An insured retirement plan, commonly called an IRP, is not a specific insurance product or a government registered retirement plan. It is a financial planning strategy that combines permanent life insurance with borrowing later in life to help supplement retirement cash flow.
The strategy can provide another source of liquidity in retirement while maintaining permanent life insurance coverage, but it also introduces debt, interest costs and lending risk. That is why an insured retirement plan should be considered as part of your broader financial plan rather than as a replacement for an RRSP, TFSA, pension or investment portfolio.
At Access, insurance decisions are considered alongside investments, tax planning, retirement cash flow and estate goals so each part of the plan supports the others.
What is an insured retirement plan?
An insured retirement plan is a strategy that generally uses a permanent life insurance policy with cash value. Permanent policies, such as certain whole life or universal life insurance policies, may build cash value over time.
Later in life, instead of withdrawing that cash value directly, the policy owner may apply to a bank or other financial institution for a loan or line of credit and use the policy as collateral. The borrowed money can then supplement other sources of retirement cash flow.
It is important to understand that there are two separate arrangements:
- The life insurance policy with the insurance company
- The loan or line of credit with a lender
Owning the insurance policy does not guarantee that a lender will approve borrowing against it later.
How does an insured retirement plan work?
While every strategy is different, an IRP generally follows several stages.
1. A permanent life insurance policy is established
The strategy begins with an actual need for permanent life insurance. The policy owner pays premiums and, depending on the policy, cash value may build over time. The policy must be properly structured and maintained for the strategy to work as intended.
2. Cash value builds over time
Permanent life insurance can accumulate cash value while the policy remains in force. The amount available in later years depends on factors such as:
- The type of policy
- Premiums paid
- Guaranteed policy values
- Non-guaranteed dividends where applicable
- Investment performance in some universal life policies
- Policy fees and insurance costs
Not every value shown in an insurance illustration is guaranteed, so it is important to understand which figures are guaranteed and which are projections.
3. The policy may later be used as collateral
In retirement, the policy owner may approach a financial institution and apply for a loan or line of credit using the life insurance policy as security. The insurance company does not guarantee that financing will be available.
4. The borrowed funds supplement retirement cash flow
If the loan is approved, the policy owner may access funds over time rather than withdrawing money directly from the policy. Those funds can supplement other retirement resources such as:
- RRSP or RRIF withdrawals
- TFSA assets
- Pension income
- CPP and OAS
- Non-registered investments
- Other savings
This is why an insured retirement plan is better viewed as one potential component of retirement planning, not the retirement plan itself.
Is an IRP the same as taking a policy loan?
No. This distinction is important. A policy loan generally means borrowing directly from the insurance company against the policy’s cash value. An insured retirement strategy more commonly refers to borrowing from a separate financial institution while using the life insurance policy as collateral.
The tax treatment of accessing money directly from a policy can differ from borrowing through a third party lender. For that reason, the borrowing structure should be reviewed with qualified insurance, financial and tax professionals before proceeding.
Why would someone use life insurance in retirement planning?
Life insurance is primarily designed to provide insurance protection, but certain permanent policies can also create cash value. For the right person, that can support several long term goals at the same time. An insured retirement strategy may help provide:
- Permanent life insurance protection
- Another potential source of retirement cash flow
- Greater diversification between retirement resources
- Estate liquidity
- A legacy for beneficiaries
- Flexibility in how retirement assets are accessed
However, those benefits should only be considered when permanent insurance already makes sense within the broader plan. Buying permanent insurance solely because it may provide future borrowing capacity can create unnecessary costs or complexity.
Is life insurance good for retirement planning?
It can play a role, but it should not automatically be the first place someone looks for retirement savings. Registered accounts such as RRSPs and TFSAs have clear tax advantages and should usually be considered within the retirement plan.
Does an insured retirement plan provide tax free retirement income?
Under a typical collateral borrowing strategy, the money received from the lender is a loan, not a withdrawal from the insurance policy. Borrowed money is generally treated differently from investment income because it creates a debt that must ultimately be repaid.
However, that does not mean every insured retirement strategy automatically produces “tax free retirement income.” The policy structure, borrowing arrangement, tax rules and future changes to legislation can all affect the outcome.
A more accurate way to think about an IRP is that it may provide retirement cash flow through borrowing, subject to interest, repayment obligations and tax considerations.
Tax advice should be obtained before implementing the strategy.
Do you have to repay an insured retirement plan loan?
Yes. It is still a loan. Depending on the lender and arrangement, the borrower may:
- Pay interest as it arises
- Make principal and interest payments
- Allow some interest to be added to the outstanding balance
- Repay the loan later
In some (most) arrangements, an outstanding loan may eventually be repaid using insurance proceeds after death. However, this depends on the loan agreement and collateral assignment. If money is owed to the lender when the insured person dies, that debt can reduce the amount ultimately available to beneficiaries.
What are the risks of an insured retirement plan?
An IRP can look attractive when viewed through long term projections, but those projections should be stress tested.
Interest rates can change
Borrowing costs in retirement may be much higher than expected when the strategy is first established. If interest is added to the loan rather than paid, the outstanding balance can grow substantially over time.
Borrowing is not guaranteed
A lender must still approve the loan. Credit requirements, lending policies and acceptable collateral values may change over the decades between purchasing the policy and needing retirement cash flow.
Cash values may differ from projections
Some policy values are guaranteed while others are not. Participating policy dividends are not guaranteed and universal life investment values can change with investment performance. Lower cash values could mean less borrowing capacity than originally expected.
The strategy requires a long-term commitment
Permanent life insurance can require significant premiums. If the policy becomes unaffordable or is cancelled earlier than planned, the strategy may not produce the expected result.
Debt can reduce the estate
Any outstanding borrowing and interest may need to be repaid from other assets or insurance proceeds. That can reduce the net amount ultimately available to beneficiaries.
Tax rules can change
An IRP may be structured based on current Canadian insurance and tax rules. Those rules may change during a strategy that could remain in place for several decades. This is one reason regular reviews are essential.
Is an insured retirement plan better than an RRSP or TFSA?
They serve different purposes. An RRSP and TFSA are registered savings vehicles specifically designed to help Canadians save and invest. An insured retirement plan is an insurance and borrowing strategy. It should generally complement rather than replace traditional retirement planning.
For example, someone considering an IRP should first understand:
- Whether they are making appropriate use of their RRSP and TFSA
- Their pension and government benefits
- Their expected retirement spending
- Their investment portfolio
- Their tax position
- Their permanent insurance needs
- Their estate and legacy goals
Only then does it make sense to ask whether permanent insurance could add something useful to the plan.
How Access approaches retirement and insurance planning
An insured retirement plan can connect several areas of your financial life, including insurance, retirement cash flow, borrowing, investments, tax and estate planning. That makes coordination important.
At Access, the starting point is the broader financial picture rather than a single product. A strategy should have a clear purpose and should support the goals already established in your financial plan. For someone considering an IRP, that means reviewing the insurance need alongside retirement resources, expected cash flow, tax considerations and estate planning.
Only after those pieces are understood should permanent life insurance and future borrowing be evaluated as part of the strategy. If you are considering how life insurance may fit into your retirement plan, connect with Access to start a conversation with our team.
This article provides general information only and does not constitute personal insurance, investment, tax, legal or lending advice. Insurance products, lending requirements and tax rules may change. Speak with qualified professionals about your individual circumstances.