How Does a CIRP Work?
If you are a business owner who has accumulated a large amount of savings inside your corporation, you may be looking for ways to invest them wisely and access them tax-efficiently. You may also want to leave a legacy for your family or your favorite charity. If so, you may want to consider a Corporate Insured Retirement Plan (CIRP).
A CIRP is a strategy that involves buying a permanent life insurance policy on your life (or the life of another key person in your business) and using it as collateral for a loan. The loan can be used to supplement your retirement income or for any other purpose. The loan interest is generally deductible for the corporation and the loan advances are tax-free for you. At death, the insurance proceeds are used to pay off the loan and the remaining amount is paid to your beneficiary as a tax-free capital dividend.
A CIRP offers several advantages for business owners, such as:
- Tax efficiency: You can use your corporate surplus to fund the policy, which grows tax-deferred inside the policy. You can also access tax-free income from the policy by borrowing against its cash value. The loan interest is tax-deductible for your corporation, and the death benefit creates a tax-free dividend for your shareholders.
- Asset protection: The policy and its cash value are protected from creditors, as long as the policy is assigned to the lender. The policy also provides a source of liquidity for your corporation in case of emergencies or opportunities.
- Estate planning: The policy can be used to fund a buy-sell agreement, cover the loss of a key employee, secure a loan, or fund a capital gains liability. The policy also allows you to transfer wealth to your heirs in a tax-efficient manner, as the death benefit creates a tax-free dividend for your shareholders.
- Flexibility: You can choose the amount and frequency of deposits into the policy, as well as the investment portfolio that suits your risk tolerance. You can also decide when and how much to borrow from the policy, as long as you meet the lender’s requirements.
Is a CIRP Right for You?
A CIRP is not for everyone. It is best suited for business owners who:
- Require and qualify for permanent life insurance protection
- Have excess cash flow or surplus funds in their corporation
- Are looking for a tax-efficient way to invest and access their corporate wealth
- Are comfortable with borrowing and managing debt
- Have a long-term horizon and a stable income
If you are interested in learning more about a CIRP, you should consult with a qualified financial advisor who can assess your situation and recommend the best solution for you. You should also seek the advice of a legal and tax expert to ensure that the CIRP is structured properly and complies with the relevant rules and regulations.