An option to consider – the Corporate Insured Retirement Program with Corporate 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 the bank as collateral for a loan. This loan may be used for things such as paying you a dividend. 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 the bank as collateral security for a bank loan, which is structured as a line of credit. To provide you with the retirement lifestyle you desire, your corporation may use the borrowed funds to pay you a dividend. If the loan is structured properly, your corporation may be able to deduct the interest on the bank loan against its taxable income.
If the strategy assumes the interest expense is fully deductible from your corporation’s taxable income, then each year your corporation pays the interest expense on the line of credit and claims the interest expense as a tax deduction from its current income. The tax savings that result from the deduction help offset the interest expense paid each year. At the end of each year, your corporation borrows an additional amount equal to the interest paid in the year less the tax savings realized from the deductions. This amount is used to invest in a business or property that produces income. The result of this process is that your corporation’s line of credit balance will increase each year.
When you die, your company receives the tax-free death benefit from the life insurance policy. 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 repay the bank loan and the excess proceeds are paid to your estate as a dividend. 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.