Pitfalls of The Insured Retirement Strategy

Back in mid-1990’s the insurance industry came out with a new concept called the Insured Retirement Strategy.   The idea is that you build tax-deferred investment values inside a life insurance policy during your earning years.  Upon retirement, rather than withdrawing funds from the insurance policy (which would trigger taxes)  you instead use the policy as collateral for a bank loan.  In other words, you get your cash from the loan instead of the policy, thus minimizing taxes. The loan simply accumulates and is paid off by the proceeds of the life insurance policy when you pass away.

Here’s an example.

You purchase a Universal Life Insurance policy at age 45.  Over the next 20 years you accumulate $1,000,000 inside the policy, tax sheltered.  Upon retirement, you use this million dollars as collateral to withdraw $50,000 every year.  The $50,000 is of course tax free (because it’s a loan).  The loan accumulates with interest and when you pass away your $1,000,000 insurance policy pays the bank off for the loan.

The pitfalls of the Insured Retirement Strategy

If you are being pitched with this concept, it’s important that you assess the risks.  The insurance industry will provide you with lots of information on the benefits of this strategy so I’ll skip that. Insteat lets look at some of the risks and pitfalls that you should consider.

  1. High MER’s and DSC:  The life insurance policy investments used in this strategy can have much higher MER’s (expenses) than comparable investments outside an insurance policy. They also frequently have deferred sales charges (DSC). In layman’s terms that means you make less money and have less flexibility.   
  2. RRSP’s and pensions are better: Insurance industry brochures will suggest that Insured Retirement is suitable for those who have maximized their RRSPs.  The corollary to that is that you should only consider Insured Retirement strategy after you’ve ensured your RRSPs, TFSAs and pensions are all brimming full.  To put it another way, Insured Retirement should not be a pillar of your retirement planning it should only be a secondary or additional option.
  3. CRA Risk:  The strategy works because you’re accumulating funds inside a tax sheltered investment and then effectively accessing them without triggering taxes.  The CRA has some stringent rules about doing stuff that takes advantages of tax loop holes. The insurance industry suggests you can mitigate this risk by ensuring you have an actual need for the life insurance. Still, the CRA could change the regulations in the years between now and when you retire and prevent you from using the insurance policy as collateral.  How likely is that?  There’s no way to measure, however it may be worth noting that you can’t use an RRSP as collateral on a loan.
  4. Interest rate risk:  It’s clear to most of us that there’s some risk inherent in the investments as they grow.  But what about the interest rate on the loan upon retirement?  The banks will only let your loan grow to a specific percentage of your collateral. With a high interest rate on the loan at retirement, the amount of the loan could outstrip the value of the insurance policy, forcing the bank to call the loan.  Now instead of taking a tax-free annual payment, you’re stuck coming up with a huge chunk of money to pay off the loan early – probably requiring you to cancel the policy and pay the taxes on all that money you’ve been sheltering.
  5. Bank risk:  You diligently build the investments over 20 years,  then hop into the bank to take your first loan.  The bank informs you that the rules have changed – and not in your favour. Perhaps instead of letting you take a loan of 75-90% of the value of the policy they now cap it at a maximum of 50%.  Or maybe they’ve been burned at some point and simply refuse to use a policy as collateral.  Either way, what’s going to happen with taxation, banks, and insurance in 20 years is unknowable, and that brings some risk into the process.

In the end, Insured Retirement Strategy can look attractive for the right investor.  But be careful that you have the financial wherewithal to weather the storm if things change to your detriment.  If you’re looking at the strategy, remember this should only be considered as a secondary strategy after RRSP’s and TFSA’s.  And always do a worst case scenario check – what happens if none of this comes about as projected?

Written by Glenn Cooke

Glenn Cooke is a life insurance broker in Canada and president of Life Insurance Canada. He has more information about life insurance on his website.

29 Responses to Pitfalls of The Insured Retirement Strategy

  1. Great analysis, its very true that the only people who should consider this will have already maximized their other retirement investments. Typically these people have the financial smarts to see that there are other alternatives with lower costs (MER etc) that offer similar benefits.

  2. Very well explained.

    The sad part is some insurance brokerages sell this product through multi-level marketing. The new immigrants/ financially uneducated esp the Filipinos are being sold by this product.

    They are told by the insurance agent that if they will sell this product to their friends and family they will have a huge commission for a $200/mos premium they will receive $2500.

    Clients and prospect clients are being promise of 18% or 8% return of their investment and told that these return are guarantees.

    I wonder how to stop these unethical and misleading practices.

    • Hi! I am an advisor from the MGA you are referring to, and yes I’m here to get some facts straight (some because, well, we dont really have much space here)

      First of all, an MLM’s model is to pay a percentage of a recruit’s sales towards his/her ‘upline’. FYI our commission is 100% ours, whether you are a seasoned advisor or someone who just started. Instead of getting a percentage from our downline’s sales, we are given bonuses. (Sweet!)

      Second, we NEVER promise an 18% return of investments (is that even legal??)
      We follow protocols from the companies we represent who are VERY STRICT in making sure that we do not overpromise to our clients.
      (our represented companies have huge reputations at stake after all)
      We do stress tests and show them worst case scenarios (the reason why our client’s policy explanation takes TWO GLORIOUS HOURS!),
      show then RORs of 6% and lower, and yes, we also let them know that bank loan policies may change in the future (that may, of course, affect their retirement income. Duh.)

      The commission is sure big (it’s not actually $2,500. It’s even more;) BUT we never ask them to pay anything upfront until after the policy delivery. Because if, after stating all the benefits of IRP and the client decides it’s not for him, he can definitely decline the plan.
      It’s his money after all.
      If he does like it then great! But while most advisors disappear after a done deal we are REQUIRED to make at least an annual visit to explain our clients’ statements. We face them (yep. Including those times when the market is low) because that’s how advisors are supposed to do it. It’s a way for us to assess whether they need to make some adjustments with their monthly premiums. Or if the need is greater. Or referrals! (Yay!)

      I will not claim that I am an expert in every financial matter but Insured Retirement Plan is definitely my specialization. We’re not here to replace RRSP and TFSA. Rather, we want to show everyone another choice for their future money planning. Compare them, and then let THEM choose.
      And of course, to somehow educate the financially uneducated.

      We don’t force our clients to get IRP, besides, not everyone is qualified to have one. As I said, it’s the client’s money anyway. That is why we always encourage our clients to do their due diligence. (Which I hope the writer did before coming up with this article)
      I mean, he does have great points. But only to his level of understanding (well this has been a few years ago, I sure do hope he knows more now)

      But because he didnt do his research and apparently the balls to maybe ask us and get as much information as he should have then he should have known why the cash value would not be ‘eaten up’ by the cost of insurance. (and why there is a lot of Filipino clients).

      It’s a shame to assume something you have not much information (and worse, publish it!)

      All you had to do is simply ASK and you shall receive (thy answers!)

          • Great response Elle B, this poor guy really doesn’t know much about a Corporate Insured Retirement Program at all! It is sad that people forget (or neglect)to do their homework before they complete such articles. There should be several compliance issues with the article he wrote.

            You forgot several benefits however, if Whole Life Insurance, such a Manulife PAR is inside Corporation, using 60 cent dollars to build wealth, as the business owner would be using pre-taxed Corporate dollars, which at death the majority can be paid out through the Capital Dividend Account tax free on death based on CDA Credit in policy. The Manulife PAR product’s current Dividend is 6.25% (recently announced remaining same Sept 2019 to Sept 2020). We illustrate at Current minus 1.0% (or 5.25% currently. Not sure where 18% came from?

            Of coarse there is interest to pay to Manulife Bank, or whatever Bank chosen and terms can change, but in a low interest, low growth environment, the dividend is great and interest rates should remain, tame, this is however a risk to consider. The great thing about Manulife Bank, is the interest can capitalize over time and be paid off by the Beneficiary at time of death, with the majority, if not all being tax free proceeds. In most cases, a policy of the size the writer is speaking of, there is normally a much larger death benefit than what is owing on the loan at the end, providing a boost to their estate.

      • Hahaha I find you funny Elle you are very defiant seems like you are hiding something….hmmm

        The advisors I’m referring too, I have evidence of their hand-writing promising to their clients about guaranteed return, guaranteed COI.

        Me and the clients even phoned the insurance companies and true enough the promises they told the clients are not in the policy and not what the insurance Headoffice are saying.

        So if you are doing your due diligence then good for you.

        One thing for sure I’m a number person and I see the whole picture and if you Google look at BMOIRp page 4 and look at their primary market you will wonder why you have to give a client who is not yet maximizing their rrsp, tfda any of the government plan to think even the insurance company say so.

        So what I can say let us see 10 years from now because there might be class lawsuit to those advisors selling promises not in line of what the client needs….I might be a lawyer by then and hunting those unethical and uneducated advisors.

        Kawawa naman mga Filipinos nandito na sa Canada naloko.

    • Allow me to elaborate the Pittfalls and give a better qualified opinion from me, a Long-term Practitioner of Accounting, Taxation, Auditing, Life Insurance Advisor and Mutual Fund dealer.

      1. High MER’s and DSC. If high MER means 0.5 to 1% higher than convenstional Mutual Funds, I rather stick to IRP.
      With all its tax-free benefits both on Death Benefits and Refirement Fund, I can sacrifice 1% or $10.00 per $10K of investment. I wonder why the author mentioned DSC, there is no applicable DSC because we are not making actual withdrawals in IRP. The retirement is in a form of a bank loan with no actual withdrawal on the Fund Value, which also an indication that the author might not be a well-rounded advisor.

      2. RRSP’s and pensions are better. How can it be better when they are all taxed at the 21% at least. It may also be a cause of Pension claw-back on both OAS and GIS.

      3. CRA risks. Yes possible, but for now, it is just a mere “What if”. It may not happen. So are you gonna make a lifetime decision based on fear. On the other thought, do you think CRA has no power over changing the rules in RRSP & TFSA, surely they can ammend its rulings if deemed needed. So Conventional investments are not CRA proof either.

      4. Interest rate risk:. Collateral bank rate is based on Prime rate. Meaning higher interest rate only mean higher prime rate. Which also has direct impact on Mortgage, fixed loans, business loans and car loans. On your own opinion, do you think overall market growth will not be adversely affected if Bank of Canada will not control the rapid increase of lending rate. So if that happens, such drastic effect will also impact any Market Invested Funds such as RRSP, TFSA and Company Pensions. In Conclusion, higher bank loan could also destroy your RRSP and other conventional investments.

      5. Bank risk. Collateral loan is actually one of the most favored loan by banks, due to the nature having adequate security. Again, this pittfall is a pure “What If”, it may not happen. Why so parranoid on circumstance that had never ever happened in the past. The banks and other lending institution has always maintained a ratio of 75% allowable loan based on total Fund Value. However, most IRP are projected either on 60% or 65% ratio, so there is enough room for possible adjustment.

      If I have not addressed anything yet, feel free to ask.

    • Hi Joem,

      What’s unethical is writing up this article without doing proper research. It is a one-sided opinion without soliciting necessary facts from qualified professionals.

      It’s just unfortunate that we can post anything over the internet without being scrutinize or reviewed by a regulatory board.

      Insured Retirement Plan on the other hand has been legalized, supported, studied and approved by the regulatory board under the umbrella of the Ministry of Finance as well as CRA. There is an entire 8-page literature in CRA website about Collateralized loan on Life Insurance. The writer should have read that first before posing the “No. 3 CRA Risk”. It is not considered a tax loop-hole because CRA is actually fully aware of its existence and recognizes its validity.

      Maybe on your own UNQUALIFIED opinion, you may consider IRP as unethical and misleading probably because this unique financial concept itself is beyond your level of understanding or expertise. The fact that you mentioned an 18% return, indicates that you are not doing a proper research because nowhere in our IRP presentation we guarantee an 18% rate of return.

      I am, on the other hand a long-term practicing corporate and tax accountant, so among everyone, I should be the one who has sufficient level of expertise to scrutinize this financial concept. Which is why, all my 5 children, including my new born baby girl have IRP, because it is truly good and I am certain that they will thank me in the future for a very good effective financial plan that I set for them at the early years of their lives.

      The above 5 Pittfalls mentioned, are just mere “WHAT IFs” meaning, they may not happen at all.
      I don’t want to limit my financial potential simply because I am always in fear or in constant parranoia.

      In my own qualified conclusion, the main reason why the writer had come up to this ideas was maybe because he is an advisor from other company which in direct competition of companies promoting IRP. It is an easy attempt to smear an image of the competitors just to gain clients.

      Well we don’t operate like that. I rather give facts to those who are truly interested to know about the true value of IRP.

  3. Thanks Elle ,
    I am joining Greatway financial. You have done a good job. Most people have negative attitude and write negative without proper information. i do not find anything wrong with IRP. I was with other financial company—i am not expert but know–if we compare with other products–this is the best. Where there is an investment–risk is always there but here ,it is a calculated risk. Even in the worst case-nothing to loose. But everything is not for everyone–IRP is given to those persons, who are eligible and they need it. Thanks

  4. Leave me a good and honest answer. Most of the big banks would only offer this to those people that have excess cash. They would also note that people who have not maximixed their RSP and TFSA are not really a potential client. People they are targeting are high net worth client. Why are they not offering this to ordinary people like me? are they wrong in their study that IRP should also be offerred to ordinary people like me? Can you please enlighten me on this matter.

    • Hi Phil, in the bank they would offer this to someone who can save $20k annually for 15 years( just an example). And who can only do that,rich!
      Thats why insurance company offers this to people who can only put $600 minimum and above annually ( depends on their age)…
      Even if the bank says we cant accept it as a collateral or even the government put tax on it ( because of its growth capability) and also, for me its still better to have something than having nothing! …
      Every financial product in the market is amazing. Cant compare them apple to apple they have their own feature. Determine your financial goal then check which one would one would benefit you most.

      IRP is RISKY ( but how risky is Risky, numbers doesnt lie!) and NOT guaranteed ( guaranteed investment only guarantees capped potential growth!). Ex. Which ine is better guaranteed 8% ROR from 1950 till 2018 or risky and not guaranteed( s&p 500) numbers doesnt lie.

      $ money under your pillow 20 years less buying power.

      $ inside savings in the bank 72 years before it will double.

      $ in TFSA no tax but how about the growth plus inflation.

      $ in RRSP tax on withrawal but you can put it in RIFF( but what is the max allowable withrawal). Plus clawback with your CPP. And hows the growth capability.

      $ IRP is RISKY and NOT guaranteed!
      But always remember this NUMBERS doesnt LIE! I can explain more about this if you are willing to listen?…

      So choose above which one will you benefit most in relation with your financial goal. Thank you.

  5. I came across your article and gave me some important insights about IRP. Thank you. It’s true that brokers would most likely to emphasize only the good side of this strategy which I understand is mainly its tax sheltered environment. Bottomline, if an Advisor is only motivated to sell/endorse this product; or at the first analysis goes on to talk about IRP and present a UL right away, because of the high commission attach to it, then they are doing a disservice to their clients. Sad but this happens a lot.

  6. Im getting confused.. I was offered an IRP and the offer is good though I found it too good to be true.. I’m not really aware of this IRP and other insurance but I’m in doubt of investing and if the deal will really happen after 20 years..

    • Mel, you are offered a very effective plan, stick to that.
      You understood how it was explained to you by your advisor. Hold on to those information.
      Don’t be distracted by these people who impose their opinion on something they have never taken time to study.

      IRP is above and beyond conventional approach of Personal Finance, which is why it is very effective, but unfortunately, were beyond understanding of other advisors.

      The 5 pitfalls that the author had mentioned are just mere “WHAT IFs”
      Meaning they may not happen in the future.
      So, are you going to plan out your life based on fear?

      But for RRSP, it will absolutely be taxed, very certainly. And since it will be an income upon withdrawal, much more chance of you losing portion of your Government Pension due to significant increase of your income.

      IRP is a smart way of diversifying your retirement funds in a way that it provides Tax Free Survivor benefit to your beneficiary, while maintaning the tax-free retirement fund.

      RRSP on the other hand is very effective investment tool as far as tax planning is concerned of your current income. But it will surely bite your a$$ in the future especially when you retire if you completely rely on it alone.

  7. Insurance is not an Investment that’s it. Insurance needs to an Insurance Investment needs to be an Investment never ever combined the two or you will loose one!

  8. Your Family will never ever get the Investment part if the insured die, oh you can but you have yo add additional payment like wow..!!!
    That’s your Investment so your Family cannot get it unless you add additional payment tsk tsk
    Insurance is Insurance
    Investment is Investment
    Listen to a Real Financial Advisor not to an Insurance Agent their different.

    • Me, I am an accountant, a tax accountant, a CPA and licensed advisor for more than 8 years. In my professional opinion, IRP makes more sense if carried out properly.

      Your opinion on Investment is Investment, Insurance is Insurance is a conventional approach to Finance.

      IRP is a above conventional, and in my opinion, Mina, you are not in the position to make qualified opinion on certain matters beyond your knowledge or field of studies.

      Have you taken time to learn the very details of IRP?

      Because me, I have been very well exposed to the conventional type of investing and taking insurance plans, but the 2 products are not working together. Meaning, your RRSP will remain taxable, regardless. Then you are going to pay your life insurance lifetime.

      With IRP compatible Universal Life Policies, the investment(Cash Value) generates a bonus (free money from insurer) which will eventually pay the future premiums of the plan. Meaning, your life insurance will eventually be paid-off just out of the fruits of the Cash Value over a certain period of time, without the need to reduce the cash value. So by then, you have the option to stop your contributions, or still continue so as to have a bigger pension, Do you want your insurance plans to be free? Because I do.

      Then if in case you’ll retire. Thru the IRP concept, then your Cash Value will be utilized as supplement to your Retirement Fund tax free because you are not making an actual withdrawal, you are making bank a bank loan. It is a smart way of legally avoiding tax and possible pension clawback. In RRSP, as I mentioned, there is nothing you can do more it. You will pay tax no matter what.

  9. This people who sell IRP is a big scammer. They didn’t know exactly what they’re selling. They only sell IRP for commission.
    That’s it money money
    i used to sitdown with one of their agent and she is really forcing me to get one and like she didn’t even explained it what is the IRP all about she keep on saying that i can retire with $300,000 after 20 yrs, cause I have buly that time i already stop paying my Insurance and after that my money is already accumulate $300,000 in 20 yrs. Like how? If I will only pay $200 a month for my IRP how it will turn out 300k for 20 yrs?

    • Hi Beth,

      I have more than 20 years of experience in Corporate Financial Accounting, Auditing. I am also a Tax Practitioner in Canada and other foreign country. I am a Certified Public Account.
      I also happened to work in a prestigious law firm on my past career.
      I am a promoter of IRP as well as conventional investments such as RRSP, TFSA, RDSP and RESP.
      All banks offer IRPs as well, it is their websites.
      There is also 8 page literature in CRA website about Collateralized Loan on Life Insurance which technically is IRP. You can search that.

      Do you think we are all scammers?
      Or you might just be ignorant to the benefits of the IRP.
      I suggest, have an intensive discussion with Advisors who specialize in IRP before you impose your unqualified judgement.

      Who knows, you are like me few years ago, I was ignorant of the benefits of IRP, but when I’ve learned its true benefits, I regretted why it took me longer to study this amazing Financial Concept.

      All my 5 children have IRP because I know for sure, they will thank me in the future once they matured and realize that I have started a very effective plan for them at the early stage of their lives.

      • Your kids have a UL set up for IRP? God help them. If you are a true accountant, you would know to stay away from IRP unless they are a high net worth individual because the whole purpose of it is tax deferred growth as an added basket to their portfolio. Second of all, you are not a CPA, you aren’t in the CPA directory. Did you even talk about the annual renewable term on the UL policies you sell? You’re under Primerica too, what an absolute joke. Take your sales pitch somewhere else and actually sell the product to right market.

  10. This Insurance Agent only show their Illustrations not the Real Policy.
    Illustrations is different from the Policy period.
    Don’t show Illustrations to get a clients show them what’s inside the policy because the policy will tell all. Be transparent and will see if this people will still get Insurance from them.

    • Very interesting comments. When you go to college or university you will never learn much about financial education. You graduate and learn how to best find a good paying job. That is why when ignorant people heard about different strategies on how to save money to supplement your retirement income, this sounds alien to them. That is why Canadian statistics says; 53 percent among the 65 years old are financially broke,14 percent are still working, only 9 percent are financially well off. Who takes control of your money and savings right now? The banks is controlling your money and earning from your money. How about you? You work so hard like a cow until when 70 yrs old? And still ends up broke when you retire. All because of ignorance and lack of financial education. Do your research people. Why the rich people don’t have rrsp or tfsa but they have millions in their Insured Retirement plans, why is that? Don’t bother to learn you will be working till 70 yrs old anyway.

  11. The analysis on the Pittfalls of IRP is yes informative, yet quite misleading. Yes it will be bad if all the 5 points mentioned above will happened altogether. So, as yourself, what is the likelihood of them happening altogether?

    Let’s say one or two of the points may eventually occur, it is still better than being taxed so much upon retirement if your option is only RRSP or other Taxable Pension Fund.

    Plus our approach in IRP is simply an alternative to an Insurance Product. Instead of the client buying an insurance plan, why not bump it up to an Insured Retirement Plan so that in a way, the client may have an option in the future to evolve the plan as a “Tax Free” source of retirement.

    All the above risks are actually present to RRSPs with exception to the No. 4 & 5. Some RRSPs have high MERs too. CRA may change their rulings on RRSPs as well in the future. But one thing certain on RRSP and Pensions, they are all taxable and may have pension claw-back.

    But other benefit of IRP, just in case we don’t live longer throughout retirement, at least the insurance package will give the beneficiary a tax-free death benefit, which will also be credit free.

    With IRP, I rather pay between 3 to 5% interest than paying over 20% tax with inherent reduction to Government Pension.

    I have a client who died with $192,000 in RRSP and TFSA, the wife only inherited net $70,000 because the client has so much debts and his savings were just utilized for the debt payment before the fund has been given to the wife, plus the wife did not have enough room to accommodate her husbands’ RRSP roll-over. So a huge chunk of the RRSP was just paid to tax.

    If the husband had taken IRP, then the wife would take the death benefit, hassle free. Death Benefit on the Insurance is mostly higher than the Investment (Cash Value) of IRP or even RRSP.

    • You’re still not talking about the fact that the UL policies you sell have yearly renewable terms. Failing to mention the rising cost of insurance eating away at the “investment” portion of your client’s policy is a damn shame and disservice to your client. You imply that they hold on to this policy as they age. Given the fact that health deteriorates over time, don’t you think the cost of insurance will be so great by the time they retire that they are left with no choice but to drop the policy because they can no longer afford it? You’re great at sounding intelligent by throwing big words and numbers at people, yet you fail to realize on your own that you are a disservice to your clients. Sell this product/strategy to high net worth people. They can afford doing this strategy for tax deferred growth. Problem is you don’t have the balls, the credentials and the network to even step in a room with the wealthy that this plan is actually designed for.

      • You’re right about the Yearly Renewable Term, wrong about assuming we don’t inform our clients. We do. That is part of our policy delivery service that we do before the client decides to accept his/her policy. We show them scenarios of very low market returns and the effects of it on their plan. We show them there are possibilities that it will lapse, thus, losing their coverage.
        We show them the terms and conditions regarding IRP because just like any other plan, it has its own share of downsides. Full disclosure is very important for us.
        We do not qualify every client we have, especially older clients or those who cannot afford it. We don’t sell for the sake of selling.

        Many big banks also offer IRP but only to high network clients. But there’s no law surrounding IRP that it should only be offered to them.
        That’s why there’s Greatway. We want to make the middle class aware of an alternative plan that may be more beneficial for them. We spend atleast 2hrs to discuss IRP with them without the assurance that they will take it. THAT is client service.

        If you want to know more you are free to go to any of our offices all around Canada. You can go there and ask without being pressured into “buying.”
        Im sure you would like to be educated more.

        It’s not wise to make assumptions without taking the time to really know what you’re talking about. You do sound smart, if only you didnt rely your points based on google results.

  12. Home › Insurance › Pitfalls of The Insured Retirement Strategy

    Pitfalls of The Insured Retirement Strategy
    Written by Glenn Cooke

    Hello Glen! Do you have anything to say to these comments?
    Your silence is deafening

  13. Mr. Glen is silent because he knows he cannot counter my valid points!

    He should have done due deligence by proper research and solicit qualified opinions by different sectors within the Financial Industry.

    This article is pretty obvious to smear the image of IRP which is inevitable gaining much more popularity!

  14. If you want to discuss further Insured Retirement Plan/Strategy, feel free to email me.

    If you may have read my comments above, I have stress out certain QUALIFIED/VALID points coming from an unbiased Finance, Accounting, Taxation practitioner.

    email me at [email protected]

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