Strategies

Insured Retirement Plan – Using life insurance as a tax efficient retirement strategy.

The Insured Retirement Plan (IRP) life insurance strategy takes advantage of a number of tax efficiencies inherent in life insurance policies to provide a tax-free stream of retirement income. The basic strategy consists of three steps:

1. (Accumulation phase) Premiums are paid into a life insurance policy with an emphasis on investment accumulation. During this phase, investments grow on a tax sheltered basis.
2. (Income phase) Upon retirement the policy used as collateral for an annual loan which is used as retirement income. The loan effectively allows the retiree to access the tax sheltered growth inside the policy without triggering taxes. And because the income stream is a loan, there’s no impact on any income-tested government benefits or marginal tax rates.
3. (Exit phase) Upon death the life insurance policy pays off the accumulated loan with any remaining death benefit going to the retirees beneficiaries. Death benefits are not taxable in this situation and include any investment portion, resulting in the tax-sheltered investment growth being paid out tax-free.

In the Accumulation phase, investments inside the policy grow on a tax sheltered policy. At retirement the we want to access the funds but if we did so directly, there would be tax implications. However, death benefits are paid out tax free and include tax sheltered growth inside the policy. So if we can defer accessing the tax-sheltered growth inside the policy until death, it will be paid out without any tax implications. This is accomplished by accessing the investments in the policy indirectly through the use of a loan (which can be used as income, but of course is not taxed as such, giving us a tax-free stream of income). And finally upon death the investments are paid out tax free as part of the death benefit and used to pay off the loan balance. This has allowed us to grow tax-sheltered investments inside a policy and access them without taxation simply by using a loan as a proxy for retirement income drawn from the policy.

Insured Retirement Plan Example

Lets look at an example in order to get a sense of scale. I’ve used an actual illustration from a life insurance company to run the following numbers so the insurance costs (at the time of writing) are accurate. However the interest rates are assumed and the strategy is heavily dependent on them.

Assumptions:

• Male age 50.
• $1,100,000 of universal life insurance.
• Deposits/premiums of $50,000 from age 50-59 No deposits from age 60+.
• Interest assumption on investments of 6%.
• Bank loan is colateralized at 4%.
• Most values illustrated are not guaranteed and can vary significantly. The illustration has not been optimized for any individual situation.

Conclusion:

• Client deposits $50,000 from ages 50-64.
• Client withdraws $100,000 of after tax income (as a loan) ages 65-79.
• Loan is fully paid off upon death, with balance going to beneficiaries.

Accumulation Phase

Deposit $50,000 for 15 years.

The insured person has deposited $50,000 for 10 years from age 50-59. Deposits were paused from ages 60-64. Just prior to the insured turning age 65 the policy has a death benefit of $1,650,511.

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