Insured Retirement Plan is a strategy using life insurance to increase your retirement income. In some cases it’s an outstanding investment – far outperforming other similiar investment options. In short, this strategy can substantially increase the amount of money you have in retirement compared to other investment types.

This plan is less about using life insurance as insurance (though read to the end – the strategy kicks out a ‘free’ whole life insurance policy your estate can use to pay any taxes due upon death) and more about treating the premiums as an investment only. Because life insurance has preferential tax treatment, it can be used to produce better results and more income when considering after tax income.

Who should not use this strategy

If your RRSP’s, TFSA’s and RESP’s are not fully maximized then you should avoid this strategy and instead continue to invest in these other three investment vehicles. All three of those choices will produce results that far exceed anything a life insurance policy can do.   

Who should use this strategy

If your tax preferred investments (RRSP’s, TFSA’s and RESP’s) are all maximized, then in some fashion any further retirment savings are going to be taxed.   

We assume that your taxable investments are done using some sort of asset allocation, and that some portion of those investments are in fixed income – bonds and similiar more guaranteed investments, earning a lower more stable interest rate than say an index fund. It’s that portion of your investments that you would compare investing in a life insurance policy. Often, this would be 10-20% of your taxable investments.   

So, if your tax sheltered investments are full, and you have a portion of your taxable investments in fixed income or bonds, then this is the strategy for you.

Basics of the strategy

Here’s how the strategy works. You treat the life insurance premiums as an investment and ignore the insurance portion of the policy. The deposits are used to purchase a 20 premium participating whole life policy. Unlike most life insurance applications where you fix the coverage and calculate the premiums, with Insured Retirement Plan you fix your deposits and calculate the coverage. For the first 20 years, you ‘invest’ your premiums into this policy.

After 20 years the policy becomes fully paid up – no more premiums. Pause until retirement at age 65.  

At 65, if you collapse the policy or remove the cash value to use as retirement income then the cash value becomes taxable. So lets avoid that. Instead, you use the cash value of the policy as collateral for a bank loan (yes, the major banks will do this). You obtain a loan each year from age 65-85, there’s your retirement income topup.

Because the loan is a ‘loan’ and not income, the loan amount is after tax – you’ve increased your after tax retirement income by the amount of the loan. And this portion of your income because it’s not treated as ‘income’ by the CRA,does not impact any of your government benefits.

You take this loan income from 65 to age 85. Loan interest is capitalized, you don’t make any payments on the loan.

Upon death, the life insurance death benefit is used first to pay off the loan. And again, life insurance death benefits are paid out tax free. Any remaining life insurance coverage above the amount of the loan is paid to your beneficiaries – there’s the free life insurance policy I mentioned earlier. Canadians that find this strategy suitable often have tax implications upon death, so this free life insurance policy can be used to pay those taxes as well.

 In short, pay into a whole life policy. At retirement, take out a bank loan that you never pay back. Use the bank loan as supplemental retirement income. Upon death, the loan is paid off and remaining insurance proceeds are paid to your beneficiaries.

The comparison? Since we are comparing to fixed income assets, we would compare this to bond returns or similiar. And the question is simply, if you put the same amount of money into a life insurance policy vs bonds or similiar, which will provide a higher income in retirement. And the answer is almost always, the life insurance policy – and substantially so.

Example Results

After 20 years the You can download HERE a sample illustration. I’ve used a Male aged 45, with deposits of $20,000/year for 20 years. And I’ve arbitrarily used Equitable Life for the company.

The results are astounding. The life insurance policy produces:

• $52,990 of income from ages 65-85 (20 years)
• A final death benefit for your beneficiaries of between $500,000 and $700,000.

For the same $20,000/year for 20 years, a fixed income investment would produce:

• $52,990 from ages 65-76.5 (11.5 years)
• No remaining death benefit.

The life insurance policy returns $52,392/year for 9.5 years longer than the alternative investment AND gives you a free $550,000+ death benefit for your beneficiaries. 

That’s compelling! It’s driven by the tax preferred nature of life insurance much more than it is the actual investment returns.   

How we can help

 Are you interested in exploring this strategy? If so, please contact us at the number at the top of this page (416) 642-6820 and we’ll step you through some further information on the inherent guarantees in the life insurance policy. We’ll review your assumptions, then we’ll shop the market for the best life insurance policy for your circumstances (we will compare the cash value from different companies at age 65 – that gives us the highest loan income per dollar of investment). Becaus we are independent brokers we aren’t tied to one specific company – we will shop the industry to make sure you have the most optimized life insurance policy.

 You may also be interested in the Estate Bond Strategy.