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Category: Universal Life

Insured Retirement Plan: A Heavily Mis-Sold Strategy You Probably Shouldn’t Buy!
Let’s be real—if you’ve heard about the Insured Retirement Plan (IRP), chances are someone tried to sell it to you as the ultimate retirement and wealth-building strategy. They might have thrown in words like “tax-free,” “leveraged loans,” or “permanent insurance” to make it sound like a no-brainer.

Here’s the hard truth: most people should NOT be buying an IRP. This is an elite strategy, meant for a very small percentage of high-net-worth individuals—more specifically, business owners with significant non-registered investments.

Who Actually Benefits From an IRP?

If any of the following doesn’t describe you, walk away from this strategy:
- You’re a high-income business owner earning at least mid-to-high six figures annually.
- You’ve maxed out all registered investment accounts (RRSP, TFSA, pension, etc.).
- You have a large pool of taxable, non-registered investments.
- You need permanent life insurance (not just for the tax perks).
If you don’t check off all these boxes, then the IRP is likely not for you. But if you do? Let’s dig deeper.

How Does an Insured Retirement Plan Work?

At its core, an IRP is a leveraged strategy using a permanent participating whole life insurance policy. Here’s the breakdown:
1. You buy a permanent life insurance policy. It grows cash value over time, tax-sheltered.
2. You overfund the policy for 10+ years. Depositing $50,000–$250,000+ annually is common.
3. You borrow against the policy’s cash value. A bank gives you tax-free loans using your policy as collateral.
4. You receive tax-free income. This supplements your retirement while your investments remain untouched.
5. When you die, the death benefit pays off the loans. Whatever’s left goes to your beneficiaries tax-free.
Why High-Net-Worth Business Owners Love It

The IRP can be an incredibly powerful tool for wealthy business owners who have excess capital sitting in a taxable investment account. Here’s why:
- Tax-Sheltered Growth: The cash value inside the policy grows tax-free.
- Tax-Free Retirement Income: Loans from the policy aren’t considered taxable income.
- Tax Deductibility: If the loan is used for investment purposes, interest may be deductible.
- Estate Planning Perks: Life insurance pays out quickly, privately, and tax-free.
The Risks No One Tells You About

Sounds great, right? But here’s what your insurance advisor might conveniently leave out:
- It’s expensive. If you can’t commit to the annual funding requirements for 10+ years, don’t bother.
- Loans aren’t guaranteed. The bank can refuse to lend, change their terms, or require extra collateral.
- Interest rate risks. If rates spike, borrowing costs eat into your retirement income.
- Tax laws can change. Today, loan proceeds aren’t taxable, but who knows in 20 years?
- Locks you in. Once you start borrowing, making changes to the policy becomes difficult.
A Real-World Example

Let’s take a 40-year-old business owner who:
- Deposits $250,000 annually into an IRP for 10 years.
- At 65, he starts borrowing $332,000 per year tax-free for retirement.
- By 90, he’s taken out $17 million in loans.
- His life insurance policy has grown to $22 million, covering the debt and leaving $4.8 million to his beneficiaries.
For the right person, this strategy can create tax-efficient wealth. But again—if you don’t have huge taxable assets and high disposable income, it’s a bad fit.

Final Thoughts

The IRP is a niche strategy, but it’s aggressively pushed onto people who shouldn’t be touching it. If someone tries to sell you on it, ask:
- Have I maxed out all registered accounts?
- Do I actually need permanent life insurance?
- Can I afford to fund this for a decade?
If the answer is no to any of those, look for simpler and less risky alternatives. But if you’re a high-net-worth business owner with money burning a hole in your corporate account, this could be a game-changer.

Got questions? Drop them in the comments or reach out!
February 13, 2025
CNBC’s Suze Orman on Life Insurance

Sure Orman is an American financial advisor, author, and podcast host. Orman has written ten consecutive New York Times bestsellers about personal finance. She was named twice to the Time 100 list of influential people, has won two Emmy Awards, and eight Gracie Awards. Orman has written, co-produced and hosted 9 PBS specials, and has appeared on multiple additional television shows. She has been a guest on The Oprah Winfrey Show approximately 29 times and Larry King Live over 30 times. Orman is currently the podcast host of the “Suze Orman Women & Money Podcast.

January 17, 2024
Insurance: Protecting What You’ve Got
This are pages from the book “Personal Finance for Dummies for Canadians”
Click Here to Download Original PDF

Comparing term life insurance to cash value life insurance (Page 334)

We’re going to tell you how you can save hours of time and thousands of dollars. Ready? Buy term life insurance. (The only exception is if you have a high net worth — several million bucks or more — in which case you may want to consider other options. See the estate-planning section in Chapter 17.) If you’ve already figured out how much life insurance to purchase, and this is all the advice you need to go ahead, you can skip the rest of this section and jump to the “Buying term insurance” section that follows.

If you want the details behind our recommendation for term insurance, the following information is for you. Or maybe you heard (and have already fallen prey to) the sales pitches from life insurance agents, most of whom love selling cash value life insurance because of its huge commissions.

We’re going to start with some background. Despite the variety of names that marketing departments have cooked up for policies, life insurance comes in two basic flavours:
- Term insurance. This insurance is pure life insurance. You pay an annual premium for which you receive a predetermined amount of life insurance protection. If the insured person passes away, the beneficiaries collect; otherwise, the premium is gone.
- Cash value insurance. All other life insurance policies (whole, universal, variable, and so on) combine life insurance with a supposed savings feature. Your premiums do not pay only for life insurance; some of your dollars are also credited to an account that grows in value over time, assuming you keep paying your premiums. On the surface, this sounds potentially attractive. People don’t like to believe that all their premium dollars are being tossed away.
But cash value insurance has a big catch.

For the same amount of coverage (for example, for $100,000 of life insurance benefits), cash value policies cost you anywhere from four to ten times (yes, 1,000 percent) more than comparable term policies.

Insurance salespeople know the buttons to push to get you interested in buying the wrong kind of life insurance. In the following sections we give you some of the typical arguments they make for purchasing cash value polices, followed by our perspective on each one.

“Cash value policies are all paid up after x years. You don’t want to be paying life insurance premiums for the rest of your life, do you?”

Agents who pitch cash value life insurance present projections that imply that after the first ten or so years of paying your premiums, you don’t need to pay more premiums to keep the life insurance in force. The only reason you may be able to stop paying premiums is if you pour so much extra money into the policy in the early years of payment. Remember that cash value life insurance costs four to ten times as much as term insurance.

Imagine that you’re currently paying $500 a year for auto insurance, and an insurance company comes along and offers you a policy for $4,000 per year. The representative tells you that after 10 years, you can stop paying and still keep your same coverage. We’re sure that you wouldn’t fall for this sales tactic, but many people do when they buy cash value life insurance.

You also need to be wary of the projections, because they often include unrealistic and lofty assumptions about the investment return that your cash balance can earn. When you stop paying into a cash value policy, the cost of each year’s life insurance is deducted from the remaining cash value. If the rate of return on the cash balance is not sufficient to pay the insurance cost, the cash balance declines, and eventually you receive notices saying that your policy needs more funding to keep the life insurance in force.

“You won’t be able to afford term insurance when you’re older.”

As you get older, the cost of term insurance increases because the risk of dying rises. But life insurance is not something you need all your life! It’s typically bought in a person’s younger years when financial commitments and obligations outweigh financial assets. Twenty or thirty years later, the reverse should be true.

When you retire years from now, you won’t need life insurance to protect your employment income, because there won’t be any to protect! You may need life insurance when you’re raising a family and/or you have a substantial mortgage to pay off, but by the time you retire, the kids should be out on their own (you hope!), and the mortgage should be paid down.

In the meantime, term insurance saves you a tremendous amount of money. For most people, it takes 20 to 30 years for the premium they’re paying on a term insurance policy to finally catch up to (equal) the premium they’ve been paying all along on a comparable amount of cash value life insurance.

“You can borrow against the cash value at a low rate of interest.”

Such a deal! It’s your money in the policy, remember? If you deposited money in a savings or money market account, how would you like to pay for the privilege of borrowing your own money back? Borrowing on your cash value policy is potentially dangerous: You increase the chances of the policy exploding on you — leaving you with nothing to show for your premiums.

“Your cash value grows tax-deferred.”

Ah, a glimmer of truth at last. The cash value portion of your policy grows without taxation until you withdraw it, but if you want tax deferral of your investment balances, you should first take advantage of your RRSP. An RRSP gives you an immediate tax deduction for your current contributions in addition to growth without taxation until withdrawal. The money you pay into a cash value life policy gives you no upfront tax deductions. (See Chapter 7 for details on retirement plans.)

Life insurance tends to be a mediocre investment. The insurance company quotes you an interest rate for the first year only; after that, most companies pay you what they want. If you don’t like the future interest rates, you can be penalized for quitting the policy. Would you ever invest your money in a bank account that quoted an interest rate for the first year only and then penalized you for moving your money within the next seven to ten years?

“Cash value policies are forced savings.”

Many agents argue that a cash value plan is better than nothing — at least it’s forcing you to save. This line of thinking is silly, because so many people drop cash value life insurance policies after just a few years of paying into them because of their high cost.

You can accomplish “forced savings” without using life insurance. You can arrange to have money automatically transferred from your chequing account into your RRSP, for example. Your employer may also offer the option of having contributions to an RRSP or company pension plan come from your paycheque — and it doesn’t take a commission! You can also set up monthly electronic transfers from your bank chequing account to automatically invest in mutual funds (see Chapters 7 and 9).

Making your decision

Insurance salespeople aggressively push cash value policies because of the high commissions that insurance companies pay them. Commissions on cash value life insurance range from 50 to 100 percent of your first year’s premium. An insurance salesperson, therefore, can make four to ten times more money (yes, you read that right) selling you a cash value policy than he can selling you term insurance.

Ultimately, when you purchase cash value life insurance, you pay the high commissions that are built into these policies. As you can see in the policy’s cash value table, you don’t get back any of the money that you dump into the policy if you quit the policy in the first two to three years. The insurance company can’t afford to give you any of your money back in those first few years because so much of it has been paid to the selling agent as commission. That’s why these policies explicitly penalize you for withdrawing your cash balance within the first seven to ten years.

Because of the high cost of cash value policies relative to the cost of term, you’re more likely to buy less life insurance coverage than you need — that’s the sad part of the insurance industry’s pushing of this stuff. The vast majority of life insurance buyers need more protection than they can afford to buy with cash value coverage.

Cash value life insurance is the most oversold insurance and financial product in the history of the financial services industry. Cash value life insurance makes sense for a small percentage of people, such as small-business owners who own a business worth more than several million dollars and don’t want their heirs to be forced to sell their business to pay estate taxes in the event of their death. (See “Considering the purchase of cash value life insurance,” later in this chapter.)

Purchase low-cost term insurance and do your investing separately. Life insurance is rarely a permanent need; over time, you can reduce the amount of term insurance you carry as your financial obligations lessen and you accumulate more assets.
March 22, 2018
Retirement Disaster Looms For Universal Life Policyholders

This article was obtained from Forbes
Link to Original Article: http://www.forbes.com/sites/investor/2012/09/13/retirementdisasterloomsforuniversallifepolicyholders/#2715e4857a0b79054b4e222f
Click Here to Download Original Article in PDF

The insurance industry has a dirty little secret that threatens the retirement plans of millions of

unsuspecting families.

The problem is buried in the fine print of universal life policies, widely promoted since the 1980s as a new and improved version of the oldfashioned whole life insurance product our grandparents relied on as the surest way to save for retirement.

Based on my experience as a financial advisor, most people have no idea about what they’ve already lost and will discover in time that there was no “sure” in their insurance. Instead, the insurance companies shifted their risk on to to their policyholders.

The new and improved universal whole life policies were designed to take advantage of high interest rates and growth in stock prices to reduce premiums and boost cash values—the term for the builtin savings component of a life policy.

That was the same argument the financial industry used to kill off the definedbenefit pension plans our grandparents relied on in order to sell a new generation of savers on the idea that 401Ks had the potential for higher returns. Those higher returns might have come true had the assumptions panned out, but instead they failed in the biggest possible way.

Universal policies became attractive because they offered a higher rate of return (the dividend) on the savings component than one could get from oldfashioned whole life. The tradeoff was that, unlike oldfashioned whole life, the effective premiums for the universal policy death benefit rise as the policyholder ages.

The insurance companies set a minimum premium payment based on a policyholder’s age at the time, and then used prevailing returns on stocks and bonds to argue that there would be enough profit on investments to cover both the rising premiums and the guaranteed dividend on the cash value.

In theory, the stock market would pay the added premium costs and the dividends. Millions bought universal life policies on the basis of those projections.

But most skipped the fine print, signed the papers, and squirreled them away in their safe deposit boxes where

they’ve been for decades. Hidden in those policies was this potential time bomb: if the projected investment returns fail to materialize, the insurance company can make up the difference by reducing the cash value —taking money out of your cash value savings account—right down to zero, if necessary. And when that’s exhausted, they can require the policyholder to make up the difference in the death benefit premiums, or risk the policy expiring worthless.

Unlike the 1980s and 1990s when many universal policies were sold, today’s interest rates languish at historic lows. In the past 12 years the stock markets have suffered two historic collapses. For those reaching retirement age now—coupled with the housing bust and a crippled economy —this is a recipe for failure, and it’s starting to hit home.

Universal life policyholders who faithfully paid all the minimum premium payments all those years are discovering that the cash values that were to be their retirement nest eggs are nearly exhausted, and many are having to cough up huge payments just to keep the death benefit from lapsing.

For example, people who bought universal life policies when they were in their early thirties, with a $100,000 death benefit, might have faithfully

paid minimum premiums of about $3,500 year in and year out thinking all was well and they were building their nest eggs. When they were younger and cheaper to insure, they were–those premiums went into the cash value buckets and earned untaxed dividends.

But as they got older, the “real” premium—the cost of insuring themrose. A person in his or her late 50s might have a policy whose cost of insurance—the real premiums—have doubled. Five years further on, the real premium could jump to tens of thousands of dollars.

Most policyholders don’t realize they have a problem, until one day they need the cash value or discover that they will be left without even the life insurance.

How we got here is depressingly familiar in an age of financial misengineering. Up until the advent of universal whole life, the predominant form of life insurance for the middle class was participating—or mutualwhole life, where policyholders are treated as mutual owners of a nonpublic insurance company.

In such a policy, premium payments never change and accumulate like cash in a bank account earning modest dividends—guaranteed by the company—that are not taxed. Policyholders can borrow the money they paid in anytime for any purpose, no questions asked, which in turn reduces the death benefit to compensate. Policyholders can repay the loans later and the death benefits go back up again. In effect, policyholders are borrowing from and repaying themselves just as they do with any bank or investment account.

Universal life is a modern invention that takes the “sure” out of insurance by tying the benefits to the performance of stock and bond markets. In contrast, mutual whole life has ancient roots, enduring the millennia because it’s a simple and safe way to grow a nest egg while providing for one’s heirs. The practice of pooling resources this way dates as early as Roman times when people formed burial clubs to pay funeral and living expenses for member families. The earliest mutual life insurance companies in the U.S. date to the 1700s, formed by church groups to benefit their congregants in time of need.

By the mid-twentieth century, the

mutual insurance industry had become the Rock of Gibraltar in the financial lives of millions of Americans. Mutual insurance companies invested their members’ premiums so conservatively that the industry survived the Great Depression intact. Those oldfashioned values have persisted and that’s why most mutual insurance companies came through the recent Great Recession with their bluechip ratings unsullied while publiclyowned stock companies had to be bailed out to avoid bankruptcy.

I know all this because I am a reformed universal life believer. In the 1980s I became successful by helping clients replace their old reliable mutual whole life policies with the new and improved universals. By the 1990s, when some of my clients began to reach retirement age, the hidden flaws showed up when the projections fell below their targets.

I felt betrayed by the companies that had persuaded me that universal life was a better policy because stock markets historically averaged a better return. I wondered what I’d done wrong, so I went back and studied the fine print, discovering that these policies were written to shift risk from the company to the policyholder. Universal life policies allow companies to raise premiums or siphon off cash

values if they can’t make enough from investments to meet their costs and still earn a profit.

That uncertainty is exactly the opposite of what whole life is supposed to accomplish—a savings nest egg that will be there no matter what happens.

Universal life policyholders who want to learn where they stand can request from their insurance companies two inforce ledger illustrations: one showing the state of the benefits at the current premium; the other showing the cost to keep a policy in force to age 100.

There are some alternatives and options for universal life policyholders, depending on how insurable they still are and other circumstances. In some cases, it’s possible to keep a policy in force at the current premium by reducing the death benefit.

For those interested in buying the right kinds of life insurance for their situations, start by determining whether a product being offered is from a mutual life insurance company that will be owned by you, or by a stockholderowned company that is obligated above all to earn a profit for somebody else. Knowing the difference could determine the quality of your retirement.

September 13, 2012