# Young, well-off, early retirement - IRP aka Universal Life?



## nouveau (Sep 8, 2016)

Hey all,

I'm trying to understand where IRP plans might actually make sense. There's a lot of warnings of caution against them out there, but some hints that they may be useful in some cases. I'm not sure what those cases are.

I have recently (within the last few years) had a really nice seven-figure exit from a company I worked for. I've been managing this windfall for a few years with a couple of different advisors for a couple of years. I'm 40 and at the point where I'd like to drastically simplify my life and finances and guarantee myself an income for the remainder of my life. I call it "retirement", but it basically means that I can hop in and out of work as I feel like, and can work for peanuts if the job would be fulfilling enough (everything is gravy!). 

One of my investment advisors has suggested a number of different plans that involve *very* aggressive IRPs (six-figure yearly premiums) through Canada Life. We've also discussed plans that use term-certain annuities using an up-front lump sum (in the seven figures) to fund the IRP.

I feel like there's a lot of risk around rule changes in insurance plans to base a significant chunk of my lifelong income on it, but obviously the advisor isn't worried about this at all. I'm sure there's a very nice commission involved if we do commit to this, so there's a big conflict of interest here. There's other things that are worries in the back of my mind: inflation risk, complexity I haven't fully understood, etc.

On the other hand, this sort of plan can get me to the point where I'm living an upper middle class lifestyle for the rest of my life (projected out assuming 3% inflation for 100 years). It might not be as efficient as it could be with aggressive financial planning, but it is simple enough that I can forget about it "forever". While I enjoy managing money to a certain degree, I'd probably be happy not having to think about it.

Does an IRP make sense in this case? Is there an excessive amount of risk basing my early retirement strategy on this?


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## nouveau (Sep 8, 2016)

I should correct my title that I screwed up - it's participating whole-life insurance that has been suggested to me, not universal life!


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## humble_pie (Jun 7, 2009)

nouveau said:


> I have recently (within the last few years) had a really nice seven-figure exit from a company I worked for ... I call it "retirement", but it basically means that I can hop in and out of work as I feel like, and can work for peanuts if the job would be fulfilling enough (everything is gravy!)


i'm sure there will be a lot of interesting & valuable replies to this post, but in the meantime it sounds as if, work-wise & employment-wise, you have already reached the sweetest spot of all.





> One of my investment advisors has suggested a number of different plans that involve *very* aggressive IRPs (six-figure yearly premiums) through Canada Life. We've also discussed plans that use term-certain annuities using an up-front lump sum (in the seven figures) to fund the IRP


six-figure premiums, ouch! seven-figure lump sum funding, ouchouch! aren't the seven figs just about your corporate exit amount mentioned above? are you not perhaps a little young to be permanently handing this over to a caretaker?





> I feel like there's a lot of risk around rule changes in insurance plans to base a significant chunk of my lifelong income on it, but obviously the advisor isn't worried about this at all. I'm sure there's a very nice commission involved if we do commit to this, so there's a big conflict of interest here. There's other things that are worries in the back of my mind: inflation risk, complexity I haven't fully understood, etc.


i'm so glad to see you contemplating the negatives. 


is looking after seven figures really so onerous, especially with talented advisors? it may be a curious thing, but others do not seem to be stressed by such a situation, in fact it's more common to see persons dreaming of the same .each:


recently a friend showed me her family trust account. Her parents are no longer alive, the trust to be held until the youngest of the 17 grandchildren attains the age of 35 years is their legacy to all of their five children (ie my friend has four siblings, two of whom are physically disabled & live in special homes.)

the account was in the low 8 figures. It was striking for its stark simplicity. Roughly 40% was in a diverse universe of canadian preferred stock. The remaining 60% was bluest of blue chip canadian common. All the good old stuff we know so well. Telcos. Banks. Pipelines. Railroads. Utilities. There was also a smallish holding of 3 US corporations. GE, microsoft, pfizer. Overall, there were no energy producers. No consumer non-durables. No speculative names. No bonds. No ETFs. No mutual funds.

the dividend income was heavy, but the medical deductions of the 2 disabled siblings will offset some clawed-back income. There was relatively little risk in the trust portfolio. There was room for capital growth.

i know for a fact that my friend spends no time whatsoever worrying about this portfolio, even though she is the principal trustee of the estate. Her advisors do it all.

this looks very good, i said, handing her printout back to her.


.


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## OptsyEagle (Nov 29, 2009)

I assume by IRP you might be meaning "individual retirement plan", but I am just guessing at what those 3 letters might actually stand for. You should clarify, since it seems to be the main question in your post.

If I am correct, then know that it is just a trumped up name to legitimize the sale of life insurance. From my knowledge, no IRP insurance product actually exists. That being the case, you might want to describe what the agent is actually proposing then just using the term IRP that, as I said, probably does not exist and was made up by your investment firm or agent to to distract you into thinking you are making an investment and not actually buying a boat load of unnecessary life insurance.

In my years of experience, I have found that life insurance is probably the best product in the world if you are worried about dying and very close to the worst product if your concern is living a long time (investment and retirement). The insurance industry has come up with some pretty slick strategies, utilizing some of the tax advantages that are unique in life insurance products, to sell them as a good investment strategy. Since 90% of the tax advantages, in life insurance, only materialize when the insured dies, they sometimes use 3rd party bank loans to pay out retirement income, while the insured lives and then plan to pay off these loans when the insured dies. That is about as dumb of idea as I have come across in my many, many years on this planet. For a wealthy guy like yourself, would you really want to rely on the good nature of your neighbourhood bank to support your lavish lifestyle in retirement. Those bank loan numbers, always look pretty high and scary in these projections at the end of your life and god forbid you ever get a banker who suffers from "nervousness to high outstanding loans syndrome", and decides to cap or call those loans, while you are alive. You will have only two choices in an event like that...bankruptcy or suicide. The latter probably being your best option. You can see why I am not really fond of that type of investment plan.

Anyway, I cannot really help you because from what you have posted I really do not know what the proposal is that you are contemplating.


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## StayThirstyMyFriends (Jul 29, 2016)

OptsyEagle said:


> <snip>
> 
> The insurance industry has come up with some pretty slick strategies, utilizing some of the tax advantages that are unique in life insurance products, to sell them as a good investment strategy. Since 90% of the tax advantages, in life insurance, only materialize when the insured dies, they sometimes use 3rd party bank loans to pay out retirement income, while the insured lives and then plan to pay off these loans when the insured dies.
> 
> <snip>


This idea was pitched to a group of people including me back around 2004. Most of us didn't do it. It came up recently as a segue in a conversation with my accountant, and he commented that some rules had changed and it wasn't as good a deal as it used to be. I'm not an expert on this, but I would agree with you to be skeptical. Rules can change... these are complicated schemes based on making the most of complicated rules. Wouldn't it nice to do something that you actually completely understand? You know, K.I.S.S.? And as Optsy says, it seems scary to hook up to an investment plan that the only way you can get out of is to die... that's hard core!

I recently read Bernstein's "4 Pillars of Investing" and in part 4 he talks about "whales"... 

_"Wealthy investors should realize that they are the cash cows of the investment industry and that most of the exclusive investment vehicles available to them—separate accounts, hedge funds, limited partner-ships, and the like—are designed to bleed them with commissions, transactional costs, and other fees. “Whales” are eagerly courted with impressive descriptions of sophisticated research, trading, and tax strategies."_

While this life-insurance scheme isn't exactly what Bernstein is talking about, it smacks of the same flavour, doesn't it? 

Anyway, getting *professional and impartial* 3rd party advice is what I'd be looking for before going forward with this...


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## Nerd Investor (Nov 3, 2015)

For those wondering (saw the question above) IRP stands for "Insured Retirement Plan". The idea is, rather than investing in a non-registered account that generates taxable income throughout your retirement, you overfund a permanent insurance policy for a number of years. This guarantees a death benefit, but also build up a an investment account that grows within the policy tax free. You then gradually borrow against this investment account to supplement your retirement. Loan proceeds are of course tax free and when you eventually pass away, the value within the policy is paid out tax free to your estate which can then repay the loan. 

It's a slick strategy in theory, and sometimes in practice, but it's important to understand that at the end of the day your are increasing your debt load to fund your retirement. Illustrations often make these look foolproof, but changes in interest rates and/or under-performance of the investment within the policy can throw a pretty big wrench in these plans. 

Having said all that, do you have any children or anyone you ultimately plan to leave an estate to? Because if you have "redundant money" you plan to leave to someone, permanent insurance is a great, tax efficient way to do that. You don't necessarily have to go to the extreme that the IRP describes.


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## nouveau (Sep 8, 2016)

I've been picking a lot of people's brains on this. Insurance is so complicated that it's tough to get a straight answer out of anyone. 



humble_pie said:


> i'm sure there will be a lot of interesting & valuable replies to this post, but in the meantime it sounds as if, work-wise & employment-wise, you have already reached the sweetest spot of all.
> 
> six-figure premiums, ouch! seven-figure lump sum funding, ouchouch! aren't the seven figs just about your corporate exit amount mentioned above? are you not perhaps a little young to be permanently handing this over to a caretaker?


Yep. And this is the conclusion I've reached over the last few weeks. I see this as being a "pillar" of my investments rather than effectively handing over control to a third party. 

One thing I've come to understand: it wouldn't be 100% permanent hand-off. After 20 years the "surrender value" *does* allow you to take some gains, but the taxes around transferring or surrendering policies make this pretty complicated. If you do try to get value out of it by transferring or surrendering it, you are taxed on the gains as INCOME. Not only that, the gain is calculated using the policy's adjusted cost base which is going to be lower than the amount of money you shoveled into the plan based on a complicated formula involving mortality statistics (you are buying insurance after all!).



humble_pie said:


> is looking after seven figures really so onerous, especially with talented advisors? it may be a curious thing, but others do not seem to be stressed by such a situation, in fact it's more common to see persons dreaming of the same .each:


I know, I feel kind of lame about it but it is actually really stressful. I've got a nest egg that I look at as being a one-time gift of luck in my life. While I worked my *** off for it, luck still played a big part. If I lose it, that's it - I feel like I'd never get back to where I am today.

As for multiple talented advisors... When I first started researching how I wanted to protect my capital moving forward, I assumed that multiple opinions would allow me to pick and choose from a well-informed position. In reality things become really complicated really fast - you set up a trust for tax efficiency, your investment advisors suggest complicated structures to optimize tax efficiency and you get access to "shiny" investment products that may perform worse than big box mutual funds. With multiple advisors, I find that the signal-to-noise is worse.

There's definitely something to be said about simplicity, even if you aren't 100% tax efficient.



StayThirstyMyFriends said:


> _"Wealthy investors should realize that they are the cash cows of the investment industry and that most of the exclusive investment vehicles available to them—separate accounts, hedge funds, limited partner-ships, and the like—are designed to bleed them with commissions, transactional costs, and other fees. “Whales” are eagerly courted with impressive descriptions of sophisticated research, trading, and tax strategies."_
> 
> While this life-insurance scheme isn't exactly what Bernstein is talking about, it smacks of the same flavour, doesn't it?


^-- this! There is a lot of crap that gets peddled. If you aren't careful the fees stack up fast and eat into those returns very quickly. 



StayThirstyMyFriends said:


> Anyway, getting professional and impartial 3rd party advice is what I'd be looking for before going forward with this...


100% agree. However, finding an impartial 3rd party that understands insurance and has no vested interest is very, very tough.



Nerd Investor said:


> It's a slick strategy in theory, and sometimes in practice, but it's important to understand that at the end of the day your are increasing your debt load to fund your retirement. Illustrations often make these look foolproof, but changes in interest rates and/or under-performance of the investment within the policy can throw a pretty big wrench in these plans.


Yes, this is true. The illustrations are always "based off the current rates" which are highly variable. There are multiple options for pulling money from the insurance plan, but the tax consequences of each are very difficult to understand. The loan-against-policy comes with an associated boat-load of complications on its own.



Nerd Investor said:


> Having said all that, do you have any children or anyone you ultimately plan to leave an estate to? Because if you have "redundant money" you plan to leave to someone, permanent insurance is a great, tax efficient way to do that. You don't necessarily have to go to the extreme that the IRP describes.


We do, but I don't feel like we want to leave more than enough to him to guarantee him a house without a mortgage and enough not to starve if he's out of work. 

...

So, where do I stand on this? I've got a rough idea of all the concepts behind this. I feel like this is a product I should not commit more than ~10-20% of net worth to - it's a 20-year commitment that I can use to build an income stream far in the future with some tax-efficiencies built in (though these are obviously offset to some degree because you are actually still paying for insurance). It's not "til death do you part", but it's sure a lot more efficient if you don't plan on surrendering or disposing of the plan before then. 

Anyways, I think it might make a decent contribution to the "guaranteed" pillar of my estate, but probably at 1/5-2/5 of what the insurance advisor is pushing. Before I commit, I'm going to get a third party to look over the plan as a whole!


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## doctrine (Sep 30, 2011)

Given it's a 20+ year (or to end of life) commitment, the first thing you should do is nothing while you contemplate your options. There are fee-only advisors out there, and it might be worth to shell out some money to receive some unbiased advice. I have looked at whole life insurance, and never came away with a comfortable feeling. 20 years! If you're not comfortable, stay away. At the very least, they should be providing you how much you pay them over the life of the plan up front and in dollar terms, which I doubt they will. And if they don't, I would run, not walk away.


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## Nerd Investor (Nov 3, 2015)

doctrine said:


> Given it's a 20+ year (or to end of life) commitment, the first thing you should do is nothing while you contemplate your options. There are fee-only advisors out there, and it might be worth to shell out some money to receive some unbiased advice. I have looked at whole life insurance, and never came away with a comfortable feeling. 20 years! If you're not comfortable, stay away. At the very least, they should be providing you how much you pay them over the life of the plan up front and in dollar terms, which I doubt they will. And if they don't, I would run, not walk away.


I'll echo this. I would actually work backwards and use the dollar amount and time frame you are comfortable with (maybe looking at a few different options) and go from there. It's possible to have it paid up in 10 years for example if you prefer. If you talk to a Wealth Management (say at one of the big banks) they can generally shop and get you quotes from multiple companies rather than just selling insurance from a particular company (as many mutual fund/insurance sales people do).


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