If you are a business owner in Canada, you may be looking for ways to grow your wealth, protect your assets, and plan for your retirement. One option that you may not have heard of is a corporate insured retirement plan (CIRP).
How Does a CIRP Work?
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 involves the following steps:
- You purchase a universal life insurance policy (UL) from a reputable insurer, such as BMO Life Assurance Company, and name your corporation as the owner and beneficiary of the policy.
- You make regular deposits into the policy, which are invested in a portfolio of your choice. The deposits are made with after-tax corporate dollars, but the investment growth inside the policy is tax-deferred.
- Over time, the policy accumulates a significant cash value, which is the amount of money you can access from the policy at any time.
- When you are ready to retire, you assign the policy as collateral for a line of credit from a third-party lender. The lender advances you a loan based on a percentage of the cash value of the policy, usually up to 90%.
- You use the loan proceeds to supplement your retirement income. The loan interest is tax-deductible for your corporation, and the loan principal is tax-free for you.
- Upon your death, the life insurance death benefit is paid to your corporation, which uses it to pay off the loan and any taxes. The remaining amount is credited to the capital dividend account (CDA) of your corporation, which can be paid out to your shareholders (such as your estate) as tax-free dividends.