When it comes to planning your retirement, you have a number of tools available to you. From government annuities to investments, there are plenty of ways to maximize your savings for retirement, that all-important stage of your life called retirement. A lesser-known, complementary avenue to traditional retirement savings is the insured retirement strategy (IRS). This financial vehicle complements traditional methods of retirement planning, family protection, and wealth management. In this article, we’ll look at how you can leverage your life insurance for retirement. We introduce you to participating life insurance with high commuted values.

Participating Life Insurance

As the name suggests, this kind of insurance offers high tax-sheltered growth. Apart from the basic insurance premium, a portion of the premium ensures that your assets grow significantly, over the long term. Participating life insurance—unlike term insurance, which an individual essentially rents—accumulates values that become a real asset that can be included on the insurance policy owner’s financial balance sheet. The insured retirement strategy (IRS) uses participating life insurance as an accumulation vehicle, and may be paid out on an accelerated basis over a period of between 10 and 20 years. The cash surrender value of participating life insurance can be quite substantial, especially if paid out on an accelerated basis. In addition to protecting you and growing your wealth, the IRS gives you access to sources of liquidity at (or before) retirement, and diversifies your sources of tax-free income in retirement, and at death.

Who is this strategy primarily intended for?

  1. People who are close to maximizing their RRSPs and TFSAs
  2. Time remaining before retirement: 15 to 20 years.
  3. Individuals who want to optimize their taxes at retirement, and for inheritance purposes

Case study

  • Name: Patrick Dufour
  • Age: 44 years old
  • Retirement age: 60–65 years
  • Job: salaried employee at a large company
  • Annual income: $165,000
  • Marital status: common-law spouse
  • Children: two children (14 and 12)
  • Current savings:
    • TFSA, RRSP, and RESP: almost maximized
    • IRS: $500,000 over 20 years
  • Obligations:
    • $25,000 remaining on his mortgage

Our recommendations

We recommend that Mr. Dufour convert his non-medical term insurance to an IRS with a 20-year participating insurance plan once he finishes paying off his mortgage in a year’s time.

Once his RRSPs and TFSAs are maximized, he can use the IRS as an additional tax-free savings method.

Since he is 44 years old and doesn’t smoke, we recommend that he take the $500,000 IRS, to be paid in 20 years. With this insurance, he will invest $1,811.70/month in his IRS, and in the event of death, he will be insured for $500,000. His monthly contribution to the IRS is similar to what he pays for his mortgage payment, which keeps his budget balanced.

After 20 years, on the insured individual’s 65th birthday, the total surrender value will have come to $511,000. So, from the age of 65, Mr. Dufour will be able to use the cash surrender value to pay himself a tax-free income of $38,700/year for 15 years while remaining insured, and without risking a default on his insurance contract.

The difference here is that, because it is loan income, the disbursement of amounts is non-taxable. To ensure compliance with the strategy, the insurance contract must be assigned as collateral to a financial institution, at the time of retirement. The latter provides a loan to the IRS policy owner, in accordance with their needs. With the money loaned by the financial institution, Mr. Dufour can pay himself a tax-free retirement income to meet whatever needs he may have, between the ages of 65 and 80 years of age.

Finally, participating life insurance can be a highly useful financial strategy for retirement, adding a new dimension to retirement and estate planning. Other than the well-known basic options such as government annuities or RRSPs, the IRS (aimed at creating non-taxable income) fits nicely into a retirement disbursement strategy aimed at avoiding clawback of the Old Age Security pension, for example.

For more information about the different types of life insurance, or to get the financial support you need, feel free to book an appointment with one of our advisors.