Understanding the risks of an Insured Retirement Strategy

Life expectancy risk

The life expectancy risk refers to the possibility of the client outliving their projected life expectancy, upon which the loan amount is based.

What you needs to know

The longer you live, the more the loan can grow. If this happens, the policy may not provide sufficient collateral to sustain the loan and it could result in the bank or lender needing more collateral to be provided, a partial repayment from another source, or the loan being called.

This risk could result in potentially triggering a large tax liability.

Investment and Loan risk

An insurance policy’s growth rate can be predictable or volatile depending on what type of interest option you choose. Also, interest rates tend to rise and fall with the general economic cycle.

What you needs to know

The Insured Retirement Strategy illustration cannot take into account the various fluctuations that happen to rates over the life of the policy. It assumes both a constant interest rate charged for the loan and rate of return for policy accumulation. If the interest rate on the loan increases or the policy’s interest options perform below expectations, the loan amount

could outplace the growth in the policy. This could result in the bank or lender to either:

a) Demand a partial loan repayment or service the loan by monthly or lump sum payments.

b) Additional capital/assets to be pledge, forcing the policy to be surrendered which can be subject to tax liability.

Spread risk

Typically, guaranteed investments have returned less than the prime rate by approximately 2%. This difference is called the “spread”.

Changes to the spread effect the maximum amount a client can borrow annually. As the spread increases, the amount of loan available to supplement retirement lifestyle will be much lower.

What you needs to know

Historical spreads are not indicative of future spread risk.

The extreme sensitivity makes conservative estimates for both the loan and investment rates of returns essential for reasonable projections and risk management.

Market risk

Market risk refers to the volatility of the underlying investments.

What you needs to know

This volatility needs to be taken into consideration when deciding on their choice of investment options for their universal life policy. Also, their choice of investment options has an impact on the available loan ratio they may receive.

Incorporating annual client policy reviews as a process will provide updates on how insurance values are meeting client objectives.

Credit risk

Ability to obtain a loan from the bank.

What you needs to know

ivari is not a party to any loan agreement a policy-owner may make with a third party lender. We do not have any authority over the terms of the loan and cannot guarantee the ability of a client to receive credit using ivari’s Insured Retirement Strategy. Discretion regarding the issue and management of credit lies solely between the borrower and lender.

Loan risk

Your loan can be terminated by the bank or lender at any time.

Since the policy is used as collateral for the loan, the policy-owner(s) and the borrower(s) must be the same person(s) in order to execute the Insured Retirement Strategy.

What you needs to know

Be aware that any of the following issues (among others) could result in the lender demanding partial or full loan repayment:

• Termination of the insurance policy for any reason

• Default on interest payments (where interest is not capitalized)

• Outstanding loan exceeds allowable ratio when compared to the cash surrender value of policy

• Bankruptcy by the policy-owner

• Death of the policy-owner

In a scenario where a loan is called and policy must be surrendered; there will be negative tax consequences if policy cash value exceeds adjusted cost base. Be aware that there may not be sufficient policy funds to repay outstanding bank loan and the taxable policy interest gain.

Taxation risk

Tax rules are constantly changing.

What you needs to know

Key aspects of our Insured Retirement Strategy are based on current tax legislation and there is no way to predict how future tax legislation will affect this program.