On the surface, these topics might seem unrelated. Retirement planning is done so that you can enjoy your golden years, taking advantage of the wealth you have accumulated during your working years to fund your lifestyle in retirement. In our roles as financial advisors, we need to make sure that people understand their retirement plan does not end the day they retire. It ends the day they die. This is because we need to ensure that clients have a plan in place that will fund their retirement right up until that final moment.
Life insurance cannot play a part in retirement planning though, can it? The fact that you need to die before your beneficiaries receive any funds would seem to make it a completely separate idea. This is not true at all. Let’s take a moment to look at how you can use both the death benefit from life insurance and the cash values in whole life participating insurance to help with retirement planning.
In this article:
- Consider Your Government Benefits – Using Life Insurance Death Benefit in Your Retirement Plan
- A Case Study Example
- Life Insurance Can Provide Supplemental Income
- A Separate ‘Asset Class’?
- Conclusion
Consider Your Government Benefits – Using Life Insurance Death Benefit in Your Retirement Plan
There are a couple of retirement benefits supported by the Canadian government that will definitely make up part of your retirement plan. These two benefits are the Canada Pension Plan (CPP) and Old Age Security (OAS). You need to understand how these systems work to see how they will influence your retirement income.
CPP is a system funded by contributions you and your employer have made during your working life. At a high level, CPP is a system in which you earn credit. Every year there is a maximum amount of contributions you can make. If you hit that amount, you get a full credit for that year. If you do not, you get a proportional credit. In 2025, if you earned 100% of the credit you are eligible for in the system and started collecting CPP at age 65, you would receive $1,433 a month. The reality is that the average amount of CPP people receive is $844.53 a month. CPP does have a survivor benefit, but no single taxpayer can earn more than the maximum. The most any one person can receive from CPP is $1,433 a month, even if you are entitled to more through the survivor benefit calculation.
OAS is different. It is funded fully by the government and is subject to an income test (the clawback you may have heard of). For the purposes of this example, I will assume that the clawback is not a factor. In 2025, that means your taxable income in retirement is less than $93,454. For 2025, the OAS amount is $727.67 a month. There is no survivor benefit, and you must be alive to collect OAS.
A Case Study Example
Let’s consider an “average” Canadian married couple, Jamie and Quinn, in terms of their CPP amount. Both have retired at age 65 and now they collect the following from CPP and OAS:
- CPP: $1,689.06 monthly (each receives the average amount)
- OAS: $1,455.34 monthly (two times the monthly amount)
Combined, this represents $3,144.40 in monthly income during retirement.
Now let’s consider what happens when Quinn dies. After this, Jamie’s income looks like this:
- CPP: $1,351.25 monthly (Jamie’s full amount plus 60% of Quinn’s amount as the survivor benefit)
- OAS: $727.67 monthly (no survivor benefits are included in OAS)
This makes Jamie’s income from government sources $2,078.92 monthly. When one spouse dies, the surviving spouse’s income from government sources drops by $1,064.48 a month. This is a significant portion of the total amount and can have a major impact on retirement income planning if there is an unexpected death early in retirement.
The Role Life Insurance Can Play
While reviewing their goals with their financial advisor years before retirement, Jamie and Quinn realized that if one of them died, there would be a large enough decrease in their retirement income that they wanted to explore options to minimize the effect on the survivor. The solution they chose was to purchase a joint-first-to-die life insurance policy with a death benefit of $100,000.
At the time they applied, Jamie was 50 and Quinn was 46, and both were non-smokers. The monthly premium amount was $269.01. When they looked at the premium, they saw that the cost was significantly less than the amount their income would drop from government sources when one of them died.
Now, when the surviving spouse is faced with the drop in income after the first death, it is offset by the proceeds of the life insurance policy. This makes the surviving spouse’s retirement lifestyle more sustainable long term.
The best part of this solution is that it was multi-layered. Since they took out the coverage before reaching retirement, the life insurance provided them with financial security for their family during two important stages of their lives. The first level of protection was during their working years while saving for the future, and the second level was in retirement, protecting their lifestyle by offsetting the reduction in income from government pensions.
Life Insurance Can Provide Supplemental Income
For this example, we need to specify that the type of life insurance we are talking about is permanent, cash value life insurance. The cash value contained in the policy is the key to this strategy working. The cash value in your life insurance policy can be accessed in a variety of ways.
- Surrender of Coverage: If you willingly choose to do so, you can surrender a life insurance policy to the insurer and receive the cash value back. There may be income taxes owing on this money, so you need to make sure you understand that before you proceed. If you have a participating policy with dividends accumulated in it, you can also surrender just this portion of the coverage, which provides more flexibility.
- Policy Loans: You are also able to borrow money from a life insurance policy. Again, this can potentially trigger income tax consequences, so make sure you understand what is happening and how it will affect your income.
- Collateral Assignment: There are lenders that will use the cash value of your life insurance to secure a line of credit for you. Depending on your personal situation, you can access as much as 75–100% of the cash value (depending on the lender). This differs in one major way: since no cash is removed from the policy, no taxable income is triggered. The way this works is that the lender is first in line when you pass away. The death benefit pays off any outstanding debt, and the beneficiary receives the remaining funds.
A Separate ‘Asset Class’?
Something to consider with participating life insurance, if you have included the idea of using it as an income source in retirement, is that it is an asset that will not behave like other parts of your portfolio. This type of life insurance has a cash value component that will grow over time. The term “participating” refers to the fact that the policy is eligible for dividends each year. Dividends are paid from specific profits that the insurer makes and, while not guaranteed from year to year, will add to the growth of the cash value and death benefit of your policy. Participating whole life insurance has core characteristics that help it perform like a unique asset class. A few of these include:
- Tax-deferred growth: The growth in a participating life insurance policy is not subject to annual taxation (as long as it falls within CRA rules).
- Low volatility: There is no correlation between participating whole life insurance and investment markets, so the cash value growth in the policy is low volatility and highly stable.
- Guaranteed cash values: When the policy is originally purchased, the annual cash values are laid out at that moment in time. If you want to know exactly how much cash value will be in the policy at the 23rd anniversary, you can find that out because it is guaranteed. Dividend values may vary, but they will only add to the guaranteed amounts, never deduct from them.
It is behaviour like this that can make a participating whole life insurance policy an excellent tool to diversify your investment plan on the fixed-income side. It is not investing in bonds, but it behaves that way, allowing you to diversify a portion of your portfolio that is traditionally harder to balance with a good mix of investments.
Conclusion
As you can see, life insurance can be a very valuable part of your retirement plan. The strategies for how to use it will vary depending on your personal circumstances. Book a call with one of our advisors to help you find the best solution for your individual situation.
