To help some clients generate supplemental retirement income, an Insured Retirement Program (IRP) can be a great strategy. If a client owns permanent life insurance, their policy has a cash surrender value. Basically, that value can be used as collateral for an IRP line of credit.
In the previous instalment of this series, we introduced the advantages of an IRP for clients seeking a new income stream in retirement. Now, let’s address 10 commonly asked questions that advisors have about this option.
- Does a client have to be a retiree to open an IRP? No. They just need to be age 50 or older to apply.
- From a tax standpoint, how does an IRP differ from other retirement fund sources? Other forms of retirement income could be subject to income taxes. Because no withdrawal is being made from the insurance policy itself, cash accessed via an IRP is tax-free.*
- How does an IRP compare to a reverse mortgage? It’s similar in the sense that the client is getting access to built-up equity in the insurance policy. They can use the line of credit funds as a source of retirement income as they would with a reverse mortgage.
- How is line of credit interest treated? It’s charged monthly and capitalized, i.e., added back to the loan (provided the loan remains in good standing).
- Is it true that a client doesn’t have to make any payments? That’s up to them. Interest can be paid monthly, and repayment is open with no penalties. But don’t think of an IRP line of credit as a typical loan that you have to pay back. Provided the loan remains in good standing, no payments are due on the loan until the policy is surrendered or the death benefit is paid.
- Is there a downside to not having to make any payments? Only if the loan grows to a point where it exceeds the percentage allowed. In that case, the bank may require additional collateral or a principal paydown. Learn how to set up a Manulife Bank IRP.
- How much can a client withdraw? There’s no dollar amount maximum with an IRP. At Manulife Bank, we can lend up to 75% of the net cash surrender value under the basic program, or 90% under the custom program. Clients can keep drawing from the IRP line of credit as long as they stay within the margin.
- Do contributions to a permanent life insurance policy grow tax-free? Generally, yes.*
- Will setting up an IRP affect a client’s death benefit over time? No. The IRP is a line of credit secured by the life insurance policy. As long as the client keeps the policy in force, there is no impact on the death benefit.
- What is the application process for an IRP line of credit? It’s straightforward. A client just has to own a permanent life insurance policy and be willing to pledge that policy for an IRP loan. You’ll work with your client to complete an IRP application along with the applicable assignment form and send it all to Manulife Bank for adjudication.
For many of your clients, an IRP can be highly beneficial for financial planning. It’s yet another strategy from Manulife Bank that you can offer – one that helps create a tax-free source of cash flow in retirement.
* Clients should consult their own tax advisors with respect to their specific situation.