Due to the drag on investments of the insurance costs and the illiquid nature of insurance policies, this strategy will not compare favourably to registered savings vehicles such as RRSP’s and TFSA’s. It is also not appropriate as your primary retirement income strategy. However once additional registered vehicles are no longer available to you, the tax treatment of insurance policies makes this compare very favourably against non-registered investment retirement savings.
Insured Retirement Plan (IRP)
Once your TFSA’s and RRSP’s are maximized, the Insured Retirement Stategy provides additional opportunities on tax sheltered growth for retirement savings. The strategy takes advantage of the tax sheltered growth inside policies during the accumulation/savings stage, then uses the tax free nature of life insurance death benefits to allow you access to those funds without paying taxes on the access.
How it Works
Funds are invested in a tax-sheltered environment inside the insurance policy. Upon retirement, rather than withdrawing the funds which would incur taxes, the policy is used for an annual loan amount which is used as supplementary retirement income. Loans are not treated as income for tax purposes. Upon your death, the death benefit (which includes the tax sheltered investments) is paid out tax free. In the end, you have tax-sheltered savings that you are able to access in retirement without paying taxes on the growth.
Male age 50, $1,100,000 universal life policy. Assumed 4% interest on loan and 6% return on investments. Values shown are not guaranteed and will vary by individual.
- Ages 50-60: Premiums of $50,000 annually for 10 years.
- Ages 65-80: Loan (supplementary retirement income) of $114,000 after tax for 15 years.
- If death at age 85; Loan is paid off and $1,004,135 death benefit paid to your beneficiaries.
- If death at age 90; Loan is paid off and $1,616,110 death benefit paid to your beneficiaries.