Life Insurance - Insured Retirement Program
An Insured Retirement Policy is a strategy to generate cash based off a Universal Life (UL) policy. Typically, this strategy is used by people who have maximized their RRSP contributions and are looking for another way to build a tax-deferred cash pool. The investment portion of a UL policy is permitted to grow cash-deferred, thus making this opportunity possible.
An insured retirement plan utilizes a tax exempt UL policy to accumulate tax sheltered investment growth. As long as the investments remain in the Tax-Exempt portion of the insurance contract the investment growth can accumulate indefinitely on a tax deferred basis, provided they meet the guidelines with respect to contribution limits (as per Regulations 306 and 307 of the Income Tax Act). Furthermore, unlike most other traditional non-registered investment accounts, reallocations of the investments within the Universal Life insurance contract can be made on a non-taxable basis.
At retirement, an opportunity exists whereby the insurance contract can be used as collateral to secure a bank loan or line of credit. Since bank loans or lines of credit are not considered income, a supplementary retirement income stream can be created which is entirely tax-free and may even make it possible to reduce the potential claw-back on Old Age Security (OAS) benefits. It should be noted that the loan applicant will have to prove creditworthiness at time of application. As per subsection 15(1) of the ITA, careful consideration should be given to whether a shareholder benefit could be assessed if the corporately owned insurance contracts are used to secure a personal loan. Steps can be implemented to minimize this risk, including the payment of a guarantee fee.
At death, this strategy is also very estate friendly in that both the life insurance and investment component of the Universal Life contract will pay out tax-free. All things being equal, the effect of tax sheltered investment accumulation within a UL contract is so significant that it can substantially outperform other less tax efficient investments, even after adjusting for the insurance costs.