Insured Retirement Plan in 2022, has the strategy held up?

Curtis HaighBlog

One of the most popular blog posts I wrote was back in 2019  explaining the Insured Retirement Plan.   It is mid way through 2022 and the markets are currently struggling under higher inflation, geopolitical tensions across the globe and the lingering effects of Covid. What about the Insured Retirement Plan in 2022, has the strategy held up? Read on to find out.

Before we proceed any further, I highly encourage you to read the original article found here which talks about the mechanics of how the strategy works. The original article describes the basic functions of the Insured Retirement Plan, and who it may be suitable for.

While the strategy itself has not changed so much, the economic environment around it certainly has.  So, is it still as good in person as it looks on paper?

In my view, the Insured Retirement Plan as a concept can be compelling.  Lets recap how the concept works. 

  1.  A Universal Life or Whole Life Insurance policy is purchased which projects to have cash values at a later date either by way of investment earnings or dividend cash value.
  2.  Towards retirement,  instead of cancelling the policy and withdrawing the cash (which may trigger a taxable event), a collateral loan is taken out which uses the cash value of the policy itself.  This strategy leaves the policy itself and the cash value intact.
  3.  The policy death benefit guarantees the collateral loan, and any residual money over and above that loan would be paid to the beneficiary or estate. So long as the loan does not exceed the collateral (cash value), the strategy remains on side.

What type of individuals may be best suited for an Insured Retirement Plan?

I can not emphasize this enough!  Insured Retirement Plan’s are generally best suited to high income earners or individuals in a high income tax bracket who have maximized both their RRSP and TFSA room for the tax year. 

In 2022, the Maximum RRSP contribution room you can earn is $29,210. 

In 2022, the total cumulative TFSA contribution room available is $81,500 with another $6000 yearly contribution limit added. 

For all of the immediate and long term benefits of investing in an RRSP and a TFSA, we generally suggest to all of our clients that they consider maximizing these products before considering any alternative retirement funding strategies.

What are the risks of an Insured Retirement Plan (IRP?)

  1. Investment performance may not meet initial interest rate projections!   I can’t even count the amount of times I have seen advisors present an Insured Retirement Plan to their client with 8-10% annual interest rate projections in a simple index fund.  Poor market performance can adversely affect the outcome of this strategy!
  2. Premiums can increase! Some Insured Retirement Plans have an adjustable cost of of insurance (COI), which means that your premiums could actually be more than the return on the cash value of your investments.
  3. Loans carry a prescribed rate of interest!  Could you imagine a scenario where the loan on your cash surender value costs more in interest than the annual return in your policy investments? This can absolutely happen so long as rates continue to rise.
  4. Laws Change, Taxation Changes! Sometimes things don’t always go according to plan. Laws surrounding financial products and the Canadian tax code often change.  If you are relying on this strategy as a primary source of retirement planning, you could put yourself at risk if there are legislative changes making the Insured Retriement Plan less attractive.

While the Insured Retirement Plan may still look attractive to some, my advice is still to do your homework before you dive into the strategy.    Some things to ask the advisor presenting you with this strategy.

  1. What are your qualifications to present this type of financial product to me?
  2. Will you still be in the financial industry when I retire and need your help to access my money?
  3. Can you illustrate an alternate example? What if my premiums increase or my investment performance does poorly?
  4. Are there any disadvantages or penalties if I decided to cancel my policy in the future?
  5. Do you only offer insurance products, or can you offer me investment products such as an RRSP or TFSA if I choose not to proceed with an Insured Retirement Plan?

In summation, the Insured Retirement Plan concept has lots of moving parts but it can be another interesting financial strategy for the right person.  Far too often the Insured Retirement Plan is sold by commissioned salespeople who do not remain in the industry, leaving their clients trying to navigate a complex product.  Always do your homework!  Ask lots of questions and get several opinions before you purchase a policy using this strategy.  If it sounds too good to be true, it usually is.