Get life insurance protection without tying up your cash flow.
As a business owner, you need cash on hand. Do you also want tax-effective ways to grow your retained earnings and transfer wealth to the next generation? Adding an Immediate Financing Arrangement (IFA) to your permanent life insurance with a cash value helps with all these goals.
The IFA strategy
You get permanent life insurance optimized to have a high early cash value. Lenders typically require whole life insurance because the structure is less volatile than universal life. You typically pay large premiums using a guaranteed 10-pay structure to:
- Grow your cash value quickly
- Eliminate the need for any additional premiums in the future
Shortly after paying each premium, you take a loan with your insurance policy as collateral.
This collateral loan is structured as a line of credit, which gives you flexibility.
You use the loan proceeds as you wish. The ideal way is to invest.
Your maximum loan can be:
- 100% of your cash value: the lender generally does not require additional collateral
- 100% of your premiums paid: the lender generally requires additional collateral to cover the gap between the cash value and the amount borrowed. Why the gap? The cost of the insurance and the surrender penalty for cancelling coverage in the early years.
How much you borrow and when you borrow is your choice. The primary consideration is how much risk you’re willing to take on. Leveraging less of the Cash Surrender Value (CSV) is less risky. Taking a loan for 100% of the premiums is the riskiest.
Lenders have cash-value-to-loan ratio limits, which determine when additional collateral is required. If performance is lower than expected, lenders may require collateral to be assigned when borrowing 100% of the CSV.
Who benefits from an Immediate Financing Arrangement?
An IFA is ideal when you meet all the following criteria:
- You need or want life insurance.
- Your private corporation has enough retained earnings or ongoing income to make large deposits into the insurance policy to create a large cash value to borrow against (often a minimum commitment of $50,000 a year for 10 years).
- You are comfortable with loans.
- You would use the loan to generate business income or taxable investment income.
How does an IFA strategy benefit you?
An Immediate Financing Arrangement provides a range of benefits:
- If you use the loan proceeds to generate business income or investment income, you may:
- Get tax deductions on your loan interest.
- Get tax deductions on a portion of your premiums (the Net Cost of Pure Insurance (NCPI)).
- Since your cash value grows each year with whole life insurance, you can borrow more in the future and increase your deductions.
- You can get life insurance coverage without a significant impact on your cash flow. The money you put in can be accessed immediately by taking a loan from an external lender.
- The growth inside your insurance policy is tax-sheltered. If you decide that you don’t want to leverage your policy now or ever, you still get the tax advantages of investing inside cash value life insurance.
- After you repay the loan, your cash value becomes unencumbered. You can now use the cash value as collateral for tax-free loans to supplement your retirement income later in life (a Corporate Insured Retirement Plan).
- Eventually, the tax-free death benefit creates a credit to your corporation’s Capital Dividend Account. This allows capital dividends to be declared. These capital dividends can be taken out of your corporation tax-free.
How do you get an IFA?
The first step in getting life insurance is to qualify. That starts with a purpose such as one or a combination of:
- Funding a buy/sell agreement
- Providing cash to cover estate taxes
- Maintaining your family’s lifestyle after you’re gone
- Paying off loan obligations on death.
We show you Insurance Options with and without an Immediate Financing Arrangement. If you have health concerns, we find out about your insurability without identifying you.
Once you are satisfied, you apply for insurance. We guide you through the process.
Once you’re approved and make your first planned deposit, you apply for an IFA loan with a financial institution experienced with life insurance leveraging. This process requires financial statements from you and your private corporation, as well as a brief biography and loan and mortgage statements.
After you are approved for an IFA, you get a line of credit to use as you wish. The maximum depends on the structure you selected and may require additional collateral in the early years. You pay the interest on the loan on an ongoing basis (generally monthly) — unlike a Corporate Insured Retirement Plan, your loan interest cannot be added to the loan balance (“capitalized”). If you use the loan to generate business or investment income, you can claim an interest deduction the following year.
The lender usually conducts an annual review where they request an inforce illustration (which we handle for you) and potentially other documents. They also charge a small fee — usually a few hundred dollars.
What are some of the risks of an IFA?
Since an IFA brings rewards, an IFA is vulnerable to risks which may require that you collapse or alter the strategy, including:
- Changes to the creditworthiness of you or your business.
- Changes in the lender’s practices regarding IFAs or other loans.
- Changes in the floating loan rate. Increases may require you to provide additional collateral or repay a portion of the loan.
- Changes in income corporately or personally (including the risk of a sudden illness or disability).
- The lender requires annual proof of sufficient income to justify the loan. As the loan grows, so does this requirement. Capping the loan can mitigate this risk.
- Changes to the tax rules regarding IFAs or other forms of loans.
- Earning lower investment growth inside your life insurance policy than anticipated.
Find out more
You have much to consider before adding an Immediate Financial Arrangement to your life insurance. We are here to help you understand the pros and the cons. That way, you can decide whether an IFA is right for you.