Mastering IFAs for Physicians (Part 3 of 5): Policy Structure & The Loan Explained – A Taxevity Companion to beyond MD Ep. 91

In the Beyond MD podcast, Dr. Yatin Chadha covers a range of financial topics to enhance real-world financial literacy. As featured guests in Episode 91 (Apple | Spotify | YouTube), we explored Immediate Financing Arrangements (IFAs) – a powerful insurance leveraging strategy helping physicians accelerate wealth building. This 5-part blog series expands on our discussion, providing deeper insights into how IFAs can support your goals for protection, growth, and impact.

Policy Structure & The Loan Explained: The Mechanics of an IFA for Physicians

In Part 1, we defined an Immediate Financing Arrangement (IFA), and in Part 2, we discussed which physicians might be best suited for this strategy. Now, let’s explore the practical mechanics: how a whole life insurance policy is structured for an IFA and the details of the loan process.

Understanding these components is crucial for physicians considering this advanced financial strategy.

Optimizing Your Whole Life Policy for an IFA

As established, whole life insurance is the typical foundation for an IFA. To maximize its effectiveness for leveraging, the policy needs to be structured appropriately. When projecting policy performance, particularly how non-guaranteed elements like dividends might behave, we use conservative assumptions at Taxevity to provide a realistic financial outlook.

Key structural elements of whole life for an IFA include:

• High Early Cash Values: This is a core feature. Some policies are designed so that a significant portion of your premium payments contributes to the cash surrender value (CSV) in the early years of the policy. A higher CSV means more collateral is available sooner to secure the IFA loan.
• Payment Options: Two common approaches for funding the policy in an IFA strategy are:
  • Life Pay with Additional Deposit Options (ADO):
    • This structure involves base premiums that are technically due for the life of the policy. However, the IFA strategy typically uses ADOs to significantly overfund the policy in the initial years (e.g., the first 10 years).
    • The primary goal of this overfunding is to build sufficient cash value so that the policy’s non-guaranteed dividends can, even under conservative projections, can likely cover all future base premiums. This effectively makes the policy self-sustaining from a cash flow perspective after the initial funding period.
    • A key reason for choosing a life-pay structure is that certain potential tax deductions related to the IFA loan (specifically a portion of the premium based on the Net Cost of Pure Insurance or NCPI, which we’ll cover in Part 4) require a premium to be payable in the year the deduction is claimed.
  • Guaranteed Limited Pay (e.g., 10-Pay or 20-Pay):
    • Another option is a policy with a contractually guaranteed limited payment period (e.g., 10 or 20 years) can be used. With this design, once the specified premiums are paid, the policy is fully paid-up, and no further premiums are ever required to keep the base coverage in force.
    • This approach offers maximum certainty regarding future premium obligations. However, it means that the potential to deduct a portion of the premium (the NCPI component) as part of the IFA strategy ends once the premiums are no longer payable.

Tailoring the policy design to your specific cash flow, investment timeline, and overall financial goals is one of our key roles at Taxevity.

The IFA Loan Process: From Collateral to Capital

Once the appropriately structured whole life policy is in place, the loan process begins:

• Cash Surrender Value (CSV) as Collateral: The CSV of your life insurance policy is assigned to a third-party lender (typically a bank or specialized financial institution) as security for the loan.
• Loan Amounts:
  • Lenders will typically lend up to 100% of the CSV without requiring additional collateral.
  • If you wish to borrow an amount equal to 100% of your premium payment (which might be more than the CSV in the early years), the lender might require additional collateral for the difference, often for a short period of 4 to 6 years until the CSV catches up.
• Types of Lenders:
  • Major Banks: Canada’s large banks (e.g., BMO, Scotia) are active in CSV lending, often for larger loan amounts.
  • Specialized Lenders: Other institutions like Manulife Bank, EQ Bank, and DUCA credit union also offer IFA loans, sometimes with more flexible terms or for smaller loan amounts.
  • When exploring options, start with your current bank and also consider specialized lenders who have deep expertise in this niche.
• Loan Interest: The interest rate on an IFA loan is typically tied to the prime lending rate (e.g., prime + 1%). The rate varies based on the lender, the loan amount, and the borrower’s overall financial profile.

Corporate vs. Personal Loans for Physicians: Key Implications

For incorporated physicians, a common question is whether the IFA loan should be taken by the Medical Professional Corporation (MPC) or personally:

• Loan to Corporation (MPC owns policy & takes loan):
  • This is often the cleanest structure if the funds are being reinvested into the practice or other corporate investments.
  • The loan interest may be deductible to the corporation if the borrowed funds are used to earn taxable income.
• Loan to Shareholder (MPC owns policy, physician takes loan personally):
  • This might occur if the physician wants to use the funds for personal investments.
  • Guarantee Fee: If the corporation provides its policy as collateral for a personal loan to the physician/shareholder, a “guarantee fee” may need to be paid from the physician back to the corporation. This is to avoid a taxable shareholder benefit from personal use of a corporate asset. For example, if the loan rate is loaner for the corporation than for the physician personally. The appropriate rate for this fee is a matter for discussion with your accountant, as there’s no specific CRA-stipulated rate; it often ranges from 0.5% to 2%.

The optimal structure depends on where the funds will be invested and your overall tax planning, making collaboration with your accountant essential.

IFA Loans vs. Direct Policy Loans: A Crucial Distinction

It’s important to distinguish an IFA loan (from a third-party lender) from a direct policy loan (taken from the insurance company against your policy’s cash value):

• IFA Loans (Third-Party Lender):
  • The loan does not directly reduce your policy’s cash value or death benefit (though the loan is typically repaid from the death benefit eventually).
  • The policy continues to earn dividends/growth on its full cash value, unimpeded by the loan.
  • Loan interest may be tax-deductible if used for investment purposes (covered in Part 4).
• Direct Policy Loans (from Insurer):
  • These do reduce the cash value available within the policy, and any outstanding loan at death reduces the death benefit payout.
  • Policy loans are generally tax-free up to the policy’s Adjusted Cost Basis (ACB). Amounts borrowed above the ACB can be taxable. The ACB calculation is complex and changes over time.
  • For these reasons, direct policy loans may be useful for short-term liquidity needs but not for long-term leveraging strategies like IFAs

Understanding these mechanics is key to appreciating how an IFA can be strategically implemented. In Part 4, we’ll explore the tax efficiency aspects of IFAs for physicians.

Stay tuned for Part 4: Tax Efficiency Strategies for Your Practice

Here’s the full series on Mastering IFAs for Physicians:

Part 1: Leveraging Life Insurance for Investment

Part 2: Is This Strategy Right for Your Practice & Personal Wealth?

Part 3: Policy Structure & The Loan Explained (this post)

Part 4: Is This Strategy Right for Your Practice & Personal Wealth?

Part 5: Policy Structure & The Loan Explained

Deepen Your Understanding & Explore Your Options

We encourage you to get more insights by hearing our full discussion on IFAs on Beyond MD with Dr. Yatin Chadha (Episode 91). You can listen on your preferred platform: Apple | Spotify | YouTube.

Discover how Taxevity structures policies for strategic advantage for physicians. Contact us for a personalized consultation.

Promod Sharma (FSA, FCIA) and Jeevan Sharma (CFP) YOUR FAMILY TEAM

At Taxevity Insurance, we’re passionate about bringing clarity to complex financial decisions. Let us empower you with personalized strategies to achieve your goals. We focus on life and health insurance solutions to protect your business, your family, and your legacy.