A Retirement Strategy You Haven’t Considered—But Should

Ok, let’s talk about a retirement funding option that is usually not talked about but could be your secret weapon for retirement planning: an Insured Retirement Plan (IRP) through a participating life insurance policy. Now, I know what you’re thinking: “Life insurance? Don’t you need to buy so your family doesn’t have to have a GoFundMe page to pay for my funeral?” Yes, but also…. NO!. It’s so much more than that!

If you’re a self-employed business owner in Ontario, you already know that traditional retirement plans such as RRSPs won’t cut it all the time and weren’t exactly created to solve all of your retirement needs. There is no guaranteed defined pensions plan for some of your “employee” counterparts, no automatic RRSP (Registered Retirement Savings Plan) matching, and definitely no employer chipping in for your retirement. You are the employer! This means if you’re not planning for your future, then nobody is!

That’s where the Insured Retirement Plan can come in and really help you plan your dream retirement – it is part investment and also part insurance, but add those parts together, and you can have a great retirement option. Let’s take a look at how it works.

Let’s start with the obvious question: What exactly is an Insured Retirement Plan?

An Insured Retirement Plan (IRP) is a financial strategy where you use a participating whole life insurance policy to build up tax-advantaged cash value over time. When you retire, you will have access to the cash value in a tax-efficient manner. This means more money for you to pay for your retirement dreams and less money going to the government to pay for taxes.

Here’s the best part: you’re essentially growing wealth and asset values within the policy while also getting a life insurance death benefit, which will help take care of your beneficiaries and grow your estate value. When you are ready to retire, instead of withdrawing directly and paying high-income taxes (for example, think drawing from your RRSPs), you can borrow against it in the form of a tax-free payment or loan, so essentially providing yourself a tax-free retirement income without giving any taxes to the government in the form of income tax.

You’re probably thinking that it sounds too good to be true. It’s not. It’s just that this is an extremely underused and under-discussed concept because this is all built through a life insurance policy that is provided by insurance or financial advisors as opposed to accountants or tax planners who are helping you plan your tax payments.

Why is this such a great tool for self-employed business owners?

1. You are creating good assets in a tax-efficient way

If you’re self-employed, you know it can be very difficult to properly save for the retirement window, taking money from your company and having to pay high taxes to the government every year. An IRP has, instead, tax-deferred growth, meaning there’s no tax on the growth within your policy cash value as it grows every year.

2. You can access the cash value in the policy without paying tax

When it’s time to retire, and you are finally ready to start taking your money, you are not going to cancel the policy in order to access the cash value. Instead, you take out a loan from a lender using your policy as collateral. This means you’re not technically Cancelling the policy or actually withdrawing any of the cash value through cancellation, so no taxes are due on the money you’re using.

This is much different from your other retirement friend, the RRSP, where withdrawals get taxed like regular income and potentially put you in a higher tax bracket.

3. It’s Like an Investment but with some safety built-in

Unlike the stock market or investing in some equities, which can feel like a roller coaster, a participating life insurance policy is stable and reliable. Even in market downturns, it continues to accumulate value. So, while your Friends who are investing in the stock market are sweating over their portfolios, You will be relaxing with a constant and reliable stream of tax-free retirement income.

All this is happening while your life insurance policy is still continuing to grow, so one day, you will give your family the financial security they need as well as financially pass on your legacy to the next generation.

4. You’re managing the policy, and you’re managing your retirement

As I’m sure you’re aware by now, government tax rules change on income and investments in retirement quite often, and any change in laws or changing government could potentially have a huge impact on your nest egg. With an IRP, you control the policy, so if the government does decide to change tax rates or pension plan values, it won’t impact your retirement plan through your IRP.

5. You’re providing financial protection for your family while you’re living your retirement dream

Most business owners don’t just work for themselves; they have many people in their families who depend on them, their spouses, their children, and even maybe their grandchildren, who are relying on their income. The IRP ensures that Whether you live to see your retirement dream of being on a beach in the Caribbean at 90 years old with a drink in your hand or not, there will always be a large financial payout in the form of a life insurance policy provided to your loved ones.

This means less stress about spending your money and more enjoyment in living your retirement as you always wanted to.

OK, you’re interested, so how do you go about doing this?

1. You set up a participating whole life insurance policy – This isn’t a typical term life insurance; it’s a policy that will pay you dividends by the insurance company, and those dividends will allow you to increase your cash value on your death benefit by continuously buying more life insurance.

2. The cash value grows tax-deferred over the policy’s life as you are working – let’s say for the next 10 or 20 years – the longer you have the policy, the more wealth it builds. Think of it like a life insurance policy that also has a supercharged savings account built into it.

3. When it’s finally time to hang up your boots and retire, you borrow against the cash value– Instead of withdrawing or canceling the policy and triggering taxes, you will use the policy as collateral for a tax-free loan from a lender or a bank.

4. You enjoy your retirement with the tax-free “income” you are borrowing – take those vacations, buy that lakefront cottage, it’s up to you!!! Knowing you’re not funding someone else’s government pension, you are living your retirement dream.

5. When you eventually do pass away, the Death benefit from the life insurance policy pays off the loan, and your family will be paid the remainder in the form of the life insurance payout – the life insurance death benefit pays off the loan, and any remaining amount goes to your beneficiaries tax-free. No estate fees, no taxes.

Is an IRP right for you?

While an IRP is not going to be for everyone, it could be the perfect option for you if:

  • You’re self-employed or own a business in Ontario
  • You’ve maxed out your RRSP and TFSA and want another tax-efficient savings vehicle
  • You want a stable and steady retirement income rather than investing in the markets
  • You want to provide life insurance benefits to protect your family and preserve your financial legacy
  • You want to manage your retirement plan rather than letting the government do it

It’s Like a Financial Swiss Army Knife

An Insured Retirement Plan can be one of the smartest, most tax-efficient ways for business owners to save for retirement while financially protecting their loved ones. It’s flexible, reliable, and – best of all – It pays more to you and less to the CRA.

So, if you have been contributing all of your retirement savings into RRSPs, it might be time to reconsider your strategy and take a look at a different option. An IRP is really like having a financial Swiss Army knife: it does so many things, and it does them really well.

If you need help setting up a retirement strategy, talk to a financial advisor who really understands and can help you set up an IRP through a participating life insurance policy. Contact DFSIN TORONTO WEST today to learn more about your options and find the coverage that best fits your needs.