BY: ANDREW STEWART
I’m pretty sure when you first read the title, you were thinking “I don’t want to read anything that will rush me to R.I.P. Not to worry; this article will hopefully educate you about and using life insurance as an investment.
“Rest in peace” is the traditional phrase used when someone dies. On prayer cards, flower arrangements, offered by friends and relatives. Almost everyone uses “rest in peace” as a simple type of prayer wishing an end to suffering and difficulties for the person who has now completed their early journey. It’s well-meaning, of course, but I’ve never completely agreed with the phrase. For those of us who are very active and always on the go, never really resting apart from sleeping, “rest in peace” sounds like simply being asleep. That was before I learned that the soul doesn’t die at all, not even for a short time.
Now if we just move the “I” to be the first letter then it magically changes to I.R.P. (Insured Retirement Plan) You may or may not have heard this term before, but the boring definition of this strategy involves using a universal or participating whole life insurance policy, building up a cash reserve on a tax-sheltered basis and enjoying a tax-preferred income stream from the plan during retirement. The premiums and deposits cannot be claimed against your taxes like an RRSP but the investment growth is tax-free.
When it comes to the time in your life that you plan to start receiving retirement income, you can assign the policy to a bank or lending institution as a collateral loan or line of credit for up to 90% of the total cash values. The loan is used as tax-free income upon retirement. How I describe these steps to my clients are as follows: “Saving money for retirement is something everyone should do, regardless of the amount of income they make.” “How you determine which vehicle you use depends on certain individual characteristics such as goals, tax bracket, timelines, family situation and overall financial strength.”
Let’s examine a possible scenario that you might experience at some point in your life. During your income earning years, you are already taking advantage of the other tax advantage opportunities available such as the RRSP and TFSA’s. In order to reduce taxes on income taken during retirement and also to build a life insurance payout for your family or loved ones upon your passing, using a universal or whole life insurance policy is a natural fit to accomplish both goals.
Over time the dividends or investments grow on a tax-sheltered basis. This is an important part of the strategy, as unlike RRSP’s and TFSA’s, the limit on the number of deposits you can do is limited by insurance guidelines rather than income-dependent guidelines. However, if we simply withdraw the funds from the policies, taxes will be payable. So instead, we can walk into any Canadian banking institution and use the value of the investments as collateral without having to fill out a credit application. Loans and lines of credit are of course, not a taxable income. You’ve now managed to access the growth in your investments, without paying taxes on the growth during the accumulation years, or on withdrawals. Upon your passing, the benefit coverage of the insurance policy consists of the insurance component of the policy plus the additional life insurance purchased by the dividends received. The total of these are paid out tax free, initially to repay the full outstanding loan balance and any remaining amount to your named beneficiaries.
There is a variation of this strategy where the policy is owned by a corporation. If you understand how this strategy works and the benefits it can provide. Just maybe your R.I.P will be made a little easier.
