Building Retirement Income
Have you saved enough for a secure retirement?
A Corporate Insured Retirement Plan (CIRP) helps you save enough for retirement without the limitations of RRSPs. Your other options are Individual Pension Plans (IPPs) and Retirement Compensation Arrangements (RCAs).
If you don't have a corporation, you can get a personal Insured Retirement Plan, though the details differ slightly.
- The Corporate Insured Retirement plan is an effective way to get retirement income by growing the retained earnings inside your corporation using life insurance with a cash value. This is especially valuable because passive investment income is taxed at over 50%. Life insurance allows tax-sheltered growth, tax-free access and use of tax-free capital dividends.
When should I get one?
The Retirement Protector is ideal if:
- You start well before you retire
- Costs less
- The savings inside the policy have longer to grow so you get more retirement income
- You have $100k or more of retained earnings inside your corporation
- You are comfortable with leveraging
- You are comfortable with long-term investing
What are the benefits of a CIRP?
- You get life insurance in a cash effective way
- Since the first $500k of active business income is only taxed at 15% you are using "85 cent dollars" to fund your insurance (in addition to your retained earnings). This is a big saving compared to paying personally because personal tax rates are so much higher.
- You can potentially fund your retirement and any estate expenses with one solution, providing peace of mind
- Investment growth inside your policy will not trigger a claw-back on your small business deduction under 2018 passive investment income tax rules.
- You have an opportunity to grow money inside your corporation in one of the very few tax-deferred vehicles
- You can leverage the tax-deferred growth inside the policy for personal retirement income
- You're under no obligation to start taking retirement income. If you choose not to, your beneficiaries win because there will be no loan balance to pay off before they receive the death benefit
- Leveraging your corporately owned policy doesn't affect the cash value, which always gives you the option to collapse the CIRP by surrendering your policy and using it to pay off the loan ( some taxation may occur).
- Loan interest can be capitalized (added to the loan balance). The death benefit can pay off the loan and the accumulated interest.
- If you use the loan to generate business or investment income, the interest and part of the annual cost of insurance may be deductible (paying the interest annually is recommended in this case, as no deductions are allowed until interest becomes payable).
How to Get One
What are the risks of getting a CIRP?
The CIRP does require investment growth and a long-term loan, so some potential issues* are:
- Default risk: if you can’t repay the loan when the lender requires you to (which may be before death if they deem you to no longer meet their loan requirements), the lender may choose to go after assets other than your policy first
- Funding risk: if planned funding is interrupted, the policy may not function well, or may lapse
- Tax risk: CRA’s tax decisions may impact how IRPs are perceived
- Additional collateral requirement risk: can you provide additional collateral if the policy doesn’t perform as expected after you’ve started taking out loans?
- Interest rate risk: if prime rates go back up, the projected loan structure may not work and additional collateral or partial repayment may be required unless the policy investments increase as well
- Investment risk: if future investment returns are much lower than projected, the policy may lapse, reduce possible loan income, or trigger additional collateral requirements or partial repayments
- Interest vs. returns risk: the gap between your policy return and loan interest rates may widen over time, which can be a risk if the loan rate is the faster-growing force. The loan balance may overtake the cash surrender value much more quickly than anticipated.
- Can be mitigated by making conservative investment assumptions. The loan rate is usually 1%-3% above the projected return rate.
- Business practice risk: the lender may decide not to leverage life insurance in the future, cutting off a stream of income. Setting up a new loan arrangement with a more flexible institution may incur additional fees.
- Loan requirement risk: the lender may change their lending requirements (such as the maximum CSV-to-loan ratio) or your financial health may deteriorate to the point where you no longer meet them. Remember, the lender considers many factors in approving and continuing a loan arrangement. Setting up a new loan arrangement with a more flexible institution may incur additional fees and higher loan rates.
- Retirement Compensation Arrangement (RCA) risk: if it is deemed that a policy was only acquired corporately to fund your retirement, it may be treated as an RCA which was tax implications.
- This can generally be circumvented by documenting a need for the base coverage, with the loan arrangement as a secondary benefit
*Many of these risks can be mitigated by having conservative assumptions when initially producing a proposal for the policy and when applying for the line of credit.