LIMRA and the CLHIA report have shown a surge in high face value Life Insurance among affluent Canadians. Increasingly, people are looking at solutions such as the Immediate Financing Arrangement (IFA) for protection and financial flexibility. With Whole Life Insurance providing guaranteed value, and the cost of Life Insurance on the move upward, the IFA strategy has become increasingly popular for business owners, professionals, and even high-net-worth individuals.
But what exactly is an IFA? Why has it become one of the most popular financial advisor strategies and the best Life Insurance companies in Canada?
What Is An Immediate Financing Arrangement?
An Immediate Financing Arrangement is a financial strategy that allows a policyholder to finance the premium of a large Permanent Life Insurance Policy (usually Whole Life or Universal Life Insurance Plans) through a third-party lender. The key here is that instead of paying out-of-pocket, the individual or corporation borrows the money and uses the policy itself as collateral.
This structure enables clients to:
- Acquire substantial Life Insurance Coverage
- Free up capital for other investments
- Potentially benefit from tax deductions on the loan interest (when used for income-generating purposes)
This solution is typically recommended only for clients who have:
- A high income or significant investable assets
- A need for large Life Insurance Coverage
- A long-term horizon
How Does It Work?
Here’s a simplified breakdown:
1.Apply for a Permanent Life Insurance Policy
The client is underwritten and approved for a Whole Life Insurance Policy or Universal Life Insurance plan, often with high premiums to build cash value.
2. Fund The First Premium Payment
The policyholder (or their corporation) pays the first premium—this is often substantial, especially for multi-million-dollar policies.
3. Secure A Loan From A Lender
A participating bank or lender agrees to loan the amount of the annual premium (after the first year) secured against the cash surrender value of the policy.
4. Annual Interest Payments
The policyholder pays interest annually. In some structures, the interest may be tax-deductible.
5. Investment Of Capital Freed Up
Instead of tying up capital in insurance, the client invests their funds elsewhere—business growth, real estate, or portfolio investing.
6. Policy Matures Or Client Passes
Upon death, the Life Insurance proceeds repay the loan, and the balance is paid to the beneficiaries.
Why High-Net-Worth Canadians Use IFA
The IFA appeals to those who:
- Want to maintain liquidity.
- Have large tax liabilities upon death.
- They are already maxing out RRSPs and TFSAs
- Need both a Life Insurance Policy and investment leverage.
In essence, it’s a way to have your cake and eat it, too. You get protected with Life Insurance, and you don’t lose access to your capital.
Tax Efficiency And Regulatory Notes
IFA strategies often align with Canada Revenue Agency (CRA) rules regarding loan interest deductibility. When the loan proceeds are used for income-producing purposes, the interest may be deductible.
But this is not guaranteed. CRA has strict requirements:
- The borrowed money must be used to earn income from a business or property
- The insurance policy must be assigned to the lender as collateral
A detailed tax opinion and guidance from an experienced tax advisor is essential.
Types Of Insurance Used In An IFA
The IFA strategy almost always uses Permanent Life Insurance because of its cash value accumulation.
- Whole Life Insurance Policy: Offers guarantees and steady cash value growth, though the Life Insurance premiums cost is generally higher.
- Universal Life Insurance Plan: Offers more flexibility and potentially higher returns, depending on market performance and investment options.
Choosing between the two depends on your risk tolerance, timeline, and financial objectives.
Risks And Considerations
An Immediate Financing Arrangement is not for everyone. Here are some of the core risks:
- Interest Rate Risk: Rising rates can increase annual interest payments significantly.
- Loan Call Risk: If the lender reevaluates collateral, they may call the loan or reduce the credit limit.
- Policy Performance Risk: If the cash value doesn’t perform as expected, it can lead to under-collateralization.
- Liquidity Risk: You must be prepared to make annual interest payments without fail.
Due to these risks, IFA strategies are typically recommended only to experienced investors or corporate clients with stable, diversified income streams.
How To Qualify For An IFA In Canada
Most of Canada’s best Life Insurance companies offer products that are compatible with IFA strategies, but you’ll also need the following:
- Excellent health and insurability
- High income (often $250,000+ annually)
- Clean credit history
- Investable assets or business revenue to support interest payments
It also helps to work with an advisor who specializes in the best affordable Life Insurance plans that align with lending requirements. Not all policies are treated equally by banks.
Real-World Example (Simplified)
A 45-year-old entrepreneur seeks a $5,000,000 Whole Life Insurance Policy. The annual premium is $100,000. She pays year one out-of-pocket. In the second year onward, a lender lends the premium amount on an annual basis against the policy’s cash surrender value.
She still pays the interest ($5,000 to $8,000 per year), but now she deposits her $100,00 per year into real estate. If she dies, the loan is deducted from the policy proceeds, and the rest would be paid to her estate.
The IFA approach helped her to accumulate money, protect it, and deal with tax efficiently.
Final Thoughts: Is IFA The Right Move?
When designed properly, the Immediate Financing Arrangement can be a great financial tool. It allows Canadians to retain liquidity or grow wealth, yet still be able to finance very significant Life Insurance.
However, it comes with an extensive planning process, one that requires a thorough understanding of CRA rules and cooperation among financial advisers, tax accountants, and lenders.
If you’re thinking about using Life Insurance at an advanced level or looking not to tie up a huge amount of capital in premiums, taking a look at an IFA with a licensed agent may be worth your time.
Learn More: Is Term Life Insurance Worth It at Age 65?