in Canada

Find a solution for what you’re looking for 

The IRP strategy can be a powerful strategy for those who meet the criteria and can contribute to it accordingly. With any investment strategy, there are pros and cons that need to be weighed and considered before you set up this strategy. Working with a financial advisor can help you navigate whether or not this strategy is right for you and your retirement goals.

At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure the best solution for you and your needs. We provide expert life insurance solutions, including no medical life insurance, critical illness insurance, term life insurance, and permanent life insurance to build the best package to give you the protection you need. 

Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, Manitoba, British Columbia, and Alberta including areas such as Kingston, Thompson, Calgary, and Vancouver.