Insured retirement solution

Insured Retirement is a strategy that can provide a supplemental source of tax-free cash during retirement. The cash can be structured as a lump-sum or series of income-style payments. A custom-designed, permanent life insurance policy is used, fi rst to accumulate cash on a tax-deferred basis and second, as collateral for a bank loan or line of credit to provide the cash desired, tax-free.

Challenges for high-income earners

Conventional retirement plans limit RRSP/pension contributions. This may reduce the amount of cash needed to provide the income level desired at retirement. Tax liabilities at death and a desire to leave a legacy for heirs and charities also cut into the base needed to support lifestyle needs in retirement. Conventional retirement plans limit contributions. This may reduce the amount of cash needed to provide the income level desired at retirement Conversely, lifestyle needs may reduce or eliminate the capital needed to provide a legacy desired for heirs and charities

Options to enhance lifestyle

Permanent life insurance can provide the necessary cash to pay o taxes on investments and assets while creating endowments for charities and legacies for heirs. This leaves most of the accumulated assets at retirement. A custom-designed, permanent life insurance policy accumulates money on a tax-deferred basis and then is used as collateral for a bank loan or line of credit to provide tax-free cash. Life insurance o ers a unique and e ective retirement planning vehicle too, providing tax-exempt growth of cash today and tax-free access to cash during retirement.

How does it work?

Current tax laws permits the investment and accumulation of cash in a permanent life insurance policy, tax-free up to certain limits. Later, the policy with its cash value is used as collateral for a bank loan or line of credit. The proceeds can be used to buy a vacation property, go on trips or supplement retirement income. Generally, the loan or line of credit does not have to be repaid until death. Then, the tax-free death benefi t pays o the amount outstanding. Any extra money is paid to the named beneficiary

Starting the income

The strategy works most e ciently when used as part of an overall retirement income strategy employing the use of other sources of income. This includes setting up the loan later in life after some of the other investments have been used to provide retirement cash fl ow. Optimal performance relies on a combination of low interest charges on the loan relative to the growth in the policy and relatively short loan duration.

The right type of candidate

The Insured Retirement strategy is best suited to individuals between the ages of 30 and 55 who have maximized their RRSP/pension contributions, minimized their non-deductible debt and are in a high marginal tax bracket. They recognize and value the benefi ts of permanent insurance protection and want to reduce the amount of tax they are paying on investments. They are interested in supplementing retirement income with tax-free dollars and have a solid credit history. What is the most tax-e ective way to access the accumulated values in a life insurance policy?

How does it work?

A unique way to access accumulated values in an insurance policy without having to pay tax on the withdrawals is to assign the policy values as collateral and obtain a secured line of credit or loan with a fi nancial institution. A bank loan is not determined to be a policy loan because the loan is not being made by the insurer and the loan undergoes normal bank underwriting. Loans can be tailored according to your clients own needs. The repayment options provide fl exibility such as:

• Client determines their own repayment schedule

• Interest can be capitalized

• Loan paid out at death

The cash is easily accessible through their Line of Credit by Cheques, ABM, telephone or internet banking. This gives your clients fl exibility in accessing and using the money as they wish.

Accessing cash value from your corporation’s policy

The primary reason for corporately owned life insurance is to protect your business and family.

With permanent life insurance, the policy can build up money that your corporation can use if needed.1 This cash value can grow tax-free within the policy, subject to government limits.

Your corporation can access cash value of its policy in several ways:

1 Withdraw cash value.

2 Borrow from your policy.

3 Use it as collateral for a third-party loan

1) Withdraw your policy’s cash value Your corporation’s policy guarantees that the owner (your corporation) can withdraw some or all of the cash value, adjusted for any loans or fees. Known as the cash surrender value, withdrawals reduce your coverage and may be taxable. The policy ends if the corporation withdraws all of the cash value.

2) Borrow from your policy The policy guarantees that the owner (your corporation) can borrow from its cash value and pay it back over time, with interest. You can take advantage of the policy loan if the cash value is large enough and isn’t securing another loan. The loan’s tax-free, up to the policy’s adjusted cost basis (generally, the amount the corporation has paid into the policy that hasn’t yet been used to pay for coverage). The loan doesn’t reduce coverage. However, if the loan isn’t repaid, then its balance, including interest, is deducted from the amount paid out at death.

3) Use your policy as collateral for a loan or line of credit The corporation may borrow from banks or other third-party lenders against the policy’s cash value. Known as a collateral loan, it’s also not taxable but the corporation pays interest to the lender. A collateral loan doesn’t reduce your coverage and capital dividend account credit. If the loan isn’t repaid, the balance, including interest, is deducted from the amount paid out at death. Depending on the lender, a collateral loan may be available at a lower interest rate. You shouldn’t purchase life insurance just because of the future possibility of obtaining a collateral loan.

Loan repayment Once the loan is repaid, you may have a capital dividend account balance higher than your remaining insurance payout (also known as a death benefit). This extra room can provide your business with the flexibility to release other assets to shareholders as tax-free capital dividend. There’s no guarantee a third-party lender will offer your corporation a loan. You have to negotiate that with the lender, subject to their financial underwriting and requirements. Because it involves greater risks, you shouldn’t consider a collateral loan unless you’re a sophisticated investor with a high tolerance for risk. The corporation also needs enough income and capital to cover the interest and repay the loan, in addition to its life insurance payments. Depending on the loan arrangement, a shareholder borrowing personally using a corporately owned life insurance policy as security may result in a taxable benefit. Also based on the terms of the loan documents, the loan advanced by the third-party lender may still be considered a loan advanced by the corporation and may result in income inclusion.