How the Corporate Insured Retirement Program Works

Your situation

As a small business owner, a significant part of your wealth may be tied up in your company. Even though you have maximized contributions to your RRSP or pension plan, you would like more flexibility and choice regarding your retirement lifestyle. In addition, you and your corporation need permanent life insurance protection. You are looking for a financial planning strategy that will address both your current need for insurance and your future need for flexibility when you retire.

An option to consider – the Corporate Insured Retirement Program with Shareholder Borrowing

With this financial planning strategy, your corporation deposits funds into a permanent life insurance policy in excess of the amount required to cover the insurance and other policy costs. In the future, your corporation assigns the policy to Manulife Bank as collateral for a personal loan to you. By having your corporation purchase the life insurance policy and use it in this manner, you address your needs for permanent life insurance protection today and flexibility at retirement.

How does the Insured Retirement Program work?

Your corporation purchases a life insurance policy on your life and is named as beneficiary of the policy. The corporation deposits amounts into the policy, creating
significant cash values. At a point in the future, the policy is assigned to Manulife Bank as collateral security for your personal bank loan, which is structured as a line of credit. You use the borrowed funds to create the retirement lifestyle you desire. If you use the borrowed funds for investment purposes, the interest on the bank loan may be deductible against your taxable income.

When you die, your estate provides other assets as collateral for the bank loan. This allows the bank to release the life insurance policy that has been serving as collateral for the loan and your company to receive the policy’s tax-free death benefit. The excess of the death benefit over the adjusted cost basis of the policy is credited to your corporation’ s capital dividend account. Your corporation uses the proceeds to pay a dividend to your estate. The dividend is a tax-free capital dividend up to the amount available in the corporation’s capital dividend account, with any excess paid as a taxable dividend. Your estate uses the funds it receives to
repay the outstanding loan balance and distributes the excess as directed in your will.

A Client Profile

Who is it for?

Shareholders of a private Canadian corporation who:
• have corporate funds to invest
• are in good health
• need permanent life insurance protection
• want to supplement retirement income
• are receptive to long term planning strategies
• are not averse to debt

Why does it work?
• provides life insurance protection (i.e., buy-sell funding,
capital gains tax liability)
• creates cash value that grows on a tax-deferred basis
• provides security for the loan
• provides flexibility for structuring personal or corporate loans
• insurance proceeds repay loan at death
• insurance proceeds generate a credit to the corporation’ s Capital Dividend Account
• insurance proceeds in excess of loan balance available to your client’ s estate

An example

Paul is the sole shareholder of a private Canadian company. He is a healthy, 43 year old who doesn't smoke. Paul requires $1,000,000 of life insurance protection and will need a retirement income supplement from age 65 to 80.

His company will deposit $40,000 into the life insurance policy for 10 years. At retirement, his company will borrow against the cash value of the life insurance policy and use the borrowed funds to pay him a taxable dividend.

When your client purchases a policy from us, they put their financial dreams in our hands. That’s not a responsibility we take lightly.