Yesterday, we talked about the retirement strategy of using life insurance as a savings mechanism. Today, we look at the benefits of using life insurance for retirement.
To recap: Basically, you take out a guaranteed life insurance policy on an older relative and name yourself the sole beneficiary. When this older relative passes away, whether it is in 10, 20 or 30 years, you are ideally approaching or in retirement and receive the guaranteed payout.
Now how does this benefit you as a retirement instrument?
- If you are making $200,000-plus a year, and you are maxing out your RRSP contribution and TFSA contribution, over time you are probably left with savings held in non-registered investments or in a second property. Both of these are being taxed and subject to the variability of the markets.
- If you are middle aged and you have a parent in his or her 60s or 70s, and in decent health, he or she will certainly qualify for permanent life insurance. By funding this insurance with money that would otherwise be taxed in some way, and getting a payout around retirement, this meets the objective of retirement planning perfectly.
- Many people respond: “Isn’t life insurance very expensive at that age?” The answer is that the rate of return can be very good. This return is not tied to any investments held within the insurance policy. It is based on the dollars put in over the years, held within the plan using a guaranteed minimum return, and the insurance payout at the end.
- If you want more tax sheltering than you are allowed with RRSPs and TFSAs, an alternative is to pay for the life insurance on your parent. In some cases the return is so good and the other benefits are so strong, you would want to do this instead of some of your RRSP and TFSA contributions.
- If you are self-employed, earning good money but not earning a salary, you simply don’t have much or any RRSP contribution room. This type of strategy is a great alternative. You get the best of both worlds in terms of tax efficient income, and you still can benefit from a tax sheltered retirement strategy – without any hard limit on contributions. An even better option for self-employed individuals is to buy the insurance policy within their company.
- Remember that the named beneficiary of an insurance policy can be quite flexible. In some cases, parents are more comfortable with the process if they know that the grandchildren are also named as beneficiaries on the policy.
- Among other benefits of this strategy, the insurance policy is creditor proof, and the death benefit is not considered family assets in the event of marriage breakdown (unlike the RRSP and TFSA).
Some might suggest that it seems odd to financially benefit from a relative’s death. While one can understand the point of view, it is really no different than anyone who is likely to receive an inheritance. It is simply helping your family to do smart financial planning.
Make sure to read the article that originally describes how this life-insurance strategy works.