Insurance Option for Retirement Funds | FBC, Canada's Farm & Small Business Tax Specialist

Insurance Option for Retirement Funds

Are you relying solely on Canada Pension Plan and Old Age Security for your retirement needs?

What are the chances that CPP and OAS will be around when today’s young people retire?


Life insurance might provide added security.


A rapidly aging population and longer life spans are placing pressure on government managed and funded retirement plans. There is a demographic shift in which the ratio of young tax-paying people to retired people is de-creasing.


The federal government has responded by making changes to bolster the system. Canadians aged 60 to 70 and their employers are now required to continue contributing to CPP, even if the person is collecting pension benefits.


The government has initiated a number of studies into significantly overhauling CPP. 


At first, this resulted in changes to the funding of the government-run pension system. More recently, the government called for public and industry input around a shift to a privately funded system through major insurance pools.


However, Canadians have always had the option of supplementing their retirement income through private insurance.


The participating whole life insurance product, also known as par whole life, has been available since Confederation. The par whole life policy lasts the entire lifetime of the insured as long as the premiums are paid to keep the policy in force. 


As an incentive to stay in for the long term, the insured gets to participate in the investment returns and growth of the fund through dividend payments.


All dividends attributed to a policy are considered part of the policy, and the growth within the policy is tax exempt. As an investment, all the dividends and increases to the cash surrender value are vested so that the values “cannot go backwards.”


Money can be withdrawn from the policy or the policy can be used as collateral security for loans from a financial institution. The funds can then be used to pay for your retirement, if that’s what you choose.


An opportunity exists with the family farm if it is set up as a limited corporation. No CPP deductions are required if family members take their income in dividends. 


The corporation can invest the equivalent payments into a par whole life insurance policy. The premiums, however, are not deductible on whole life policies as the death benefit is not taxable to the beneficiary. 

Family members can then draw from the policy cash value either through direct withdrawal or as collateral for a loan. 


Members get the full pay-out at far higher returns than they would through CPP, and in most instances, on a more tax-advantaged basis. 


With a par whole life policy, the cash surrender value is there when you need extra funds, and upon the death of the insured, the remaining value is added to the death benefit and transferred to a designated beneficiary tax-free.

 

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