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Insured Retirement Strategy – using life insurance


Important note: This life insurance strategy is becoming more commonplace in the industry. You should be aware that the strategy is an excellent retirement savings strategy in some instances – and entirely inappropriate in other instances. If you have not maximized your RRSP’s and TFSA’s already, then this strategy is not likely appropriate for you. If you have maximized those other investment vehicles, then insured retirement using life insurance can be an exceptional opportunity. 

How it works

The basic strategy is as follows. You purchase a whole life insurance policy or universal life insurance policy that has been selected to maximize cash values or investment values. The internal growth in these policies over the years does so on a tax sheltered basis.

Upon retirement, you cease paying premiums, and now want to use the cash values or investment values as retirement income. However if you withdraw funds from the policy, they become taxable in some fashion. So instead, you use the policy as collateral for an annual bank loan. The amount of the bank loan is your additional retirement ‘income’. However since it is a loan, it’s not taxed as income (it’s not taxed at all, its a loan). The bank loan accumulates, with interest over time.

Upon your death, the death benefit of the policy first pays off the bank loan. Then, any remaining death benefit is paid out to your beneficiaries. That death benefit includes any cash or investment values inside the policy, and since it’s a death benefit, the money is paid to the bank and your beneficiaries tax free.

Why does it work?

It works for a couple of reasons. First, it only becomes attractive after you’ve maximized RRSP’s and TFSA’s. This is one area where you should be careful, as RRSP’s and TFSA’s will almost certainly perform better than an insured retirement strategy. Secondly (and only after RRSP’s and TFSA’s are maximized) the tax principles of life insurance are what make this attractive – the various areas where life insurance policies don’t pay taxes are what make this attractive numerically. i.e. you’ll have more retirement funds if you pursue this strategy than if you don’t. Growth inside the policy, even if it’s minimal, is not taxed. The loan using the values as collateral, isn’t taxed as income. And the death benefit because it isn’t taxed, pays off the loan tax free.


Here’s an example of the numbers you might see with this strategy. A 45 year old male nonsmoker purchases $500,000 of 20 pay whole life.

Premiums for years 1-20 are $16,818/year.

At age 65, a bank loan is made each year for 20 years of $19,139. This bank loan is treated as supplemental ‘income’ in retirement. It is tax free (because it’s a loan) and is not treated as income by the CRA and thus doesn’t impact any income-related retirement benefits. 
Upon death the bank loan is paid off by the death benefit and any remaining proceeds are paid out to your beneficiaries. In the above example, if the policy owner passed away at age 86, their beneficiaries would receive $845,000 tax free, after the bank loan was paid off.

Caveats – be aware

This strategy can be implemented using either a whole life policy or a universal life insurance policy. We recommend that you use a whole life policy. Whole life cash values are vested – they can not be reduced in the future unlike investments in a universal life policy. 

Secondly, whole life insurance cash values are often guaranteed, whereas universal life insurance investments are generally not guaranteed.

Next, in general, banks will loan only up to 75% of the investment value of a universal life insurance policy whereas you may be able to get a loan of up to 95% of the cash value of a whole life policy. 

A further downside to this strategy is that investments in life insurance like this are non-liquid; it’s very difficult to change your mind and start withdrawing funds without having catastrophic results in the strategy. Therefore this strategy is only appropriate for those that already have their basic retirement already handled. Insured retirement should be considered a supplemental retirement strategy, not a primary strategy. (In the event that this strategy is suitable for you, the fact that this isn’t overly liquid is likely a minimal concern as you’ll already have sufficient alternative investments that are liquid).

Lastly, when reviewing policies for this strategy, make sure your life insurance broker has reviewed a variety of policies with an eye towards maximizing cash value. Policies vary in terms of their tradeoffs between premiums, cash values and death benefits, and in this strategy high cash values are paramount.

One last thought – if you have a corporation, there is a variation of this strategy called corporate insured retirement. The strategy is mildly more complex than the above, but also provides mildly better results, i.e. it can provide a slightly higher retirement income. 

If you’d like a consultation, a further explanation, or a life insurance quote, please contact us and we’d be happy to assist.