Maximizing Retirement Savings with a Corporate Insured Retirement Strategy

Christopher Bowlby - Jun 17, 2024
For business owners seeking a strategic, tax-efficient method to secure their retirement while safeguarding their business interests, the Corporate Insured Retirement Strategy (CIRS) offers a compelling solution.

For business owners seeking a strategic, tax-efficient method to secure their retirement while safeguarding their business interests, the Corporate Insured Retirement Strategy (CIRS) offers a compelling solution.

Understanding the Corporate Insured Retirement Strategy

The CIRS involves the purchase of a permanent life insurance policy by your company, tailored to meet both your personal and business needs. The key advantage is that premiums paid into this policy accumulate a cash value over time, with investment earnings remaining tax-deferred as long as they stay within the policy.

How the Strategy Works

  1. Policy Acquisition: Your company purchases a permanent life insurance policy. Since the company is both the owner and beneficiary, these deposits are not considered a taxable shareholder benefit.
  2. Cash Value Accumulation: The policy’s premiums are designed to build a cash value.
  3. Leveraging for Retirement Income: Upon retirement, your company can leverage the policy’s cash value by arranging a loan or line of credit. This loan is used to fund taxable dividends or bonus payments to you. Depending on your specific situation, the amount that can be borrowed ranges from 50% to 90% of the policy’s cash value.
  4. Interest Payments: While the company will incur interest on the loan, it is often possible to arrange an additional loan to cover these interest payments, ensuring the policy remains intact.
  5. Post-Mortem Benefits: Upon your passing, the tax-free life insurance proceeds are used to repay the outstanding loan, with any remaining funds distributed as tax-free capital dividends to your beneficiaries.

Benefits of the Corporate Insured Retirement Strategy

The CIRS offers multiple benefits, including:

  • Permanent life insurance protection
  • Tax-deferred growth of investment funds
  • Tax-free access to these funds during retirement
  • Tax-free benefits to your estate

Considerations for Implementation

While the CIRS can be highly beneficial, it is not suitable for everyone. Key considerations include:

  • Time Horizon: A sufficient period is required to build a significant cash value within the policy.
  • Loan Rates and Cash Values: It is crucial to assess current loan rates and projected cash values to determine the strategy's appropriateness for your situation.
  • Future Business Plans: As the policy is corporately owned, consider the implications if you plan to sell your company.
  • Tax Legislation Changes: Potential changes to the Income Tax Act could impact the strategy’s viability.

Case Study: Practical Application

Consider Peter, a 50-year-old incorporated professional who maximizes his contributions to his Individual Pension Plan (IPP) and Tax-Free Savings Account (TFSA). Peter’s corporation purchases a $1,000,000 permanent life insurance policy, with annual deposits of $58,339 for 15 years. At age 70, Peter leverages the policy’s cash value to supplement his retirement income, arranging an annual loan advance of up to $57,081 for 14 years. Should Peter pass away at age 85, the outstanding loan balance would be approximately $1,400,000. The life insurance proceeds ($2,700,000) would repay the loan, leaving $1,300,000 for his wife Carol through tax-free capital dividends.

Conclusion

The Corporate Insured Retirement Strategy provides a robust framework for business owners to build non-registered assets in a tax-sheltered environment, ensuring life insurance protection and a steady retirement income. It is a strategy worth considering for those seeking a flexible and efficient retirement solution.