What is an Insured Retirement Plan (IRP)?

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Sometimes referred to as the Insured Retirement Program, the Insured Retirement Plan (IRP) is a concept, not a product. It allows a person to leverage their life insurance coverage to have peace of mind in retirement. The product used to implement this concept is whole life insurance or universal life insurance policy.

Basically, an insured retirement plan is a financial plan that offers clients permanent life insurance coverage as well as the ability to supplement their retirement income. This method is excellent for clients who have reached the contribution maximum on their RRSP or pension plan.

What is Life Insurance?

Life insurance, as you may know, is a legally binding contract between the insurer and the insured. In return for monthly premiums, the latter agrees to pay a certain amount to the policy’s beneficiaries when the insured dies. Simply put, a life insurance plan is a product that helps your family deal with the financial impact of your death.

There are two types of life insurance — term and permanent. Term life insurance coverage lasts for a specific period, which can be as short as one year or for 30 or 35 years. A permanent life insurance policy, by contrast, provides life insurance coverage that you cannot outlive. Permanent life insurance is further divided into different types, the two most common being whole life insurance and universal life insurance.

How Do You Use Life Insurance in an Insured Retirement Plan?

An insured retirement plan focuses on using your permanent life insurance policy cash value to fund income after retirement. First, you take out a whole life or universal life insurance policy. When the life insurance policy accumulates sufficient cash value, you use it as collateral to obtain a loan to provide you with a tax-free retirement income.

Upon your death, the proceeds will be paid tax-free. The insurer will first use the death benefit to pay off the loan. The remaining amount will then be paid out to your loved ones.

You can access your life insurance policy’s cash value in many ways, including by taking out a loan against it. When you take out a loan, you can access cash from your policy on a tax-free basis. Since you are not withdrawing funds from the cash value, it continues to grow on a tax-deferred basis.

Also, the interest accumulated is added back into the loan, so you do not have to worry about it while you are still alive. The insurer deducts the loan amount and interest from the death benefit when you pass away and issues the remainder to your beneficiaries.

How does an Insured Retirement Plan work?

The insured retirement plan (IRP) takes advantage of two tax benefits of life insurance:

• Proceeds of a policy get paid out tax-free.

• Permanent Life plans accumulates cash value with interest on a tax-deferred basis.

A life insurance retirement plan allows you to leverage these tax benefits to save for your retirement. However, it is most effective as a retirement tool when you have already maxed out traditional savings and investment vehicles like TFSA, RRSP, etc. Typically, these strategies are more advantageous than an insurance retirement plan, so consider using an insurance retirement plan only when you have fully implemented others. Changes in tax laws may also impact the effectiveness of the IRP.

Implementing an insured retirement plan can be a difficult process. We recommend speaking with an advisor to guide you.

An insured retirement plan has three distinct phases. These are:

• Saving/Accumulation phase: You take out a whole life or universal life plan with an inbuilt investment component. As you pay the premiums, your policy’s cash value grows. It grows on a tax-deferred basis, just like funds in a TFSA or RRSP account.

• Withdrawal phase: The cash value of a permanent life insurance policy grows slowly during the first few years before picking up the pace. So, upon retirement, you will likely have accumulated sufficient supplementary retirement income, especially if you did not miss any premium payments and have not yet tapped into the cash value. However, if you were to make a withdrawal from your cash value to fund retirement, the money will count as a taxable income. So, the idea is to access this pot of money without making a withdrawal. This can be done by taking an annual bank loan with your life insurance policy as collateral. The annual loan helps fund your retirement, and the yearly payments and interest are recapitalized into the loan. This means you do not have to repay the loan during your lifetime.

• Repayment phase: When you pass away, the death benefit is used for repaying the loan, and your beneficiaries receive the remaining benefit amount. Since the proceeds of a life insurance policy are not taxable, the loan is paid down with tax-sheltered money.

Why would you get an Insured Retirement Plan?

It is a good strategy to max out your TFSA and RRSP first before implementing an IRP. While the latter offers a way to fund all or part of your retirement, it is principally a life insurance coverage plan with a cash value component. For this reason, implementing an insured retirement plan if you do not have an insurance need does not make sense. Nor is it advantageous to give it precedence over RRSP and TFSA, but there are exceptions.

The RRSP contribution limit for 2025 is 18% of your income, up to a maximum of $32,490. In contrast, the annual dollar limit for TFSA is $7,000. An insured retirement plan is a good retirement strategy for someone who needs life insurance and can invest more than $25,000 minimum a year for retirement. Generally speaking, the ideal candidate would be a higher-net-worth individual who consistently maxes out traditional investment vehicles.

With that said, not everyone is able to put money in RRSP. In such cases, using both TFSA and an insured retirement plan to ensure income after retirement in the future can be an effective strategy.  

In fact, recent surveys indicate a further decline in RRSP participation. In early 2025, only 39% of Canadians planned to contribute to their RRSPs, a significant drop from 49% the previous year. This trend suggests that fewer Canadians are prioritizing RRSP contributions, possibly due to economic challenges and shifting financial priorities. 

Case Study: How an Insured Retirement Plan (IRP) Helped a Business Owner Maximize Retirement Income and Leave a Legacy

Background

Mark, a 45-year-old incorporated business owner, wanted a tax-efficient way to supplement his retirement income while ensuring a financial legacy for his family. He had already maxed out his RRSP and TFSA contributions and was looking to grow his wealth while minimizing taxes.

Mark purchased a whole life insurance policy with a high cash value component. He made an initial $70,000 contribution and then paid $15,000 per year. His policy accumulated significant tax-deferred growth and By the time he reached age 65, the policy had built up $850,000 in cash value.

At retirement, instead of withdrawing funds directly (which could trigger taxes), Mark leveraged his policy’s cash value to secure a tax-free bank loan. This loan provided him with an additional $50,000 per year in retirement income, supplementing his other investments. The loan did not count as taxable income, keeping his overall tax liability low.

Mark enjoyed a comfortable retirement with a steady, tax-efficient income. The bank loan was structured so that it did not require repayment during his lifetime. Upon Mark’s passing, a portion of his death benefit repaid the loan, and his family still received a significant tax-free payout. His business also benefited, as the corporate-owned policy helped offset tax liabilities upon his passing.

Key Takeaways

• Tax-efficient retirement income without depleting his personal savings.
• Preserved a legacy for his heirs by maintaining a death benefit.
• Protected his business, ensuring a smooth financial transition.

This case highlights how an IRP can be a powerful wealth strategy, providing both retirement income and estate planning benefits for high-income professionals and business owners.

Before implementing an insured retirement plan (IRP), consider the following two factors:

•  Type of life insurance policy and company:

‍Whole life or universal life insurance policies are suitable for implementing this strategy. Both build a supplementary retirement income, but a universal life insurance policy offers more flexibility. It is also typically more complicated and requires closer maintenance. You can pick the type of life insurance plan that suits your goals better. Depending on the insurer and the policy you pick, you might be able to use 95% or 75% or a different percentage of the life insurance policy as collateral.  

• Cost of insurance:

As mentioned above, a part of your premium covers the cost of insurance and administrative fees and the remainder is funnelled into an investment account. The cost of insurance either remains the same throughout or increases annually. You can pick the option that best works for you. Generally speaking, the latter is a better investment strategy because a bigger part of your initial premiums is used for building cash value.

What are the pros of insured retirement plans?

An insured retirement plan offers many advantages, such as:

• Your life insurance policy provides supplemental retirement income in addition to protecting your loved ones from the financial impact of your death.

• Your policy’s cash value grows on a tax-deferred basis.

• The interest on the loan can be (and usually is) capitalized, meaning it is payable upon your passing away. So, in effect, you do not have to worry about paying it during your lifetime.  

• Your policy acts as an asset. You can tap into your cash value without giving up ownership when you use the life insurance policy as collateral for a bank loan.

• The death benefit is not subject to tax.

What are the cons of insured retirement plans?

Like other financial products, an insured retirement plan has a few disadvantages.

• An insured retirement plan is better suited for supplementing retirement income, not as a primary source of retirement income. That is because the money is not liquid. If you need to surrender the policy to access the cash value, you will have to pay surrender charges and fees.

• Implementing an insured retirement plan makes sense only if you also have an insurance need. If you already have a life insurance policy, an IRP is not likely to be the right retirement tool for you.

• You can use an insured retirement plan to fund retirement only if you qualify for life insurance. Most whole life and universal life insurance policies (if not all) require taking a medical exam and answering a few invasive health questions to qualify.

• There is a risk that changes in lending practices and/or tax laws could prevent access to the strategy in retirement.

• Using a permanent life insurance policy to fund an Insured Retirement Plan (IRP) may also reduce the death benefit your loved ones receive. When you borrow against the policy’s cash value, the loan and accrued interest will be repaid from the death benefit unless it’s paid off beforehand. This means that the more you withdraw or borrow, the less your beneficiaries will receive. 

Conclusion

In 2023, LIMRA found that whole life insurance policies, which are commonly used in IRPs due to their cash value component, saw a 10% increase in new annualized premiums, reaching a record $1.27 billion. Additionally, the number of whole life policies sold rose by 4% compared to 2022.

This upward trend suggests that more Canadians are recognizing the potential benefits of permanent life insurance products, possibly including their use in retirement planning strategies like IRPs. However, without specific data on IRP adoption, it's challenging to quantify the exact number of individuals benefiting from this approach.

To summarize, an Insured Retirement Plan is a financial strategy that leverages the tax benefits of permanent life insurance to supplement retirement income. Using this strategy can help you achieve two goals at once — financially protect your loved ones and generate retirement income.

A Dundas Life expert can help you decide if an insured retirement plan is the right option for you. Book a call with one of our licensed insurance advisors today.

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