Bringing life insurance to life

September 03, 2019 | Connor Ryan


Share

An IRP is a retirement income strategy that uses tax-exempt life insurance to build wealth, provide tax-free cash flow, and protect the financial security of your loved ones.

Insured Retirement Plans (IRPs) allow you to benefit from your life insurance policy while you're still around. 

 

An IRP is a retirement income strategy that uses tax-exempt life insurance to build wealth, provide tax-free cash flow, and protect the financial security of your loved ones. It's especially useful if you're already maxing out your TFSAs and RRSPs, or if you're a business owner with little to no RRSP room. 

 

Top three benefits

1. Life insurance: peace of mind knowing your loved ones will be taken care of with a tax-exempt payout.

2. Tax-free accumulation: a portion of your deposit into the policy pays for the cost of the coverage, while the remaining portion is invested on a tax-deferred basis - called the cash value. Depending on the amount of insurance you purchase, you have the potential to build a great deal of equity within the policy. 

3. Retirement income: The accumulated value in your life insurance policy is a potential source of income. You can use the cash value as collateral to obtain tax-free loans from a bank or trust company, which are paid back with the eventual life insurance benefit. 

 

How it works

Imagine Taylor and Alex are 45 years old and don't need supplementary retirement income for another 20 years. They currently maximize their RRSPs and TFSAs, are in the highest marginal tax bracket and want to leave an estate for their children.

1. They apply for and purchase a $2.0 million permanent tax-exempt life insurance policy that allows them to make annual deposits of $50,000 for ten years. These deposits satisfy their premium payments and the remainder accumulates tax-free.

2. After 20 years, at the age of 65, there is $608,000 of the cash value in the plan, assuming a 3.5% tax-exempt growth rate. To supplement their retirement income, Alex and Taylor secure a loan from a bank by assigning their policy as collateral. Assuming a 5.5% loan rate, they expect to receive a total of $50,000 per year of tax-free capital for the next ten years. Loan interest is added to the loan balance and will be repaid upon their death using some of the insurance proceeds. 

3. After 40 years, the cash value is worth $2.2 million, and Taylor and Alex have recently passed on, leaving a death benefit of $3.1 million. Their outstanding loan of $1.2 million is repaid from the $3.1 million total. 

4. The rest of the policy, $1.9 million, is paid to the beneficiaries tax-free. 

 

All in all, Taylor and Alex deposited $500,000, received $500,000 tax-free and left $1.9 million tax-free to their children.