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Insured Retirement Programs

What about planning for retirement? Without careful planning, one may not have enough savings on retirement to maintain the standard of living enjoyed right now.

People typically think of RRSPs and other registered pension plans when they plan for retirement. In addition they may also use non-registered investments like mutual or segregated funds and guaranteed funds in their retirement accumulation strategies. However all these plans are subject to tax to some extent, resulting in lower growth. A limitation of registered retirement plans is that the amount one can contribute to these plans is limited. This means that there may not be enough to provide the retirement income one needs.

An insured retirement program, utilizing permanent life insurance, can provide a valuable tax deferred instrument to accumulate additional tax deferred dollars for retirement. As a result of the tax-free life insurance benefit that accompanies it, it’s possible to structure a tax-free income at retirement as well.

By arranging a leveraged loan, with a financial institution like a bank, against the security of the policy cash value, one can draw a regular annual loan, which serves as tax-free income to the insured. Although the loan accumulates interest, the intention is to repay the loan and accumulated interest when the policyholder dies from the death proceeds paid by the life insurance policy. Under current tax law, the cash value of a life insurance policy accumulates tax-free, up to certain prescribed limits. The insured retirement program lets one use that cash value at a point in the future. Whether one wants to supplement retirement income, purchase a vacation property, or travel the world, the insured retirement program lets the policyholder use the policy’s cash value as collateral for a bank loan.

This bank loan provides the cash needed – and it is thus received tax-free. The loan doesn’t have to be repaid until the insured dies. At that point, the tax-free death benefit is used to repay the loan. Once the loan is repaid, any remaining death benefit is then paid to the policy’s beneficiary.

One is a candidate for an insured retirement program if the following criteria are met:

  1. You need permanent life insurance protection;
  2. You are between ages 30 and 55;
  3. You are in a high marginal tax bracket;
  4. You continue to maximize your RRSP contribution;
  5. You want to supplement retirement income with tax-free dollars;
  6. You want to reduce the tax you’re currently paying on investments.