Insured Retirement Plan: What is IRP and How Does it Really Work?

irp - insured retirement plan winnipeg

An insured retirement plan or IRP is a financial concept wherein a permanent life insurance policy, usually, universal life is utilized as a vehicle to save up and build wealth for retirement.

An insurance retirement plan allows permanent policy owners to fund their life insurance policies over their initial base premium (cost of insurance, charges, and fees) with the intention of investing toward retirement, to take advantage of the tax-free asset accumulation from within their insurance policies during the accumulation phase, and to implement a series of annual bank loans against the policy for tax-free retirement income.

As opposed to what you may have been told, an IRP isn’t a type of life insurance but rather a life insurance retirement planning concept, where you’re technically, hitting two birds with one stone; namely:

  1. Life Insurance
  2. Wealth Accumulation

And, this concept isn’t only available to one group of insurance advisors nor is it only being done by one specific group of advisors; rather, this concept is available to be issued by any life-licensed financial advisor.

Simply put, an insured retirement plan is a financial planning concept wherein you use a life insurance policy to build wealth tax-free from within your life insurance policy with the intention of establishing an annual line of credit with a bank, collateralizing your policy for tax-free income at retirement through a series of bank loans at retirement.

Keep in mind though that a slightly-funded or minimum-funded universal life insurance policy is not an IRP.

A universal life insurance policy can be funded just enough for it to provide you with lifetime (permanent) insurance coverage but may not be able to sustain a series of annual loans to support your lifestyle at retirement.

Moreover, a minimum or near minimum-funded universal life policy may not provide you with permanent insurance coverage; universal life insurance is a flexible type of life insurance policy that may or may not provide you with permanent coverage depending on how you fund your policy.

In the last couple of years, there have been a lot of universal life insurance policies that were sold as insured retirement plans which were not properly structured (nor funded) yet the insured is under the impression that their policies are IRPs and will provide them with the necessary pension at retirement only to find out that there wouldn’t be enough funds inside their policies to fund their retirement income needs.

Most of these universal life insurance policies were sold with minimum or near-minimum funding and not only will it not provide the policyholder with their expected pensions at retirement but the policy may not even last to provide the insured(s) with lifetime coverage.

As mentioned in the preceding paragraphs, a universal life insurance policy is a flexible type of life insurance that can provide a client with permanent or non-permanent life insurance coverage; depending on whether or not there are enough fund values within the policy.

Like any other retirement planning strategy, the key to an insured retirement plan is proper funding; this means that you have to fund your IRP policy with your target savings amount on top of your initial cost of insurance.

To achieve this, you have to make it a point that the future illustrated values of the underlying investment within a proposed universal life insurance policy are projected using conservative rates of return between 3% to 5%.

If you’re being lured into an IRP using outrageous investment rates of return, keep in mind that the person selling you these projections doesn’t have control over market rates of return, and nor does anyone else.

If you’re looking to implement an IRP as part of your retirement planning strategy; make it a point that you’re in a position to fund your insured retirement plan, over and above its base policy premiums, just as you would if you were to invest in other retirement vehicles such as an RRSP or a TFSA, otherwise, your supposedly IRP plan is simply a universal life insurance policy wherein you may have built some form of equity but not enough to sustain annual policy or bank collateral loans to sustain your financial needs at retirement.

What makes an insured retirement plan attractive is the idea of saving money in a life insurance policy, which means that the insured does not necessarily waste money on life insurance premiums.

Another benefit that most people looking to implement an insured retirement plan, are after is the idea of being able to have retirement income tax-free through policy or bank collateral loans.

What I personally like about it is the idea of hitting two birds with one stone which means that while you’re building wealth for retirement, you’re at the same time protecting your loved ones’ financial interest by having a life insurance policy in place.

If you’re interested in a well-planned insured retirement plan please don’t hesitate to book a consultation with us.

Our goal is to guide you to come up with a financial solution that meets your needs, preference, and risk tolerance.