Insured Retirement Plans: Income and Tax Benefits of IRPs

Elder couple standing on coins - representing Retirement-Planning

If you have a whole life insurance policy, you may be able to use an insured retirement plan (IRP) to receive a tax-free loan for your retirement. However, understanding the ins and outs of this concept is essential to ensure that it is the right decision for you. 


Read ahead to learn about insured retirement plans, then contact our Advantage Pacific Services team for more information.

What Is an Insured Retirement Plan?

An insured retirement plan (IRP) is a way to leverage your life insurance policy value to receive additional funds during your retirement. This plan is not a product you can purchase. Instead, it is a method of using whole life insurance policies to fund retirement needs.

Whole life and universal life insurance policies are permanent life insurance policies that remain active until you die. When you purchase one of these insurance policies, it will accumulate cash value as you make payments and your insurer invests a portion of them. 

Once your life insurance account has accumulated adequate cash value — typically over five to 20 years — you may be able to use this value as collateral to acquire a loan to pay for retirement needs. When you die, your insurer will use the funds in your life insurance account to repay your loan, then distribute the rest of the death benefit to your beneficiaries. 

Even with an insured retirement plan, the cash value of your life insurance policy will continue to grow throughout your retirement. Additionally, you may not need to pay interest on the loan during your lifetime, as your insurer can deduct the borrowed amount and the interest you owe from your account when you die. 


Whole Life Insurance: The Basics

Insured retirement plans are only applicable to permanent life insurance accounts. Whole life insurance is a form of permanent life insurance.

Whole life insurance provides coverage at a fixed premium and expires when you die. Your payments will remain the same throughout your time holding the insurance. When you die, your beneficiaries will receive a tax-free lump sum payment for the amount of coverage you have chosen. 

Whole life insurance contrasts with term life insurance, which expires after a specified time, such as 20 or 30 years. It is also different from universal life insurance, which does not have a fixed premium. 

While permanent life insurance premiums are typically higher than term life insurance premiums, these plans provide more stability and peace of mind. You will never need to requalify for your whole life insurance policy, and you can be confident that it will remain active until you die. 


Policy Loan vs. Third Party Loan

If you want to take out a loan with your life insurance policy, you have two primary ways: a policy loan and a third-party loan. 

Depending on your life insurance policy, you may be able to take out a loan directly from its cash value. Some life insurance policies allow for policy loans of up to 90% of the policy’s cash surrender value. However, policy loans often have higher interest rates than traditional loans, so be sure to consider this. 

Meanwhile, you can also consider using your insurance policy value as collateral for a third-party loan. Many banks and financial institutions in Canada allow borrowers to use their life insurance as collateral. You can either repay the loan as usual or allow the lender to use your death benefit to repay it after you pass away.


Qualifying for a Third-Party Loan

When you apply for a third-party loan, such as one that uses your life insurance value as collateral, your lender will use financial underwriting to determine your eligibility. 

Underwriting involves assessing the risk a borrower brings to a loan offer before allowing them to receive that loan. During your third-party loan underwriting, your underwriter will assess your:

  • Credit history
  • Financial records
  • Collateral value

This process can take days or weeks, depending on the size of the loan you would like to borrow and whether an underwriter needs to personally assess your risk rather than using software.


Pros and Cons of an Insured Retirement Plan 

Insured retirement plans have both pros and cons. Here are a few benefits of these plans:

  • IRPs provide tax-free income during retirement.
  • Income from an IRP does not impact income-based earning tests.
  • You do not need to repay the loan in your lifetime.

Meanwhile, here are a few cons of IRPs:

  • IRPs typically have higher fees and interest than traditional loans. 
  • Tax laws are subject to change. 
  • If you ever need to collapse your insurance policy, you will need to repay the loan. 


Get Started Today

The IRP strategy is not right for everyone and requires serious considerations before implementation. Talking to a financial advisor can help you determine whether an IRP is right for you. At Advantage Pacific, we offer qualified guidance about insurance, investments, and more. Contact us today.