When most think about saving for retirement, RRSPs (Registered Retirement Savings Plans), RRIFs (Registered Retirement Income Funds) and TFSAs (Tax-Free Savings Accounts) are the usual methods that come to mind. These tax-assisted plans provide an excellent way to accumulate assets on a tax-favourable basis, but what if you have fully maximized your available contributions to these plans and you still wish to invest additional sums for your retirement?
Generally, any amounts in excess of registered plan limits will need to be invested on a non-registered basis. This means that any income or realized gains will be taxable from year to year as it is earned.
Consider Life Insurance to Compliment your Retirement Nest Egg
Chances are that you already own life insurance coverage to provide important financial protection for your family or your business. The Insured Retirement Plan allows you make excess deposits to your permanent life insurance contract to build a reserve within the policy. This is commonly known as the policy’s “Fund Value” or “Cash Value”. Depending on policy design, these excess deposits can be invested in an option of your choosing, or they can be invested by the insurance company. This accumulation fund is permitted to grow on a tax-exempt basis. This means that you’re not taxed on the annual growth that you achieve within the policy.
If structured properly, then in the future your policy can be used as collateral to secure a line of credit against your policy. Each year, the lender will allow you to borrow against your policy as a tax-free source of income to supplement your retirement. Due to the conservative and guaranteed nature of life insurance, most lenders will also allow you to capitalize your interest until death.
Upon death, the insurance death benefit is used to repay the outstanding loan with the balance being paid to your beneficiaries on a tax-free basis.
The Insured Retirement Strategy isn’t appropriate for everyone. But for those who have maximized their available RRSP/TFSA contributions or have a high level of investments which are subject to tax, the Insured Retirement Strategy can be an ideal way to shelter investments from tax, while providing a flexible source of tax-free income throughout your golden years.
Alternatives to Borrowing
Should interest rates rise to a level which makes borrowing against the policy unattractive, then your policy values can be accessed by making taxable withdrawals from the policy, or in the case of Participating Whole Life insurance, by receiving annual policy dividends in cash (may be taxable).
As always, it pays to work with knowledgable financial professionals who are well versed in advanced uses of life insurance and how to tailor your plans in a conservative fashion to satisfy your unique objectives.