What is an Insured Retirement Plan or IRP?
Today we’re going to talk about the Insured Retirement Plan or IRP.
We’re going to cover:
- What is it?
- Who is it for?
- Who is it not for?
- How it works?
- How it fits with the IFA Strategy?
What is an IRP or Insured Retirement Plan?
An IRP is a strategy that uses insurance and leverage to supplement Canadian’s retirement income.
We start by purchasing a participating whole life insurance policy from one of our top insurance carriers.
Once we have the policy secured and you are in a position to retire - we collateralize the insurance policy with the bank who fronts you a loan or a line of credit.
Then throughout retirement, you can access this loan rather than withdraw funds from the policy and have a tax-free or tax-deferred supplement to your retirement cash flow.
While doing this, the bank monetizes your interest - which means they add your interest fees to the loan and you don’t have to service the loan out of pocket.
Then one day when you eventually pass away, the insurance pays out minus the bank loan and interest and the remainder goes to your beneficiary completely tax-free, because life insurance pays out tax free in Canada.
Another big benefit is that we are using tax-exempt life insurance policies so the growth inside these policies is tax-deferred until you withdraw it. However, since we’re taking loans against it, the withdrawal never happens.
It’s quite an ingenious little system that allows business owners to access a tax deferral on investments for retirement inside their corporation that’s not available anywhere else. In addition when they pass, the whole thing can usually pass tax free to their beneficiaries.
Who is it for?
We generally do this with business owners who are incorporated and leave their money inside their corporation or holding company rather than take it out as income to put it into their RRSP.
It’s better to leave it in the corporation and only access it when you need because inside your company the money is taxed at 11 or 12 percent depending on which province you live. Whereas if you take the money out as income to save for retirement then you’ll probably be paying anywhere from 30 - 50% on that money.
The ideal candidate for this is someone who owns their company, is generating profits which are held as retained earnings - often flowed to their holding company.
They have a family, they own their house and they want to make sure their family is taken care of if anything happens by creating a legacy left for beneficiaries.
And they have at least 5 years before retirement - ideally 10 or more years to really supercharge things!
Who is this strategy not for?
Generally we don’t see a lot of employees doing this since there are other tax deferral opportunities available for employees like RRSPs, pensions and other retirement programs.
Where we do see employees taking advantage of this strategy is when their income is so high that the annual $28K RRSP limit is not enough to move the needle on tax savings, so they have a need to incorporate.
There’s also some people who really don’t like insurance - so obviously this is not a good strategy if you don’t want life insurance in the first place.
If you don’t like insurance, then obviously this is not for you - because the life insurance is the underlying core to everything.
Lastly, to set this up properly, your budget minimum should be an annual deposit of $50 thousand or more for at least the next 10 years.
Ideally it would be $100 thousand or more for 10 years because that opens up the lending options and gives you access to more banks and more service.
If this doesn’t sound like something you can get behind, then this probably isn’t for you right now.
Often we introduce a concept or strategy like this to someone and they are not ready for it now... they are still building and on a trajectory and then in a couple of years when they’re ready they reach out.
In fact many of our best clients happened just like that - not ready now, but come back in a couple of years and knock it out.
Regardless, it is important to know something like this exists now!
How does it work?
During your working years, you will over-fund your life insurance policy to generate a lot of life insurance that you need, and very high cash values.
During your working years you will also leverage the cash values in your policy to invest back into your business or into something else. This can be the IFA Immediate Financing Arrangement or the Infinite Banking Concept strategies.
The whole time this is happening, your whole life policy is growing with a dividend and with your additional premium deposits.
You don’t have to leverage your policy cash values - you could just fund the policy and let it grow on its own if you want the easiest way. This is still a good option.
If you did borrow, the lending during your working years would be CSV lending or an IFA structure where you are servicing the debt and using the policy to invest.
When you get to a “retirement” age - which is a minimum 50 or 55 years old depending on the bank then we switch the loan type to IRP which we’re talking about today.
You will sell some of the outside investments to pay out the loan you’ve been accruing against the policy, paying the loan down to $0.
Then you turn around and leverage the policy right back with the same bank. But this time the loan is an IRP loan and has different provisions.
The basic function is the same, but how you service the interest changes.
With an IRP you don’t have to service the interest out of your cashflow. The bank will monetize the interest and you don’t have to pay it back until you die. The life insurance covers everything and leaves the remaining tax-free life insurance to your beneficiaries.
How does it fit with the IFA strategy?
First you do the IFA Immediate Financing Arrangement while you are still working.
Then when you want to retire, you retire the IFA loan and re-leverage your policy under an IRP structure.
When Simon Sinek says “start with why” - this is why.
You’ve built up a giant life insurance asset plus you’ve built up a big investment portfolio of whatever type outside the life insurance policy. You do this during your working years.
When you want to stop working after age 55 you’re going to get very tax advantaged, secure retirement funds and then eventually when you pass, the whole amount will pay to your beneficiaries tax-free minus any outstanding loans that you’ve used the whole way along. This is why the Insured Retirement Plan IRP exists.
When you run the numbers against other types of retirement income the difference is insane.
Next Steps:
Since 2011, Safe Pacific Financial Inc has helped 100s of Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, retirement income and estate needs.
To discuss how the Insured Retirement Plan IRP can work for your situation, schedule a no-pressure call with one of our advisors.
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