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Overview of Insured Retirement Plan (IRP)

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Understanding Insured Retirement Plan

We are frequently contacted by Canadians who have questions about a life insurance / investment concept called the Insured Retirement Plan (also often referred to as IRP in a shorter form). Typically, they are wondering what it is, how it works, if it is right for them, should they buy it, etc.

Most of the inquiries we receive are because they have been pitched the idea of the Insured Retirement Plan by another financial advisor or life insurance agent as an alternative strategy to investing in traditional investments such as a Tax Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP) or paying down their mortgage. They are told that it is life insurance that can replace other investment accounts.  

One thing to clarify is that the Insured Retirement Plan is not a product. It is a concept or strategy that requires the client to purchase a permanent life insurance policy (whole life insurance or universal life insurance)- typically with higher than normal premiums.

A quick and basic overview of the Insured Retirement Plan concept is as follows,

  1. You purchase a permanent life insurance policy from a life insurance company.
  2. Deposits (premium payments) are made into the life insurance policy to take advantage of the tax deferred growth of the cash value.
  3. The cash value and death benefit of the life insurance policy accumulate over the years as the deposits are being made.
  4. In retirement, the policy owner assigns the life insurance policy to a lender (bank) as collateral for a line of credit. This is similar to how a mortgage is secured against a home by a bank as collateral.
  5. The policyowner will then draw from the line of credit to supplement their income in retirement.
  6. Interest is charged on the outstanding balance of the loan amount against the line of credit. There is never any real intention of paying off the line of credit balance so the interest accruing is not looked at as a major concern.
  7. When the policyowner passes away, the death benefit is used to pay off the outstanding balance of the line of credit and the remaining amount is passed to the beneficiaries of the policy.
  8. The policy owner draws from the line of credit for income in retirement with no real intention of paying off the loan.

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Who is Insured Retirement Plan Designed For?

The Insured Retirement Plan concept is designed for Canadians who are very secure financially and have a permanent life insurance need as well as a surplus of investments. It is definitely not a product for most Canadians as the majority of consumers in Canada require life insurance to protect their family and cover off debt. We recommend term life insurance for those who are in this situation.  

If you are in the early stages of accumulating wealth and growing your net worth, we usually would not recommend that you consider the Insured Retirement Plan. If you are still paying off debt or saving for retirement, we advise that you look at other investment options such as paying down your debt (e.g. mortgage, line of credit, credit cards, student debt, etc.) or deposit money into other investment vehicles such as an RRSP or TFSA. For your life insurance needs, we would recommend that you purchase a term life insurance policy and not permanent life insurance.

Here are some qualifications that should be considered first if you are interested in the Insured Retirement Plan concept. We recommend that you check off the majority (if not all) of the following boxes before moving forward,

  • You are between the ages of 35 and 55 and require permanent life insurance
  • You are in relatively good health and are able to qualify to be approved for a life insurance policy
  • You are a high-income earner
  • You are well into the wealth accumulation phase of your life
  • You have maximized your RRSP and TFSA accounts
  • You feel that you may have a gap in your retirement income
  • You have extra cash that you would like to use towards saving for retirement and are looking for additional investment ideas
  • You are comfortable with carrying debt

Basically, you should be in a very good financial situation before using the Insured Retirement Plan concept. Why? Because it is a long-term investment strategy with non-guaranteed returns on both the death benefit growth and cash values. The returns are usually very conservative as well.

In saying that, if you are a candidate for this concept it can be a great investment tool to add to your portfolio and worthwhile to invest some time to determine if it is right for you. When this concept is used correctly for the right individual, it can add a ton of value to both your retirement income and estate planning.

Benefits of Insured Retirement Plan

  • Provides tax-deferred growth of the cash value inside of the life insurance policy which is required to be purchased for the IRP strategy.
  • When drawing income in retirement from the loan / line of credit, the income received by the policyowner is not taxed.
  • At death, the death benefit is paid out tax-free to pay off any outstanding loan balance and the remaining funds are paid to the beneficiaries on the policy (again, tax free)

Drawbacks of Insured Retirement Plan

  • The performance of the cash value is not guaranteed. Most people who purchase a permanent life insurance policy are using projected values from an illustration which are not guaranteed.
  • We cannot predict the future of the tax code in Canada. The Canada Revenue Agency can make changes to how life insurance policies are treated which could affect the overall performance of the IRP strategy.
  • You should be in a very good financial position before considering this strategy. This makes it not a feasible strategy for most Canadians.
  • Many life insurance advisors/brokers in Canada push the IRP strategy onto their clients with the sole purpose of receiving higher commissions. As a result, there are a lot of Canadians purchasing permanent life insurance policies for the IRP strategy who should not be.

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How Much Does Insured Retirement Plan Cost?

As noted above, Insured Retirement Plan is a concept and is not an actual product. To use this concept, you are required to purchase a permanent life insurance policy first. The cost of the policy depends on many different factors which include some of the following,

  • Death benefit amount
  • Age
  • Smoking status
  • Health at the time of application
  • Life insurance company
  • Structure of premiums

Alternatives to Insured Retirement Plan

When considering the IRP strategy, it should be known that it is a very unique concept and should be considered on a case by case basis. You should speak with a professional who can work with you to completely understand your current financial situation, short and long term financial goals, your income, your expenses, assets, liabilities, etc. to determine what your options are.

Typically, you will want to ensure that you are mortgage free, have your retirement fully funded with investment vehicles such as RRSPs (Registered Retirement Savings Plan), TFSA (Tax Free Savings Account), stocks, bonds, cash savings, etc. before you consider the IRP strategy. These investment vehicles are all alternatives to purchasing a permanent life insurance which is used with the IRP strategy.

Top Companies for Insured Retirement Plan

Since you are required to purchase a permanent life insurance policy for the Insured Retirement Plan concept, there are a lot of life insurance companies in Canada which can be used for this strategy.

There is not necessarily a “best” company to use for the IRP strategy as there are many different factors to consider such as premium costs, cash value growth, guarantees provided, policy types offered, age when you are taking the policy out, etc.

With that being said, some of the main companies which we would recommend considering for the IRP strategy are,

  • Canada Life
  • Sun Life
  • Manulife
  • Equitable Life
  • Industrial Alliance
  • BMO Insurance
  • Empire Life

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Examples of Insured Retirement Plan

We have tried to emphasize in this article the importance of being the right candidate for the Insured Retirement Plan concept before moving forward with it. Over the years, we have been contacted by hundreds of Canadians who have been approached to use this concept or have been sold this concept already who should not have. There are many insurance and financial advisors pushing this concept onto individuals because it can drive higher life insurance premiums which in turn makes them a higher commission. Please consult with an expert who will analyze your existing financial situation and your goals to see if it is right for you.

With that being said, the Insured Retirement Plan can be a great solution for those who are in a very strong financial situation and have additional funds that they want to use for both their retirement income and planning for their estate.

An example of someone who the Insured Retirement Plan strategy should be considered for is an individual who has already taken advantage of the tax advantage investment vehicles (RRSP and TFSA) in Canada, little to zero debt, possibly a business owner or owns multiple properties and is looking to use additional cash investments to create an additional source of tax-advantaged retirement income and provide tax-free funds to their beneficiaries at the time of death.

When used correctly, the Insured Retirement Plan strategy can provide an additional source of conservative retirement income as well as a life insurance death benefit (tax free) to surviving heirs.

Summary

The Insured Retirement Plan can be a very powerful strategy when used correctly with the right individuals. It involves purchasing a permanent life insurance policy which is a long-term financial decision and can involved quite high premiums to build the cash value of the policy.

Be sure to do extensive research before making any decisions. Feel free to reach out to us if you have any questions regarding this concept as we are more than happy to help, free of charge.

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