Buyer Beware: Insured Retirement Plan
One surprising aspect of our business is how much time and energy we spend advocating against certain unhelpful financial ideas. For example, we have been cautioning against a strategy called Insured Retirement Plan for years. So it was gratifying to read in THIS ARTICLE that FSRA (a Canadian finance regulator) is taking enforcement action against some deceptions and abuses around this strategy.
We’ve dealt with IRP again and again, so we thought we’d share an explanation with our clients as a help and a warning.
Insured Retirement Plan is a retirement strategy whereby:
The client buys a permanent insurance policy, and pays extra cash monthly into the policy, which is invested tax-free
At retirement, the client assigns the policy as collateral to a lender, and takes a series of tax-free loans as retirement income
At death, the life insurance policy (including the accumulated funds) pays off the loans, and any remaining funds are paid out to named beneficiaries (usually the surviving family members)
This can be a good strategy, for the right client. Generally, that client is someone wealthy, who has already maxed out all of their RRSP and TFSA room and is looking for an additional venue for tax-free investing and (later) tax-free retirement income.
The problem is that many IRP policies are sold…
…to the wrong clients. “If your only tool is a hammer, everything looks like a nail.” Some agencies train agents to ONLY sell IRP, even when it isn’t suitable. Most clients would be better off using their RRSP, but often the agent recommends IRP because it’s all they sell. Also, some clients have only a minimal insurance need, but the agent bundles excessive insurance coverage into the IRP policy to inflate their commission.
…with misleading presentations. Permanent insurance is sold using a document that projects the policy’s accumulated values over time. Agents selling IRP often use an inflated, unrealistic rate of return for these projections. Other times, they obscure the fact that it’s an insurance product at all, and just frame it as an investment plan. Why mislead in these ways? They have to, to make the product sound like a good idea.
…as a side-hustle. Some insurance agencies recruit an agent with a promise of self-employed wealth, train them just to sell IRP, and have them sell in their spare time to everyone they know. The agents sell based on relationship, not based on competency (since it’s not their main profession). So once they run out of friends and family to sell to, they generally stop making money and quit the business. All their clients are now left with complicated financial plan, involving collateral assignments, death claims, etc., and no advisor to guide them in its execution. Both the agent and the clients have been exploited.
So what are our recommendations?
If someone approaches you to buy IRP, use caution. Unless you’re very wealthy, with maxed-out RRSP and TFSA, it’s probably not suitable. It is ok to say “no” to the agent, even if they are a loved one. Or, feel free to ask for the policy illustration and say, “I need to talk to Richard and David first.” We’ll review and explain it at no charge.
If you already have an IRP plan, know that you have the right to cancel it. Any cash accumulated in the policy will be paid out to you, and if the policy is a few years old, the agent will likely keep their commission. Or, you can keep the policy for insurance purposes, but forego the investment portion. You’ll withdraw the accumulated cash and reduce your monthly payment to just cover the insurance premium. The cash that you free up can be redirected to your RRSP, where it will get you a tax deduction and grow your retirement savings. If you’re not sure what to do, again, we’re happy to review your policy and explain it at no charge, and then you can make an informed decision.
As we said, we’re glad to see FSRA moving to curb these deceptive practices. We hope that such action will continue and will lead to a more equitable marketplace for consumers. In the meantime, please be careful as you make financial decisions, and remember that we’re always just a phone call away.
