If someone told you that one of the most effective ways to fund your retirement would be to buy a life insurance policy and pay into it as much premium as you can possibly afford, you would probably dismiss that person as an insurance agent with an overactive imagination. However, universal life insurance offers you exactly this and more.

 Universal life insurance is basically a modified whole life policy. The key differences are that universal life policies allow the life insurance premiums (actual cost of the insurance plus administration expenses) to be un-bundled from the savings components.

 Furthermore, the additional premiums can be invested in a series of investment choices, ranging from basic term deposits to more sophisticated instruments such as indexed investment accounts or a combination thereof. Therefore, part of your premiums pay for life insurance coverage, and part are invested for a rainy day or, in this case, your retirement days.

 It is the growth of the investment component that can bear real fruit down the road. You have the choice to invest up to the maximum premiums allowed (governed by your age, the size of the face amount of the insurance coverage and the individual life insurance company’s actuarial figures.) And the growth of this accumulation fund will be done on a tax deferred basis.

 Upon your death, your policy beneficiaries receive both the face amount of your life insurance coverage plus the accumulation fund.

 This accumulation fund can also be used to provide an income during your retirement years. By working with an “insurance-friendly” financial institution, the accumulation fund can be pledged as collateral to provide you with either a lump sum loan or a series of annual loans.

 Up to 75% of the accumulated policy value can usually be lent out by the financial institution. These loans act as a stream of non-taxable income as you are not actually withdrawing funds from the insurance policy, you are simply borrowing from the bank. 

 The “friendly” institution will capitalize the loan, meaning that repayment of the loan plus interest is required only upon your death, with the balance of the accumulation fund and original death benefit still going to your original beneficiaries-all on a tax-free basis.

 If you don’t like the idea of borrowing from the bank, then income can also be drawn directly from the cash surrender value of the life insurance policy. Some of this income may be deemed to be taxable depending on the policy’s adjusted cost basis.

 Ideal candidates for using universal life as a means to provide supplemental funds for their retirement include those who have maximized their RRSP and pension contributions, paid down their mortgage, are in their peak earning years (and therefore can afford to salt away meaningful additional premiums), have at least 10 to 15 years left until retirement, are insurable and have insurance requirements (such as estate concerns, unrealized capital gains, second families and untaxed RRSP or RRIFs). It should be remembered that this concept is foremost an insurance policy with the related insurance expenses and is therefore not a pure savings vehicle.

 The risks involved with using this concept to provide you with tax-free retirement income naturally revolve around possible future changes to the Income Tax Act. Currently, receiving an income stream in this manner is not considered taxable. Income.

 If in the future the government were to decide this particular income stream were to be taxable, it does not detract from some of the most beneficial provisions of a universal life policy.

 Those are: tax-deferred growth; 100% foreign investment exposure; and potentially larger deposits than current RRSP maximums.

 With these benefits in mind, if you do fit the ideal client profile, universal life deserves a serious look by both you and your accountant.