Insured Retirement Plan (IRP) for Canada
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An Insured Retirement Plan or IRP may be exactly what you need!
This Tax Preferred Insured Retirement Plan (IRP) is the program for you if you
- Are already maximizing your RRSPs
- Need to set aside additional funds for retirement
- Are looking for a tax effective vehicle in which to accumulate funds and draw an income while minimizing the “clawback” of government benefits such as Old Age Security
- Have an extra income or capital
- Are in good health
Insured Retirement Plans Make Good Tax Sense for Canada
One of the biggest hurdles your retirement plan must overcome is taxation – both on investment returns outside your RRSPs and the income you receive in retirement. The Insured Retirement Plan utilizes the features of a tax exempt universal life insurance policy to allow you to build up a cash reserve on a tax sheltered basis and enjoy a tax preferred income stream from the plan.
How is this done? When you decide to supplement your retirement income, you simply collaterally assign your tax exempt universal life insurance policy to your bank or lending institution (Manulife has its own bank specifically designed to lend against insurance plans like Insured Retirement Plans). Based on the security provided by the tax sheltered investment build up of your life insurance policy, you can receive loan advances that are not considered to be taxable income.
At your death, your lending institution receives the death benefit proceeds to cancel your accumulated loan and interest – and any excess amount goes to your beneficiaries tax-free!
Let’s See An Insured Retirement Plan Example
A Canada man, non-smoker, age 45 decides to begin using this Insured Retirement Plan. He is currently maximizing his RRSPs and could deposit an extra $20,000 per year into this program. He continues to make deposits until age 65 – the year he plans to retire. At age 66 he will begin taking a series of loans from his policy. What is his income stream projected at, and what will his ultimate estate benefit be at the end of his life (based on his current life expectancy or 86).
- Average Annual Interest Rate is 6%
- Bank Loan Rate is 7.5%
- Income from age 66 to 86
- Initially purchased $500,000 of Universal Life Insurance for $20,000 per year for 20 years
In this case, he would would be able to begin making withdrawals at age 66 of $43,495 per year for 20 years, until he is age 86. If he was to die at age 86, the loan and all accrued interest would have grown to $1,883,550. Seems high! However, the investment inside the Universal Life insurance policy is now $2,715,204 plus the original $500,000 of insurance purchased. After paying off the loan and all interest, the estate will receive $1,332,572.
During his retirement, this man received $869,900 of tax free income (equivalent to $1,426,065 pre-tax income) for a total investment of $400,000, and created $1,332,572 of equity for his estate.
This is based on current life insurance rates and the assumptions above. Each person’s Insured Retirement Plan will run a little differently based on their needs and situation. If you would like more information about an Insured Retirement Plan in Canada, please feel free to contact GBF Financial.
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