What is an IFA (Immediate Finance Arrangement)?

The Immediate Financing Arrangement is a financial strategy that provides an opportunity for individuals and incorporated business owners to obtain the permanent life insurance coverage they need while still preserving cash for investment or business opportunities.

The strategy uses the cash surrender value of a participating life insurance policy, and in some cases additional assets as required by the lender, as collateral for a loan or line of credit from a third-party lending institution.

As the cash surrender value of the policy increases, loans are taken from the third-party lending institution. The loan proceeds are used to invest in a business or other income producing investment and the interest expense may be tax-deductible. In addition to the interest expense, some or all of the policy premiums may also be deductible when the policy is used to secure a collateral loan. The outstanding loan balance is paid from the death benefit payable under the insurance policy when the life insured dies.

For incorporated business owners, the corporation is the owner and beneficiary under the insurance policy. Under current tax laws, when the insured business owner dies, the company receives the proceeds of the policy tax-free and also receives a credit to its capital dividend account (CDA) for the proceeds minus the adjusted cost basis of the policy. Capital dividends may then be paid out to shareholders tax-free by following set protocols as laid out by the Income Tax Act (Canada).

The challenge

• Permanent life insurance needs can put stress on cash flows for both individuals and incorporated business owners
• Business owners may require the funds they would otherwise use for permanent life insurance for maintaining business operations, growing their Business or other investment opportunities
• Similarly, individuals may elect to put their money towards investment opportunities instead of permanent life insurance

How it works

1. The corporation purchases a permanent participating life insurance policy on the life of the business owner that creates significant cash surrender value in the early years of the policy. The corporation is the owner and beneficiary of the policy
2. The policy is then assigned to a lending institution as collateral to secure a line of credit taken out by the corporation
3. The corporation pays the recurring policy premiums and the interest on the loan, monthly or annually. Other options include capitalizing the interest payments
4. The corporation borrows up to 100% of the policy cash surrender value (assuming a participating whole life insurance policy), or may borrow an amount up to the entire annual policy premium that has been paid by providing additional collateral security
5. The corporation uses the line of credit for investment purposes, for example, to fund an operating Business, purchase real estate or invest in other income-producing assets
6. Steps 3 to 5 are repeated annually
7. When the life insured passes away, the outstanding loan is repaid, directly to the lender, out of the policy death benefit and the remaining proceeds are paid to the corporation. The total death benefit proceeds are paid out tax free. The corporation’s Capital Dividend Account will receive a credit for the full death benefit minus the adjusted cost basis of the policy
   Please Note: The basic Immediate Financing Arrangement concept assumes the borrower has sufficient income to pay the insurance premiums and meet the loan obligations and qualifies to write off interest payments and take advantage of the collateral premium deduction for income tax purposes. The loan interest rate charged by the third-party lender for the loan may be greater than the interest rate assumed in this document. Loan interest rates are not guaranteed and are subject to change by the lender. The cash surrender values for the life insurance product illustration are independent of the loan rate charged by the lender. Total cash surrender values are not guaranteed. The third-party lender may reserve the right to demand payment of the loan in full at any time in accordance with the terms and conditions for the loan prior to the time the illustration assumes it will be paid. The life insurance illustrated in this sales concept presentation is a participating whole life insurance policy that will not expire during the lifetime of the life insured as long as the premiums are paid and the policy remains in force. If the loan amount exceeds the cash surrender value of the policy or the cash surrender value of the policy plus, the collateral that was pledged to acquire the loan, the lender may require additional collateral be pledged or, the lender may demand repayment of all or part of the outstanding loan balance. Lender may demand repayment of all or part of the outstanding loan balance.

The benefits

• Business owners will benefit from the ability to shelter growth on corporate invested assets from tax, inside the life insurance policy, during their lifetime. Although owners can use the retained earnings sitting within a participating life insurance policy as they see fit, the Immediate Financing Arrangement strategy allows a corporately owned participating life insurance policy to be used as collateral for a tax-free loan that enables the corporation to re-invest into its business or other income-producing investment
• If a corporate loan is being used to earn income from a business or other investment, the interest on the tax-free loan may be tax-deductible to the corporation. Additionally, a portion of the life insurance policy’s premiums may also be tax-deductible when the lender requires the life insurance for a collateral loan
• The strategy will also provide liquidity for corporate life insurance needs, such as coverage for a key person, debts or to fund buy-sell agreements or dividend payments to shareholders. Death benefit proceeds can also be used to help fund tax liabilities, estate equalization or to leave a legacy to heirs or favourite charities
• The death benefit in excess of the policy’s adjusted cost basis will create a credit to the corporation’s Capital Dividend Account. Capital dividends may then be paid out to shareholders tax-free

Who it’s for?

This strategy is best suited for healthy, financially stable clients who are 35 to 65 years of age.

This may be appropriate for individuals as well as for business owners. The client will often be a shareholder of a successful business and will have a need for permanent life insurance.

The client’s corporation will often generate a significant annual surplus or have large retained earnings sitting in taxable investments. Examples of life insurance needs for the corporation and its business owner include key person, funding a buy-sell agreement, funding capital gains liabilities and the permanent needs of the shareholder, which could be the desire to leave a tax-efficient legacy to heirs or favourite charities. The client will also want access to funds to help grow their Business or invest in other income producing assets.

Easy answer by Empire Life