IFA: Often Over-Promoted, Under-Explained

When Kerri, an experienced accountant, saw the email from her client Gord, she knew it wasn’t good news. The subject line just said: “Help.”

Gord owns a custom home-building business that has done well over the years and grown organically with minimal debt. Business really started to flourish during the ultra-low-interest rate environment, and it was around this time when Gord entered into an Immediate Financing Arrangement (IFA) that sounded great as presented to him at the time:

💡 “Use an IFA to fund a whole life insurance policy, leverage it to borrow back most of the premiums, deduct the interest, and reinvest in your business. It’s what wealthy business owners do.”

It sounded like a no-brainer—but it wasn’t the whole story.

Then things changed.

Business cooled down significantly with shifting market conditions that included high inflation, along with higher interest rates, that put many current projects on hold and slowed demand for new builds. The conditions that impacted his business also impacted his IFA.

1) Loan interest rates shot up. 
What started as “cheap money” became a burden.

2) The policy wasn’t growing as expected.
The policy wasn’t building cash value at the expected rate when initially illustrated.

3) Tax savings diminished.
The business was no longer generating enough income to deduct the full amount of loan interest and eligible NCPI (Net Cost of Pure Insurance).

Gord had been paying the loan interest annually in cash and receiving tax savings from deducting the full amount of interest and eligible NCPI. But when revenue slowed and expenses increased, those cash payments became a strain. To ease the burden, he arranged with the lender to capitalize the interest, resulting in the loan balance growing faster than planned. If the loan balance continued rising without policy growth to offset it, Gord would eventually need extra collateral or a full exit plan. Additionally, he wasn’t experiencing the full tax savings from the loan as initially illustrated.

Now Gord is in Kerri’s office, looking for trusted advice to help alleviate the added stress of an insurance-based strategy that hasn’t gone as planned.

When Does an IFA Make Sense?

IFA’s aren’t bad—but they are complicated.

If structured properly in the right set of circumstances, for the right client, they can work. For example, the IFA likely wouldn’t have been a problem if Gord and his business had:

Predictable cash flow to cover interest payments each year.

Diversified collateral in case the policy didn’t grow as planned.

A history of using leverage where Gord was comfortable with the risks associated with it.

In hindsight, Gord would have benefited from seeing stress-tested projections showing how the IFA may perform in lower growth & higher interest rate scenarios.
Unfortunately he didn’t know to ask for the stress-tests and he didn’t think to call Kerri for her advice prior to proceeding.

The Best Time to Evaluate an IFA? Before It’s Set Up.

If your clients are considering an IFA and you’re looking for a second opinion, please consider us as a resource. With such a complex strategy it’s essential that clients fully understand what they’re signing up for and together we can help with this.
If Gord had done that, he wouldn’t be sitting in Kerri’s office right now, looking for an exit strategy.

Let’s talk before things get messy,

Doug, Jordan, and Reid
Leyland & Matters Private Client Insurance Advisors
📧 [email protected]
📞 1 (905) 331-2885 | 1 (888) LEYLAND