Mastering IFAs for Physicians (Part 5 of 5): Navigating Risks & Ensuring Long-Term Success – 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.

Navigating Risks & Ensuring Long-Term Success with Your IFA

Throughout this series, we’ve explored the definition, suitability, mechanics, and tax efficiencies of Immediate Financing Arrangements (IFAs) for physicians. In this final installment, we address a critical component: understanding and navigating the potential risks to ensure the long-term success of your IFA strategy.

While IFAs offer significant advantages, like any sophisticated financial strategy, they are not without risks. A proactive approach to risk management is key.

Potential Risks for Physicians to Consider

• Interest Rate Fluctuations:
  • IFA loans are typically tied to the prime lending rate. If prime rates rise significantly, your loan interest payments will increase, impacting your cash flow and the overall profitability of the strategy.
  • Mitigation: Stress-test the strategy using higher potential interest rates. Ensure your cash flow can absorb such increases. Some physicians may also consider strategies to pay down the loan principal over time if rates become a concern, though this reduces the benefits of the IFA.
• Investment Performance:
  • The funds borrowed via the IFA are invested externally. If these investments underperform or incur losses, it can lessen the benefits of the leverage. You are still responsible for the loan interest and principal, regardless of how your external investments fare.
  • Mitigation: Invest prudently and according to your risk tolerance. Diversification is key. Don’t take on more investment risk than you are comfortable with simply because you are using leveraged funds. An independent wealth advisor can help with the mechanics and emotions of investing.
• Policy Dividend Changes:
  • The performance of your whole life insurance, particularly the non-guaranteed policy dividends, plays a role in its long-term cash value growth and, if using a life-pay structure, its ability to become self-funding. If dividends are lower than initially projected over the long term, the policy’s performance might differ from illustrations.
  • Mitigation: Reputable insurers manage their participating accounts conservatively. As mentioned in Part 3, at Taxevity, we illustrate policies using conservative assumptions (e.g., current dividend scale minus 1%) to provide a more safer projection. Regular policy reviews can help monitor performance.
• Changes in Tax Legislation:
  • Tax laws can change. While current IFA strategies are based on existing legislation, future changes could potentially impact aspects like interest deductibility or the taxation of life insurance.
  • Mitigation: This risk is inherent in all long-term financial planning. Staying current on legislative changes is important, which your advisors can do on your behalf.
• Cash Flow Strain:
  • If income decreases unexpectedly (e.g., due to changes in medical practice, disability) meeting premium payments (in the early years) and loan interest payments could become challenging.
  • Mitigation: Ensure a robust emergency fund and adequate disability and critical illness insurance. Structure the IFA based on stable, predictable cash flow.

Why Current IFA Strategies Are Generally Robust

Despite these risks, current IFA strategies, when implemented correctly, are generally considered robust for several reasons:

• Separation of Insurer and Lender: Unlike the earlier “10-8 leveraging” mentioned in the podcast, modern IFAs involve a third-party lender (a bank or credit union) that is independent of the insurance company. This arm’s-length relationship adds a layer of market discipline and transparency.
• High-Quality Collateral: The cash surrender value of a whole life insurance policy is very secure collateral for the lender, reducing their risk and often resulting in favourable loan terms.
• Established Tax Principles: The deductibility of interest for investment loans and the tax treatment of life insurance are well-established principles in Canadian tax law.

Keys to Long-Term Success with Your IFA

Successfully managing an IFA over the long term requires diligence and a proactive approach:

• Meticulous Documentation & Record-Keeping:
  • Maintain clear records of all transactions related to the IFA: loan agreements, interest statements, investment purchases made with borrowed funds, and insurance policy statements.
  • This is crucial for supporting tax deductions and for ongoing review of the strategy.
• Annual Reviews:
  • Conduct regular reviews of your IFA strategy with your team of advisors (Taxevity, your accountant, your wealth advisor).
  • In the reviews, check:
    • The performance of your external investments.
    • The performance of your life insurance policy.
    • Current interest rates and their impact.
    • Your overall financial situation and whether the IFA still aligns with your goals.
• Ongoing Management & Collaboration:
  • An IFA is not a “set and forget” strategy. It requires ongoing oversight.
  • Taxevity plays a crucial role in managing the insurance component and liaising with the lender as needed. We work collaboratively with your accountant to ensure the tax aspects are handled correctly and with your wealth advisor who may invest the borrowed capital.
• Adaptability:
  • Be prepared to make adjustments if circumstances change significantly (e.g., a major shift in interest rates, a change in your risk tolerance or investment goals).

By understanding the risks, leveraging the inherent strengths of the strategy, and committing to diligent ongoing management with the support of experienced advisors like Taxevity, physicians can confidently navigate their IFA and work towards achieving their long-term financial objectives.

This concludes our 5-part series on Mastering IFAs for Physicians. We hope this companion guide to our discussion on Beyond MD has provided you with valuable insights into this powerful financial strategy.

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

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

Part 5: Policy Structure & The Loan Explained (this post)

Deepen Your Understanding & Explore Your Options

Catch the full expert discussion on IFAs from our interview on Beyond MD with Dr. Yatin Chadha (Episode 91). You can listen on your preferred platform: Apple | Spotify | YouTube.

Partner with Taxevity for expert guidance and long-term IFA management tailored for physicians. Contact us for a personalized consultation.