Many affluent Canadians use Whole Life policies to accumulate retirement savings beyond what is allowed within their registered plans such as the RRSP. The Insured Retirement Program (IRP) uses the life insurance policy as collateral security for a line of credit, which then can be used to create a stream of tax-efficient income during retirement. The IRP is therefore an insurance concept designed to meet both the need for life insurance protection, and the need for cash flow in retirement.
The IRP is appealing because it not only allows the policy owner to borrow money tax-efficiently, but it also doesn’t require repayment of the outstanding loan until the policy owner dies. Typically, the loan is designed to provide a stream of a certain amount of income available each year, as opposed to simply attaching a collateralized line of credit to your policy. Interest on the line of credit can be capitalized back into the loan, so you don’t need to make monthly payments if you choose not to.
The IRP provides the cash you desire and under current tax law, you could possibly receive it tax-free. When the insured person dies, the tax-free death benefit is used to repay the outstanding loan. Once the loan amount is repaid, any remaining death benefit is paid to the policy’s beneficiary.
Note: Many institutions that offer an IRP will only offer it on policies for which the owner is the life insured. When the owner is not the same person as the life insured (for example when a parent buys and owns a policy on a child), the IRP is generally not available to the parent. The insurance company wants to know that they will get their money back if the owner, who also owns the debt, dies. In the situation where the life insured is not the same as the owner, the insurance company is not necessarily guaranteed to get paid upon the death of the owner, making the IRP much more risky for the insurance company.