Using life insurance can be a tax-effective way to save for retirement – and receive tax-free income in retirement. Here’s how it works:
- You make a series of deposits into a universal life insurance policy, allocating the minimum required amount of your deposit to the insurance premiums and the rest to your investments.
- Earnings from your investments grow tax free, just like they do in an RRSP.
- At retirement, you borrow against the policy’s cash value, receiving tax-free payments to supplement your retirement income.
- Upon your death, the life insurance proceeds are used to repay any outstanding loans. Any remaining value goes to your named beneficiaries.
If you contribute the maximum to an RRSP each year, and TFSA each year, consider using life insurance to help you save additional tax-deferred amounts for your retirement.
2 key points
- Maximize your RRSP and TFSA contributions first
- Use a universal life insurance policy to increase your tax-deferred savings
