An insured retirement plan is a retirement planning strategy where the life insured or policy owner leverages a permanent life insurance policy and uses its tax-friendly wealth accumulation features to invest money into the policy to earn a tax-free or tax-deferred return on his or her investment to build wealth in a compounding fashion to meet future financial needs at retirement.
An insured retirement plan allows the policy owner or the life insured to have the life insurance protection while at the same time making money grow either through dividends or market returns, the compounded growth remains tax-free as long as the assets remain inside the policy.
The funds can then be withdrawn either as a lump sum, on a periodic basis, or leveraged with a bank for retirement funding.
Like any other financial product, an IRP isn’t necessarily for everyone. It’s perfect for people who have already maxed out their registered investments such as a TFSA and an RRSP and are looking for other tax-friendly ways to accumulate wealth over time.
You can also get an IRP even if you’ve not maxed out your registered plans as long as you have the cash flow to fund your policy so you get the best benefit of an insured retirement plan.
As a life insurance policy, you will need to qualify for a policy that is usually underwritten based on your health, medical history, and lifestyle.
An IRP isn’t advisable for Canadians who are nearing retirement or don’t have the cash flow needed to fund the policy beyond the policy’s lifetime cost of insurance.
Generally, an IRP is excellent for people who understand the concept, have the cash flow to save up, or invest toward a retirement plan, and who have the goal of building wealth for financial independence while at the same time covering their business’ or household’s bottom line.
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If you’ve been pitched by a group of insurance brokers who only sell IRP, ones who represent themselves as “IRP specialists” and that they’re the only ones who can design IRPs, know that insured retirement plans can be designed and is available to all life licensed advisors as it is at its core – a life insurance policy.
A lot of times, IRP is used and marketed as a get a rich quick tool to unsuspecting Canadians who are lured by promises of high rates of return.
If you ever come across these people, know for a fact that no one can guarantee market returns. Yes, the promised 9% (8% + 1% bonus) average rate of return isn’t guaranteed, and the 8% projected rate of return is definitely NOT “conservative”.
Not to sound negative or a “dream killer”, the realistic average rate of return in long-term investments in Canada is between 5% to 7%. Just because your investment or universal life statement shows that you’ve made 20% gains this year doesn’t mean that you’re going to make this kind of rate of return every year, next year’s return can be -30%!
Remember, when it comes to investing, it isn’t about timing the market…
It’s about “time in the market”.
If you want to build a solid, long-term wealth for yourself and your loved ones, it’s important that you ditch the get rich quick mentality and focus on long-term asset accumulation.
“Get rich quick” simply doesn’t exist, and if it’s too good to be true, it most likely is!
Long-term wealth accumulation isn’t about how much your rate of return was this year, it’s what you’re going to average in the next 10, 20, or 30 years.
Actually, since no one can guarantee market returns, the best way to project future returns is “conservatively”…
No, I’m not talking about 8% or 9%, conservative is between 3% and 4%!
Of course, it doesn’t mean that you’re only going to average 3% on your investment inside your insured retirement plan, but it’s a way to make sure that you achieve or even exceed your target retirement capital when it’s time to call it quits with from active work.
You may argue that an average rate of return of about 10% in investment isn’t far off; well, the realistic market rates of return hover around the 5% mark, anything over this is icing on the cake, the more important thing is that you should have your cake first at the end of your wealth accumulation journey.
Promises of high returns on investment mean nothing if you don’t get to eat your cake!
Why do I compare an insured retirement plan to cakes and icing on cakes?
Most insured retirement plans (IRP) sold in Canada today use universal life insurance as the core policy type since it’s life insurance with an investment component, which can be leveraged to build wealth over time through the insured retirement plan concept.
Also know that as a life insurance policy, you would have to pay for the cost of insurance (yes, the life insurance part, isn’t really free), which usually increases over time (yearly renewable term costing).
If you were sold a minimum or slightly funded universal life and told that you have an insured retirement plan, that’s far from the truth!
I came across people who think that they have an insured retirement plan yet are only contributing between $50 and $200 a month. Depending on your time horizon (to retirement), you may need to keep more as you may not be saving enough, add to it the cost of insurance, these figures may not be able to support the life insurance part of your plan in order to maintain a permanent coverage.
Is Insured Retirement Plan Good?
IRP or an insured retirement plan, in general, isn’t a bad plan at all but it depends on how yours is structured.
As a universal life insurance policy, premium contributions are flexible, if you’re funding it well enough and are actually investing money inside the policy. It’s a very good plan as you’re technically hitting multiple goals with one plan.
If someone told you that you have an IRP and you’re only putting away $50 a month, your contribution may not be enough to keep your policy in force over the long term. Remember, as a life insurance policy, part of your monthly contribution would have to go to your premium payments. As such, your contribution won’t be able to sustain lifetime coverage as a permanent life insurance policy.
Instead of an IRP, what you may have is a minimum or slightly-funded universal life insurance policy.
The best way to make an insured retirement plan work is to keep the cost of insurance (COI) at bay, especially with universal life insurance. Most universal life insurance IRPs sold were designed to maximize agent commission, especially if it was sold by a group that only offers “IRP” as the one and be-all solution to all their clients.
If you’re 55 years old, a $500,000.00 (coverage) IRP may not be right for you because your cost of insurance is already at its peak and your time horizon to retirement is way shorter than a 35-year old female who would have $500,000.00 by age 65 if she’s contributing $200 a month.
Do I need an insured retirement plan?
That depends on your specific situation.
Like any other financial planning tool, an IRP isn’t for everyone.
For one, you should have the cash flow to finance your future through an insured retirement plan.
If you’re being forced into it and you’re not completely confident that you’ll be able to maintain the policy, it may not be for you.
The ideal candidates for an insured retirement plan are Canadians who need life insurance coverage and want to leverage their life insurance policy to invest toward their retirement at the same time.
If you’re not insured, you need permanent life insurance, have the will and cash flow to save up and invest for the future, an IRP is ideal, well provided if you don’t need the RRSP write-off!
How much you need to save up depends on your specific financial situation and goals. If you’ve maxed out your RRSP and TFSA rooms, and you’re looking for other investment venues that allow your money to grow tax-free, an IRP is an excellent choice.
Benefits of Insured Retirement Plan (IRP)
As I slightly mentioned earlier, an IRP allows you to shoot multiple birds at the same time. To expound on this statement, below are the benefits of an insured retirement plan.
- Insurance Protection while actively working
- Tax-free asset accumulation (inside the policy)
- Tax-friendly retirement strategy
- Leave a legacy (death at old age)
Insurance Protection while Actively Working
As you may know, there are generally two types of life insurance:
- Permanent, and
- Term Life Insurance
Insured retirement plans are designed using either of the two types of permanent life insurance (Universal Life, and Whole Life Insurance). As someone with financial obligations, it’s important to protect the most important asset that you and your family have – your ability to earn a living!
As mentioned in our other articles, most Canadians tend to insure every other material asset that they have yet forget to insure their most important asset.
Implementing permanent life insurance allows you to build equity inside the policy regardless of whether it’s a universal life or a whole life policy. Both can be used in an insured retirement strategy.
When you implement an IRP, you are protecting your loved ones’ financial interest and your ability to earn a living for them during the wealth accumulation phase through the insurance component, while at the same time investing toward your retirement.
Tax-free asset accumulation (inside the policy)
While insured, your wealth grows in a compounding passion over time either through dividends (whole life) or market returns (universal life). You don’t get taxed each time your money grows inside the policy.
That’s why an IRP is an excellent alternative to TFSA or even RRSP either if you’ve maxed out both of these wealth accumulation vehicles or you don’t like saving on these tax shelters.
Tax-friendly retirement strategy
One of the frequently asked questions we get when it comes to an insured retirement plan is how you can actually access your money at retirement.
As opposed to what you may have been told, IRP isn’t a pension plan. You will not get a monthly pension at retirement from your IRP but there are several ways on how you can access your money inside an insured retirement plan, and they are as follows:
- Lump-Sum Withdrawal
- Annual or Monthly Withdrawal
- Bank Collateral Loan (Retire with Bank’s Money)
Lump Sum Withdrawal
Yes, you can actually make a lumpsum withdrawal from your IRP at retirement but we don’t necessarily recommend this as there will be a taxable event and you will lose the insurance coverage.
Unlike lump-sum withdrawal, with periodic withdrawal, you’re just withdrawing funds that you will need for retirement. Following the 4% retirement rule, you shouldn’t withdraw more than 4% of your total liquid assets annually at retirement to avoid running out of money while you’re still alive.
In most cases, you will need to make your money last between 20 to 25 years after the age of 65.
While periodic withdrawal is a good way to access your funds from your insured retirement plan, your coverage may be affected, and your funds may get depleted over time, as such, you may not be able to leave a legacy to your next generation through your life insurance.
Bank Collateral Loan
The best way to maximize the benefit of an insured retirement fund is to use the bank’s money for retirement.
By collateralizing your policy with the bank, your policy stays in force and the bank’s money that you’re using for retirement isn’t taxed because you’re using loan money instead which isn’t an income.
Banks know that most Canadians will have between 20 and 25 years to live after they retire at age 65, so they know that eventually, they’ll get paid but in your case, as a retiree, you’ll be able to use the bank’s money to fund your retirement without touching your assets inside your life insurance.
When you eventually pass away, the bank will have a lien on your policy for the portion of the amount you’ve withdrawn to fund your retirement. Any death benefit in excess of your bank loan will then be paid out to your next generation.
So, in essence, by doing a bank collateral loan, instead of cash value withdrawals, you’re able to use your IRP to fund your retirement, without actually withdrawing the funds from inside your policy, which means, your funds continue to grow, despite conservatively because the bank will not lend you money against your policy if your investments still fluctuate in market portfolios but the idea is to be able to use your IRP to fund or supplement your retirement without the risk of depleting your funds or running out of coverage, so your beneficiaries will still receive their tax-free legacy from your insured retirement plan when you eventually pass away at old age.
IRP Key Factors to Consider
As mentioned above, an insured retirement plan is a life insurance policy in the first place, so proper coverage must be considered.
Life insurance can provide your loved ones the necessary capital to pay off your sustain any financial obligations that you may have, in case you pass away during your active working years.
For young families (families with underaged kids), I’m very specific with income protection coverage.
Say Sam is earning $50,000.00 a year and he suddenly passes away. The $50,000.00 a year income that he’s able to provide his loved ones with is gone!
To replace Sam’s annual income, the family would need at least $1,250,000.00 worth of life insurance coverage. This is based on the 4% retirement rule, which states that a person is can successfully retire if he or she can live off 4% of his or her liquid assets.
So, if Sam’s survivor reinvests the $1,250,000.00 life insurance death benefit payout, and they only withdraw 4% every year from this hypothetical investment. They can withdraw $50,000.00 a year to maintain their lifestyle as if Sam never actually left them, well at least, financially.
Now, $1,250,000.00 may seem like a large sum of life insurance coverage for many Canadian families but it’s the right coverage if you want to replace a $50,000.00 a year of income. Of course, it’s a matter of preference, and the whole amount doesn’t necessarily have to be permanent insurance because there are ways on how one can make such coverage more affordable by combining permanent life insurance with term life insurance riders.
For example, the permanent life insurance portion can only amount to $100,000.00 or $250,000.00 depending on the amount of your permanent financial obligations, like final expense (funeral costs, and taxes at death (e.g. capital gains on assets, etc.), legacies, or charitable giving). The rest of the coverage can be availed as a term life insurance (rider), which sits on top of the base policy. If you’re keen to learn more about how this can work for you, please book an appointment for a Zoom call here.
Your Risk Profile
While most insured retirement plans usually use universal life with YRT (yearly renewable term) cost of insurance. An insured retirement plan can be designed using a participating whole life policy if you’re risk-averse, and you don’t have the stomach to absorb market fluctuations.
If on the other hand, you acknowledge that though the market is volatile, you understand that the general trend is upwards, and you prefer higher return potential, universal life insurance (insurance with investment component) can be used for your insured retirement plan.
Your Investment Time Horizon
As I mentioned above, IRP isn’t for everyone, if you’re older and are nearing the retirement age of 65, a different strategy may be more suitable for you. This is because, the cost of insurance tends to be higher, so it may not make sense trying to work out an insured retirement plan because your cost of insurance may just eat up into your investment earnings, not unless of course if you’re high net worth and your goal is to leave a sizeable tax-free legacy to your next generation.
If you’re an average working Canadian and you’re in your late 50s, someone selling you an IRP may be working toward their own benefit instead of yours.
At SmartWealth, we take pride in putting our clients’ benefit first, instead of ours. Book your initial consultation here, and get to know how we work with our clients. We work toward earning your business and maintaining a long-term relationship with you; not toward simply selling your product and disappearing thereafter.
The Goal You Want to Achieve with Your IRP
An IRP isn’t the be-all and end-all investment solution for everyone, and as opposed to what you may have been told, it’s not actually an investment or a pension plan per se.
It’s an “insured retirement plan”, so based on the word “insured”, it’s an insurance policy, in the first place. One that allows you to accumulate wealth for retirement purposes while having the necessary coverage in case you pass away young so your family need not suffer the financial consequence of death.
With that set aside, you may not need an IRP if you are already well-covered against the financial risks of serious life events that may prevent you from doing what you do to earn a living for yourself and your loved ones.
For many Canadians, the goal of putting an IRP in place is to be able to grow money for retirement while having life insurance coverage but most IRP sold are simply universal life insurance that is either underfunded or slightly funded.
If you have an IRP or implementing one, understand that contributing $50, $100, or even $150 a month in a $250,000.00 or $500,000.00 life insurance policy is not enough to meet your retirement goal, as your monthly contribution may only be covering your initial cost of insurance.
The goal of an insured retirement plan is to accumulate wealth for retirement, sadly most “IRP” sold in the market today aren’t IRPs but are simply universal life insurance, dressed up as IRPs.
When planning for retirement, you should be open to funding your plan; especially in the case of an IRP, your funding should be well beyond the necessary premium contribution to keep the policy in force as permanent life insurance, otherwise, you will not meet your retirement goal, and your policy may lapse at old age.
The most important thing to consider when implementing an IRP is your goal for the plan, and instead of simply selling you the concept, your agent should work with you to make your policy work for you instead of them.
This goes without saying that you must work up how much you need to put away inside the policy so you can effectively build wealth for retirement and take the most advantage of your policy.
The main goal of a retirement plan is to help you build your retirement funds, if you’re simply paying for the cost of insurance in your universal life insurance, your policy isn’t an insured retirement plan and is not helping you achieve the goal you’ve set out at the beginning of the policy.
You must know how much you need to save up to successfully achieve your retirement goals, then contribute the necessary monthly contributions to achieve this goal.
If you’re not sure, we can review your policy and help you make a plan to make your policy work for you. You can book a consultation with us here.
Your Cash Flow
As mentioned, retirement planning isn’t something to nickel and dime on. In fact, you should splurge on all your investments if your cash flow can sustain it.
I see a lot of ill-designed “IRP” with monthly contributions that only cover the initial costs of insurance and people think that they can retire from their so-called insured retirement plans.
The fact is, most Canadians aren’t saving enough for retirement, and sadly, most aren’t aware that they aren’t saving enough.
If you’re living paycheck to paycheck, and you’re not saving enough on your “IRP”, it’s just a life insurance policy and in most cases, one that may lapse between your 60s and your 70s; an indication of this is when you’re only contributing between $50 and $200 on a universal life policy with a $500,000.00 worth of coverage.
We offer complimentary reviews for such policies, especially if you’re not sure as to how it works and until when you’ll remain covered – you can book an appointment with us at your convenience here.
Depending on your age, you should be putting away between 10% and 25% of your gross income to build wealth for retirement, regardless of whether it’s put in an IRP, a TFSA, or an RRSP. The more important thing is that you’re saving up in an investment portfolio that allows your money to compound (ideally tax-free) during your active working years.
Is IRP Worth It?
If well-planned, well structured, and well-funded, an IRP is definitely worth it because it allows you to hit multiple birds with one stone, namely:
- Income Protection
- Tax-Free Asset Accumulation (Inside the policy)
- Retirement Funds
- Leave a Legacy (Optional)
It’s like investing in a stand-alone investment plan like mutual funds or segregated funds but having the life insurance protection at the same time. The important thing that you have to keep in mind is that you’re contributing more than the required premiums to keep your policy in force.
If what you have is a minimum-funded or slightly funded universal life, that’s what you have – a universal life insurance policy, which is not necessarily an insured retirement plan.
A true insured retirement plan is a well-funded universal life insurance policy where you either save a percentage of your gross income (at least 10%) beyond what is required to maintain your policy as a permanent insurance.
If cash flow isn’t an issue and you can maximize your savings in a universal life policy, then an IRP is worth it. Sadly, what most people think are IRPs aren’t! If you would like to implement an insured retirement plan that will work for you as expected, book a free consultation with us and we’ll help you implement a no-fluff, no exaggeration insured retirement plan that will truly help you achieve your goals.
Is IRP Tax-Free?
The death benefit in an insured retirement plan is tax-free but depending on how you’re going to access your funds will determine as to whether or not you’re going to get taxed from your IRP’s living benefits (money inside the policy).
If you cash-out your policy with a lump sum withdrawal, you may face a huge tax bill; annual withdrawal may avoid such a huge tax bill but may still have tax consequences when you withdraw passed your policy’s (ACB) or adjusted cost base.
The most tax-friendly way of utlizing your funds inside your policy is to instead leverage it with a bank instead of makind direct withdrawals. You still withdraw the same amount of money as you would if you withdraw from your funds directly but your policy isn’t at risk of lapsing due to possible fund depletion and you don’t have to pay taxes because what you’re using aren’t the funds inside your policy but the bank’s money.
A bank collateral loan raises concerns with some Canadians who are looking to implement an insured retirement plan because they’re going to have to pay interest on their withdrawals but regardless of the interest rate, you’re still saving more compared to when all of your withdrawals get added to your taxable income.
On average, Canadians at retirement will have $14,400.00 in government pensions, take note that government pensions are fully taxable. If you need $40,000.00 of total annual retirement income and you’re withdrawing the rest of your retirement allowance from taxable sources, your tax bracket at retirement will be based on the total income of $40,000.00.
If you have an IRP and you’re doing the bank collateral loan strategy, your income tax bracket will only be based off the $14,400.00 of government pensions that you’re receiving.
Again, you will have to pay interest on the bank’s money that you’re withdrawing but then since you’re using bank loans to fund or supplement your retirement, it doesn’t get added to your taxable income at retirement, which keeps your tax bracket low at retirement, which helps if you have RRSP money too because you would have contributed at a much higher tax bracket during your active working years.
Which Is Better, RRSP or IRP?
You may have heard agents who only sell IRPs say nasty things about RRSPs but here’s the truth: If you can’t fully fund an IRP, you may not even get the best benefit of an RRSP.
IRP and RRSP are completely different plans, while both help you build wealth in tax-free environments, they serve different purposes.
When you make contributions to your IRP, you don’t get to discount those contributions from your taxable income come tax time, while a $10,000.00 contribution to an RRSP lowers your taxable income by the same amount. So, say for example you’ve earned $90,000.00 this year and you’ve contributed $10,000.00 into an RRSP, you’re deemed to have only earned $80,000.00 for tax purposes since whatever taxes you’ve already paid on the $10,000.00 you’ve invested inside your RRSP will be returned to you as an incentive for your good deed of setting aside money for retirement.
If you contribute $10,000.00 in an IRP (or even TFSA), you will still be at the $90,000.00 income tax bracket.
As you see, there are pros and cons, of course, so it’s really a matter of preferrence, your income, and what is important to you.
Is saving taxes on your active income more important?
You should take advantage of RRSP and maximize your contribution if possible. You can still get a permanent life insurance even if you’re maximizing your RRSP, and depending on your affordability, and risk profile, it doesn’t always have to be a universal life insurance policy because a participating whole life policy can also help you build tax-free asset accumulation inside an insurance umbrella.
For the right candidate, it doesn’t have to be an either or scenario as you can take advantage of both.
Again, if you’re not in the higher income tax bracket, an RRSP may not be necessary since the tax saving is immaterial. The ideal candidates for an RRSP are people who are making at least $50,000.00 a year because they are taxed at a much higher tax bracket than someone earning $30,000.00 a year.
If you don’t have a life insurance policy, you should get one specially if you have underaged kids or anyone dependent on you for financial support.
When it comes to life insurance, it’s also not a term life vs permanent life scenario as you can take advantage of both in one policy.
Permanent life insurance preserves age rate and aims or guarantees your coverage for life, not to mention that you also build equity inside the policy at the same time; while a term life insurance policy allows you to increase your coverage at a much higher amount than what most of us will be able to afford if you’re only implementing a permanent policy.
Most Canadians are either underinsured or at risk of losing life insurance coverage at old age because their agent belongs to either the term life or the permanent life faction.
These financial products serve different purposes and must be used to take advantage of what they are designed for.
An IRP for example may be more advantageous if you’re not in the higher income tax bracket because your wealth grows tax-deffered much like an RRSP and it stays tax-free as long as the funds are inside the policy, while you’re covered with an insurance policy at the same time.
If you’re in the higher income tax bracket, you can put more of your money inside a RRSP to minimize the taxes on your earned income, you can then channel your tax savings in permanent insurance or a TFSA to get the full advantage of the tax refunds you’re receiving every year due to your RRSP contribution but then of course, before you invest, make sure that you have the necessary coverage to protect yourself and loved ones against serious life events that may prevent you from doing what you do to make a living.
Can You Withdraw Money from IRP?
The short answer is: Yes, you can withdraw money from an insured retirement plan (IRP) – but there may be charges and tax-implications depending on when and how much you’re withdrawing.
In most instances, you wouldn’t need all of the wealth you’ve built inside the policy, so lump-sum withdrawal may not be necessary.
If you’re just withdrawing your capital – an amount that is less than your policy’s adjusted cost base, there will be no tax implication because you’re essentially withdrawing your premiums, which may be more than your actual contribution.
As mentioned above, if you’re really funding your IRP to build a retirement fund for yourself, the best way to utilize it is by leveraging it with a bank collateral loan strategy but then if you’re not comfortable with this strategy, you can always make direct withdrawals from your fund.
One thing to note when thinking of withdrawing money from your IRP is that universal life and whole life policies have maturity periods, which means that you may incur charges if you’re cashing out your policy before it matures.
You should have a complete copy of the actual (signed) illustration when signing up for such plans because it shows you your cash surrender values (the amount you can cash out) vs your total account value. Most insurance companies have a maturity period of 10-years where your funds are free and clear of charges, while some have a 15-year maturity.
An IRP is a long-term financial plan, as such, it’s not meant to be cashed out in less than 10-years and as the name implies, it’s a “retirement plan”, meant to be used for retirement funding, either as a supplement or as a full source of funds at retirement.
Pitfalls of Insured Retirement Plan (IRP)
- Cost of Insurance (COI)
- Market Volatility
- Your Policy May Lapse or Terminate
- Your Personal Time Horizon
Cost of Insurance (COI)
One of the pitfalls of an insured retirement plan is the cost of insurance that’s associated with your life insurance protection. Since an insured retirement strategy uses a life insurance policy to build wealth, there are costs associated with your policy that gets deducted from your funds (behind the scene) that’s why it’s important that you should be able to save up well beyond the cost of insurance. If you do this, your cost of insurance will technically appear to be free because your funds will be higher than the actual capital you’ve contributed to the policy over time.
Another pitfall of an insured retirement plan is market volatility.
Most insured retirement plans designed today use universal life insurance, which is a life insurance policy that allows your premiums or policy contributions to be invested in stocks and fixed income portfolios.
That is what allows your money to earn and compound over time, however, do understand that the market fluctuates, and as opposed to what you may have been promised; returns are not guaranteed and no one has control over the market; not you, not me, nor the “IRP specialist” who’s selling you the insured retirement plan policy.
While the general trend of the market is upwards, anyone guaranteeing market rates of return of between 8% and 10% does not have your best interest in mind.
What I always tell my clients is to have the person put it in writing and sign their name on their claims with a wet signature, then tell them that you will sue them in 10 or 20-years if your results are otherwise.
As mentioned in a previous section of this article, this year’s positive rate of return is often offset by next year’s negative rate of return; your real rate of return is the long-term average of your investment’s rates of return, which may be in the neighborhood of around 5%.
Of course, you may get more than 5% but then to make sure that your policy will stay in force over your lifetime and that you’re going to have enough funds to either supplement your retirement or even to be the sole source of your retirement funds, only expect the realistic average rate of return – anything over this, is icing on your cake!
If you’re not comfortable with market fluctuations but has the cash flow to invest in a non-volatile insured retirement plan, a whole life insurance policy may be used as an IRP.
Your Policy May Lapse or Terminate
Real IRP policies don’t lapse or terminate, unless you as the policy owner decide to cash it out but most so-called insured retirement plans aren’t really insured retirement policies but are either minimum or slightly-funded universal life insurance policies.
Let me explain, universal life insurance is a flexible type of life insurance policy that’s a hybrid of term and whole life insurance, so depending on how you fund it, it could either stay in force as permanent life insurance or it may eventually lapse like a term life insurance policy.
When implementing permanent life insurance, you’ll usually have a 20-year or lifetime contribution period if it’s a whole life insurance policy. Universal life insurance has flexible premiums which range between a set minimum and a maximum amount that you can contribute to the policy, so you could implement the policy by only contributing the minimum required premium to cover the initial cost of insurance, add more money, or withdraw funds from your policy.
Due to the flexible nature of a universal life insurance policy, most UL “IRPs” sold are actually underfunded universal life insurances that are going to eventually lapse because the amount of monthly contributions will not be able to sustain the eventual cost of insurance increase as the life insured ages.
So if you’re not saving enough inside an “insured retirement plan”, and you want your policy to at least stay in force as permanent life insurance; you have to determine how much you need to contribute on a monthly basis, either in a 20-year period, until your 65th birthday, or throughout the rest of your life.
This makes sure that you will not lose coverage at old age; once you contribute the right amount so your policy stays in force as permanent life insurance, you can fund it further to turn it into a real insured retirement plan by contributing the necessary saving rate so you can build wealth for the future.
If you like the IRP concept and you’re just not ready to fund it enough to build wealth; at least fund it enough so you will not lose coverage at old in the worst case that you can’t use it as a retirement plan.
A 20-year contribution period, computed at an expected rate of return of 3% is ideal universal life insurance as the base of your insured retirement plan; in the worst case that you can’t fund your policy to turn it into a full-pledged insured retirement plan, you would still have built up more funds than your actual contribution, something that you could cash out at retirement or leave within the policy so you’re covered for life.
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