Insured Retirement usingUniversal Life instead of an RRSP
Case StudyInsured Retirement -- is it really better than an RRSP? Sally Generic is 45 years old and wants to know. She needs $500,000 Life Insurance coverage for the next 20 years and normally puts $7,000 yearly into her RRSP. Her Marginal Tax Rate (MTR) is 31.15%. Each year she gets a $2,180.50 tax refund. A 20 year $500,000 Term life insurance policy will cost her $770 per year. Sally deposits her $2,180.50 tax refund,again into her RRSP and receives a second refund of $679.23 which nearly covers her life Insurance. (cost $770) Doing this costs Sally $10,000 per year. She has heard about the Insured Retirement Strategy using a Universal Life Policy as an alternative to an RRSP. She wonders what the advantage is? Her financial planner explains the concept to her. Instead of putting nearly $10,000 into an RRSP. She Deposits $7,000 into a Universal life policy (UL) consisting of $183,000 UL coverage and a $317,000 20-year term rider, for total coverage of $500,000. This gives her the same coverage she needs as her 20-year term policy. Because Sally is paying the $3,000 tax on her $7,000 deposit to the Insured retirement strategy, her real cost is $10,000 per year. The same cost as funding the RRSP and paying for the term Insurance separately . It is obvious to Sally both costs are identical, but she still isn’t sure what the advantage is? Her financial planner shows her a comparison of an RRSP Vs the Insured retirement strategy. hellohellohelloehelloehelloRRSPhellohello Universal Life Policy Yearly Deposithellohello$9,180.50xxxhellohello$7,000 Total at age 65llohello$376,359.12hellohello$267,709 At age 65 Sally notes the RRSP has greater balance than the Insured retirement strategy (almost $90,000 more in the RRSP than the UL) She asks her financial planner "how the UL can help her when it has less cash than the RRSP??" Her planner points out--the withdrawals from her RRSP are fully taxable at her marginal tax rate (MTR) and withdrawals from the Insured Retirement Strategy are TAX free. How can UL withdrawals be tax free Wonders Sally? Her planner explains the money in the UL will be leveraged. Sally doesn't actually withdraw the cash she borrows it. The policy is assigned to the Bank as collateral and the Bank lends Sally an amount each year. She will receive this amount each year until she passes away and because the money is borrowed it is Tax free. RRSP Retirement StrategySally wants approximately $55,000 per year for retirement. Knowing she will receive CPP and OAS (Old Age Security).Sally’s Retirement Income will be:
$11,340.59 TAX $43,235.95 after-tax-income. This is the money Sally will have to spend in her retirement. This is the figure that matters! If Sally does this her RRSP/RRIF will be depleted by the time she turns 82. At retirement Sally is still in a 31.15% MTR ---same as while she put the cash away. Insured Retirement Strategy using a Universal Life Insurance policySally borrows $29,107 per year from the UL.This is the equivalent to the after tax amount Sally receives from the RRSP. Sally needs to withdraw less from the UL account because there is no tax. Sally’s UL Retirement Income will be:
Totalxxxxxhellohello$45,509.71 CPP and OAS are taxable, but the nonrefundable tax credits eliminate all remaining Tax! $45,509.71 in after-tax-income with the UL.$43,235.95 in after-tax-income with the RRSP. $2,273.76 increase in her after-tax-income per year! By Withdrawing less per year from the UL account, Sally can see the UL strategy will last to at least age 100. The RRSP will be depleted by her age 82.What Sally learnedSally has more money for a longer period of time with the Insured Retirement Strategy.The costs for doing either are the very same. At age 65 Sally’s 20 year term policies come to an end. Sally would have to renew her term Insurance or buy a new policy a cost of over $5,000 yearly to maintain her insurance. With the UL Sally will still have over $350,000 of Life Insurance. Sally doesn’t have to worry about obtaining life at age 65 with the Insured retirement strategy. If Sally passed away before age 65 with RRSP strategy her beneficiaries would receive the Insurance payout tax free, but her RRSP would be taxable to whoever received it. If Sally's spouse received the RRSP rollover the tax would be payable as he withdraw the money. If the RRSP went to anyone else Sally’s estate would have to pay all the Tax immediately. Sally can see under the UL strategy her beneficiaries-regardless of who she named-would receive both the account and the insurance amount Tax-free. When Sally does pass away the Bank loan is automatically paid by the UL account and her beneficiaries receive the remainder of her account plus the Life Insurance as a Tax-free- death-benefit.Sally can see how this would amount to a lot more!
Want to know what your after-tax-income would be using a UL instead of an RRSP?Fill out the form to find out.PLEASE NOTE - Some fields are required to do the calculation. No information is ever released, sold or otherwise misused from this form. Regards 
FAQs - Frequently Asked QuestionsQ. Why would the Bank lend me money I am no longer working?A. The Bank is willing to lend this money because there is no risk to the Bank. It’s based on the value of the UL policy which is the life Insurance and the account together. The Bank loan is paid off when you die. Q. Why do I have to borrow my own money? A. You don’t, you could withdraw the money. That’s taxable. You borrow the money at prime. If you withdraw the money you will have to pay - in Sally’s case, 31.15% tax - on each withdrawal. Withdrawing means tax, borrowing meanings no tax. Q. Do I lose the account to the Bank, when I die. A. The Bank loan is paid off and the remaining account is passed on to your beneficiaries as a tax-free-death-benefit. Q. What if the RRSP has better returns then the Universal Life Insurance policy? A. The returns for the UL and the RRSP will be the same - if your RRSP is up your UL will be up. If your RRSP is down your UL will be down. They work lockstep because the same investments are in both. Q. How do I know your figures for CPP and OAS are correct? A. I took the 2008 figures from the “Financial Advisor’s pocket reference” publish by CCH Canada Limited. They provide the software tax accountants use. Q. How do I know your calculations for the UL are correct? A. I used Canada Life’s software to create the illustration. Q. My Bank has never mentioned this? A. Banks are not allowed to sell Insurance products. So why would they mention it to you? Q. My current advisor says you should only do this once you have maxed out your RRSPs. A. Go to my page about RRSPs and understand how that will cause double taxation in retirement through tax at your full marginal rate and potential claw backs of your government benefits. Q. I have more than $7,000 per year to put away. A. the Insured Retirement strategy works for any amount as long as you are consistent and you give it the time it needs to work its magic. Q. If the insured retirement strategy is so good how come everybody’s not doing it? A. Quite a few folks are doing this. One Bank has a loans department staffed with 7 people who do nothing but process these loans all day every day. Many advisors while familiar with the idea, but don’t quite understand the nuts and bolts of it. So they don’t present it. It takes more work to set this up, then to just grab a cheque from you for your RRSP contribution. Q. What do you need to qualify for this? A. The cash to invest and you and/or your spouse must be insurable. Q. Won’t the government close this down if a lot of people do it, and they start losing tax money? A. They might, but they would have to completely rewrite the beneficiaries act, pass that through parliament with every news agency reporting on the biggest negative change, since the introduction of income tax in 1917. Even if they did all that, they would grandfather anyone who was currently doing it. If you already have one set up you get to keep it. They just wouldn’t allow any new people to start. And God help them the next election. Top of Page
Terry Johnston CFPJ C Mitchell Financial Services Inc. Phone: 866-721-7781 ext. 232
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