Insured Retirement Plan Pro and Cons
Cash value accumulation: Because the policy owner is borrowing against the total cash value, the daily growth continues uninterrupted. The policy owner enjoys ready access to money from the bank while the total sum of cash value rises daily inside His / Her policy.
Tax-free money to use as a source of income: Because no withdrawals are occurring within the policy itself, no taxable event is triggered. If the policy owner elected to withdraw money from his insurance policy, any amount is withdrawn above the adjusted cost basis (ACB) would be taxable. But with an IRP process, the policy owner does not trigger a taxable event because the asset (the policy) is collaterally assigned. The money is a loan coming from the bank, not the policy. We recommend consulting with a Chartered Accountant for any questions regarding your specific circumstances.
Deferred interest payment: The policy owner is not required to pay monthly interest payments on his loan. The interest is capitalized and deducted from his tax-free death benefit along with the principal loan balance. The remaining balance of the death benefit is paid out to named beneficiaries. When structured properly, the amount passed on to the surviving family can be far more than the total premiums deposited. We refer to that as “replenishing” the asset back to the family. All that being said, the borrower (policy owner) can repay the bank, partially or in full, at any time while He / She is alive and release the collateral assignment.
The benefit of having a participating whole life insurance policy is primarily certainty. No matter what happens, the policy owner is guaranteed a fixed sum and a simple, secured way to provide guaranteed retirement income. The downside of Insured Retirement Plans, and the policies they depend on, is that by taking an advance on the future death benefit so you can use it while you are alive, less is available to pass on. However, this strategy is typically arranged with this intention in mind. Another downside is that a policy owner must work with a 3rd party lender rather than the insurance company they co-own. Anyone familiar with the Austrian School of Economics typically does not support business with commercial banks who fractionalize the money supply. That being said, the policy owner understands they do have options.
Here are some of the worst-case scenarios of Insured Retirement Plans:
Loan Interest Rates: The interest portion on the IRP loan may be perfectly affordable at first. But interest rates may rise in the future. And the longer the loan duration, the greater that repayment could become. It might even reach a point where the interest equals the cash value. However, the cash value accumulation and dividends of the participating contracts often perform in tandem with interest rates on a lagging scale. If loan rates rise, the life company can earn more, which increases the death benefit and cash values of the policy owner correspondingly to mitigate this risk. If this scenario was to arise, the lender would simply stop providing credit. If a loan exceeded the cash value, they would have to pledge another asset as collateral, or the policy would effectively end to pay off the loan. Hence the policy owner’s behaviour and understanding while using this method are critical. They must keep a prudent relationship between the loan balance, cash values and their annual spending.
Reduced death benefit: Having access to a lump sum of tax-free cash to spend is too much for most to handle. It’s tempting to live largely and spend it all just because you can. However, if that does happen, then the policy owner would leave significantly less money for his family upon death. Doesn’t that defeat the purpose of life insurance in the first place? Again, this is subjective and really a moving target as the policy owner’s life shifts and changes over time. What may have been necessary at the onset of the policy and their life in retirement 25 years later may adjust decision making. The key is to have the power and control to do so, which this method allows.
It’s simple, IRP is the acronym for Insured Retirement plan. This is also referred to by a few other names commonly in Canada. It is sometimes known as a “preferred retirement solution” or a preferred retirement account. Every life insurance company in the nation has its own spin or label to attach to this concept with their marketing departments.