The Advantages of Whole Life Insurance for Retirement Planning
Today we are going to be discussing a tool that can play a significant role in your retirement planning, Whole Life Insurance.
In this blog, we'll explore the benefits of Whole Life Insurance and how it can be a valuable addition to your retirement plan in Canada.
Here’s the quick version of how it works and then we’ll get into more detail.
You start by over funding a participating whole life insurance policy with the goal of growing the cash surrender value.
Then in retirement you’re able to access this cash value in different ways including, withdrawing the money, taking policy loans from the insurance company or leveraging the cash values with a 3rd party lender like a bank.
When you leverage your insurance policy with a bank for retirement purposes, it’s called an Insured Retirement Plan or IRP.
How does this work?-Whole Life Insurance
Now let’s get into more detail of how this all works. We’ll start with what is Whole Life Insurance?
This type of insurance is a type of permanent insurance that provides coverage for the rest of your life so long as pay the premiums. It’s just like the name says – whole life.
One of the key benefits of Whole Life Insurance is the cash value component.
This means that a portion of your premiums goes into a cash value account that grows over time through a dividend. The growth comes from investments made by the insurance company’s participating account.
This cash value can be accessed through policy loans, withdrawals or leverage from a 3rd party like a bank, giving you access to funds in retirement.
Tax-efficiency of Life Insurance in Retirement
Another benefit of Whole Life Insurance is that it is a tax-efficient way to save for retirement.
The cash value component of the policy grows tax-deferred. This means you don’t pay any tax on the growth until you withdraw the funds.
But when you leverage against the cash value in your policy like we show you, you never withdraw the funds, so that taxable event never happens.
Additionally, death benefits paid to your beneficiaries are generally tax-free.
So you’re able to grow the money in your policy tax-deferred and then able to pass it down to your kids or beneficiary tax-free.
The Insured Retirement Plan
When we set up these insurance policies for you to fund or supplement your retirement it’s called an Insured Retirement Plan.
We didn’t invent the name. The Insured Retirement Plan is a bank name for the types of loans that banks will give you against the insurance policy that’s been properly set up to generate a high cash value.
We mentioned earlier that we show you a way to never withdraw the funds in your whole life policy, so the taxable event of withdrawal never happens.
Well here’s how that works. Once you’ve built up significant cash values in your policy, you can actually take that policy to a bank as collateral for loans.
When you’re past a certain age – which can be 50 or 55 or 60 depending on the different bank’s rules, you can take those loans every year.
The way an IRP loan is set up, the bank will monetize the interest payments, meaning they add the interest owing on top of your loan – you don’t have to make annual interest payments.
The bank is still charging you interest, they’re just adding it to your total loan instead of asking you to pay it every month or every year.
Because the bank is holding your life insurance policy as collateral what they’ll do is just wait until you die and then collect whatever outstanding loans and interest is owing out of the death benefit.
Using a life insurance policy to help with your retirement income is a great idea for the right person because you’re able to grow your money tax-deferred for your entire life, you’re able to access that money in a tax efficient way through loans in retirement, and then when you die, the death benefit pays out tax free minus any loans and interest you’ve taken.
In conclusion, Whole Life Insurance can be a valuable addition to your retirement plan in Canada.
With its cash value component, tax-efficiency, and ability to provide a source of guaranteed income, it can play a significant role in helping you achieve your retirement goals for the right people.
Who should and shouldn’t do this?
Who is the right person to use an IRP retirement income strategy? And who shouldn’t do this?
This is an advanced strategy that should only be done by someone with a sophisticated understanding of money, collateral and debt. This generally isn’t someone’s only source of retirement income – they would have income from other sources like rental properties, a stock portfolio, businesses or other retirement income.
The IRP strategy would be a tax-advantaged supplement to their income – not their entire retirement strategy.
The IRP strategy would be using excess funds to implement it and it definitely wouldn’t be using all of your funds to implement it.
Who shouldn’t do this?
Someone who’s not financially sophisticated and doesn’t have a good understanding of how money works and the risks associated with using large amounts of debt.
We sometimes get people in desperate situations looking for a hail mary to fix their retirement situation – and this is definitely not for you if this is the case.
Someone who doesn’t have other assets generating income for them wouldn’t be a good candidate for this because there’s interest rate risk and the funding requirements to get this set up can be high and need to be consistent over an extended time period.
But for the right person – usually an entrepreneurial minded person or business owner, this can be a no brainer if set up properly with the right contribution amounts and time horizon.
Contact Us
At Safe Pacific Financial, we specialize in helping Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, and business growth.
If you would like to discuss whole life insurance or investments, we’re happy to chat and see if we can be a good fit to work with you. Fill out our contact form and we will get back to you within 24 hours on business days.
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