There isn’t a one-size-fits-all answer to financial planning for your retirement. But an insured retirement plan can make a great addition to your overall financial plan in many cases. This, combined with contributing as much as you can to tax-free savings plans (TFSAs) and registered savings plans (RRSPs), can make for a comfortable retirement.
An insured retirement plan is a long-term investment. And because it uses life insurance as its funding source, it provides peace of mind in addition to the potential retirement benefits. It’s worth noting that an insured retirement plan may not be right for everyone at every stage in life. So, it’s important to discuss your options with an experienced financial professional.
What Is an Insured Retirement Plan?
When we think of different plans like a TFSA or RRSP, we’re discussing an actual product. An insured retirement plan, or IRP, is a little different because it’s not a product. It’s better described as a concept.
The idea of an IRP is to leverage a life insurance policy not only to gain peace of mind but to supplement your retirement income with the value that your life insurance policy builds over time.
An IRP typically uses permanent or whole life insurance because these forms of life insurance cannot be outlived, and their cash value builds up as you pay the monthly or annual premiums. The exact timeframe that the premiums are paid depends on how the policy is set up.
Should Your Financial Plan Include an IRP?
It may seem like a simple way to add some income to your retirement, but an IRP isn’t necessarily the first avenue one should take when planning for their golden years. For high-income earners, it makes sense to max out your TFSA and RRSP limits to take advantage of all the tax benefits.
That said, an IRP could be a great next step in your financial plan once these limits are met each year.
Components of an IRP
Because an IRP is not a product, there are a few components, or “stages,” to it.
The first stage of an IRP is accumulation. This begins with taking out a whole life or universal life insurance plan. You’ll begin building cash value in addition to the peace of mind that your loved ones and business interests are cared for should anything happen to you.
These life insurance policies operate similarly to a TFSA or RRSP because they grow on a tax-deferred basis, meaning you don’t pay tax on the growth until you withdraw funds from them.
You can tap into your life insurance at almost any point, but it makes sense to allow the policy to grow in value to maximize your supplemental income during retirement. One way to tap into the funds is by taking out an annual loan using the life insurance policy as collateral. Because the interest and payments are recapitalized into the loan, you don’t actually pay the loan back in your lifetime.
When life ends, the loan you took as supplemental income is paid off using the death benefit of your life insurance policy. But because the payout from life insurance isn’t taxable, the loan is paid with tax-sheltered funds, leaving more money for your beneficiaries.
Important Considerations Before Exploring an IRP
An IRP may be a beneficial way to supplement your retirement, but there are a few things to consider before jumping into it.
Type of Insurance Policy
Either a whole life or universal life policy is a suitable way to start an IRP because each of them builds income over their lifetime. Which one you pick should be determined by your financial means and goals.
For example, a universal life policy usually offers more flexibility, but it can require a more hands-on approach to maintain and can feel complicated. Your financial advisor can help you determine which policy is right for you.
Cost of Policy
An additional consideration regarding an IRP is the premiums. Each premium payment you make is divided to cover the cost of the policy, its administrative fees, and build an investment account. You can decide whether that premium remains static throughout its life or increases annually.
Discuss Your Options with a Qualified Professional
Planning your retirement is an important thing to get right. That’s why the professional team at Qopia Financial is committed to supporting each of our client’s most important financial decisions and plans.
If you’re planning for your retirement, or you’re wanting to step it up a notch to create a more comfortable nest egg, contact our team today. We’re happy to book you an appointment to review your needs and goals and guide you through a plan.
Financial Planner of Qopia Financial / Portfolio Manager of Aligned Capital Partners Inc.
I grew up in a small town south of Ottawa, called Metcalfe, ON and graduated from the University of Ottawa in 2012. My love for sports is a major reason why I place so much importance on performance and this includes performing for clients. Those closest to me would describe me as straightforward, but also generous, driven, and dynamic. As a coach, teammate, and partner of my clients, I want to see that everyone wins.
Since 2017, I have been working as a Financial Advisor and have always had a natural affinity for business and investments. In early 2021, I completed my Chartered Investment Management (CIM) ®designation, which has helped me select and recommend the highest quality investments for my clients. My goal is to provide the most competitive, transparent, and cost-effective Estate Planning and Investment Management service in Canada, which focuses on Tax minimization, Growth and Protection.
I don’t do it alone. At Qopia, I have a team of dedicated administrative staff, in-house analysts, insurance specialists, lawyers, accountants as well other Financial Advisors with whom I can consult. I pride myself on striving to deliver the industry’s top service for my clients.