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Home Financial Health Blog The Life Insurance Retirement Plan (LIRP)

The Life Insurance Retirement Plan (LIRP)

by Tim Weichel

The objective of a Life Insurance Retirement Plan (LIRP) is to provide investors supplemental retirement income via a life insurance policy featuring market appreciation, re-invested policy dividends, tax-deferred accumulation, and a life insurance death benefit.  Permanent participating whole life insurance is often used as a vehicle for a Life Insurance Retirement Plan.

Designed to take advantage of the tax treatment of life insurance, it is suitable for investors with high income, who have contributed the maximum to their RRSP and TFSA.  A LIRP is an option for those investors wanting to invest more for retirement once they have reached the contribution limits on registered plans.  A LIRP can provide a long-term accumulation vehicle for supplemental retirement income. In addition, at your death, it offers a tax-free benefit to help replace lost income or to provide an inheritance for those who depend on you. The individual applying for a LIRP must be insurable and have a need for life insurance.

How does it work?

Earnings inside a participating whole life insurance policy grow tax-deferred over 10 to 20 years of contributions after which payouts can be structured to provide a tax-free income.  When paid-up additions are chosen as the option for reinvesting the policy dividends, the amount of insurance and the cash value of the policy both grow over time.

The policy owner can structure a tax-free payout using a loan secured by the accumulated cash value in the policy.  He or she does not have to repay the loan until death, when the life insurance covers the amount of the loan, with the remainder of the life insurance proceeds going to the named beneficiaries tax-free.

Corporate LIRP

There is also the possibility of structuring a LIRP to take advantage of cash accumulating inside a corporation, where passive investments would normally be taxed at the top marginal rate.  Inside a life insurance policy, the investment portion of the policy remains tax-deferred.

Download an example of a Life Insurance Retirement Plan

Summary

• Suitable for high net worth individuals who have maximized their RRSP and TFSA contributions or for business owners who wish to pass on their business tax-efficiently
• Provides an instant growing tax-free death benefit
• Provides a tax-sheltered environment for investment growth (similar to a TFSA)
• Provides the opportunity to create tax-free income by borrowing against the accumulated cash value inside the policy at a future date
• Available as whole life or universal life depending on whether the investor wants to manage his or her investment choices

To find out if this strategy is suitable for your situation, please give me a call and we can set up a discovery meeting and prepare an illustration tailored personally for you.

 
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