RRIF Insurance

A Registered Retirement Income Fund (RRIF), is a very popular method for distributing RRSP assets by December 31st of the year you turn age 71. One of the terrific attributes of a RRIF is its ability to generate income and grow in value at the same time. The new rules allow the RRIF payments to be paid out up to age 100, subject to future rates of returns and withdrawals taken.

The problem comes when you die - or if you have a spouse, after both of you have died. At that point, the total accumulated value of your RRIF is added to income and taxed as if it were earned that year.

This would almost certainly place you into the highest marginal tax bracket and expose your RRIF to the tax-man's grasp. In Alberta, the highest tax rate is 39% in the year 2012 and other provinces typically have higher tax rates.

If, however, a small portion of the RRIF income is used to buy life insurance to provide estate protection, the ultimate benefit to your family is significant. Another way to fund the tax liability of your RRIF is out of your non-registered assets if sufficient funds are available.

Here's an example: Bob and Mary Smith (not their real names) are 65 and 64, respectively. From an actuarial standpoint, Mary will outlive Bob and is expected to live to age 85.

The core of this concept is to utilize a small portion of RRIF income as mentioned above or other non-registered income to fund a joint last-to-die life insurance policy which will pay out the eventual tax liability of the RRIF once Mary passes away by say age 85. The bottom line effect of this concept is it places more income from your RRIF into your family's hands versus Revenue Canada. As a result, this concept is appealing to many clients who feel that they would like to maximize the value of their RRIF for their family as opposed to Revenue Canada.

The concept is applicable to any RRIF, even RRIFs currently in place. Age and health have an impact upon the insurance cost, so procrastinating will not be to your advantage.

If the thought of leaving a significant portion of your RRIF assets to strangers at Revenue Canada does not appeal to you, talk the idea over with your spouse or your children - after all, they are the ultimate beneficiaries of this strategy.