If the thought of relying on RRSP’s to top up your retirement income has you frustrated and searching for something more desirable, …welcome to the concept of Insured Retirement.
WHAT IT IS
Simply put, an Insured Retirement is a permanent insurance-based life insurance policy that offers some unique features and guarantees. Many insurance carriers offer dividends in addition to Guaranteed Cash Values. The investment portion of the policy continues to grow. The policy becomes an Asset with guaranteed growing cash values that can be leveraged by the banks as fully secured, which allows access to the values tax free. Accessing the funds via loans do not affect taxable income and therefore do not put the insured at risk of OAS claw-backs and are not subject to CRA imposed minimums and taxation.
HOW IT MAY HELP
There are many reasons why the Insured Retirement is fast becoming one of the most talked about strategies in client meetings around investing, insurance, taxation, and retirement planning.
RRSP’s have many rules, every dollar contributed and every dollar of growth is taxed on withdrawal. For estate planning, passing an RRSP to future generations is not ideal because of the taxation implications to the estate.
TFSA’s are a great way to supplement retirement income. Taking advantage of tax-free growth, flexible investment, and withdrawal options, creating tax-preferred income streams available to Canadians. Unfortunately, many Canadians are not actually investing their TFSA…the funds are sitting in “savings accounts” with little to no return opportunities.
Insured Retirement combines the best of the all the strategies. Tax efficiency, guarantees, growing cash values, accessibility, flexibility, sustainability, paid up options, and growth…so much opportunity for growth!
We have a client, a 40-year old professional entrepreneur, healthy, non-smoker, that has maxed out his RRSP contributions and his TFSA. He has savings that he would like to re-allocate to an investment that will top up his annual income in retirement without impacting his taxable income. He already has a life insurance policy that has a portion that can be converted into permanent insurance…we can illustrate the potential for an Insured Retirement.
If he contributes $12,000 per year for 8 years (total of $96,000) to the Insured Retirement Strategy, this would purchase approximately $229,000 of permanent life insurance. When he is 65 and ready for retirement, he could access about $20,000 per year via a secured loan for 20 years. ($400,000 total) This is tax-free income. He has the flexibility to access funds at any time and is never locked-in to any choices. He does not need to worry about market risk and market timing. Plus, there is still the additional death benefit and cash values (less the secured loans) that will go to his beneficiaries.
By investing the same funds in a traditional investment with 3% average returns until age 65, he would be able to access approximately $8,000 per year for 20 years. With no guarantees and no additional death benefit. Depending on his investment choices, he may be subject to market risk and taxation.
Consider these questions:
What is your chance of running out of money?
What is your tolerance for running out of money?
What is your plan if your children or parents ask you for money in your retirement?
Have a question? Or need clarification?
Call to schedule an appointment with one of our advisors.