An Immediate Financing Arrangement (IFA) is a specialized financial strategy in Canada that allows individuals or corporations to purchase a permanent life insurance policy and immediately borrow against its cash value—providing liquidity while keeping life insurance in place.
This dual-benefit approach has become increasingly attractive to high-net-worth individuals, incorporated professionals, and business owners seeking tax efficiency, estate planning solutions, and financial leverage. However, despite its appeal, an IFA isn’t without risks.
In this blog, we’ll walk through the six most important risks associated with IFAs in Canada. Understanding these risks is crucial for anyone considering this strategy, so you can make informed decisions and avoid unexpected pitfalls.
1. Risk 1: Rising Loan Interest Rates
The Cost of Borrowing May Climb
One of the most immediate and impactful risks of an IFA is exposure to fluctuating interest rates. Most IFA loans are based on floating rates, which means that as market interest rates rise, so do your borrowing costs.
If the interest rate on the loan outpaces the returns generated by your reinvested capital or the growth in your policy’s cash surrender value (CSV), your IFA can quickly become a liability. This mismatch can shrink your cash flow and strain your ability to keep up with loan interest payments—especially if your income fluctuates or investment performance lags.
For borrowers leveraging IFAs to reinvest, a rate hike can make the math stop working in their favour—turning what looked like a tax-efficient liquidity strategy into a drag on overall financial performance.
2. Risk 2: Dividend and Policy Performance Risk
What Happens When Dividends Drop
A key pillar of the IFA strategy is the cash surrender value (CSV) of a permanent life insurance policy—typically tied to the dividend scale of the insurer or the investment performance of the policy. When dividends are strong, the CSV grows, providing robust collateral for ongoing borrowing.
But dividend rates aren’t guaranteed. If they drop—which has happened in past economic downturns—the policy’s cash value may underperform expectations, limiting how much you can borrow. In some cases, lenders may issue margin calls or require borrowers to inject additional capital to maintain the loan-to-value ratio.
Over time, sustained underperformance can erode the long-term value of the policy, leaving both the liquidity and insurance protection goals of the IFA at risk. This is especially problematic for borrowers who have built other financial plans around optimistic projections.
"It's not about having more money. It's about knowing how to manage it." — Suze Orman
3. Risk 3: Credit and Collateral Requirements
Not a Set-It-and-Forget-It Strategy
Many investors are attracted to IFAs for their apparent simplicity—but they’re anything but passive. Once the loan is in place, annual credit and income reviews are typically required by the lender to ensure the borrower still qualifies.
Any significant changes—like a business slowdown, unexpected illness, or personal income drop—could impact your creditworthiness, resulting in higher interest rates, reduced access to credit, or even demands for additional collateral.
In the worst-case scenario, if you can’t meet the lender’s criteria, you could be forced to repay the loan, potentially by surrendering the policy or liquidating other assets—both of which can come with financial and tax consequences.
4. Risk 4: Erosion of Death Benefit
Borrow Now, Pay Later (from Your Estate)
One of the most overlooked consequences of an Immediate Financing Arrangement is the impact on the death benefit. While life insurance provides a tax-free payout to beneficiaries, any outstanding loan at the time of the insured’s death is deducted from that benefit.
That means the larger your loan balance, the smaller the amount your heirs will receive. For individuals using IFAs as part of an estate planning strategy, this erosion of the death benefit could undermine your intentions—especially if the insurance policy was meant to cover estate taxes or provide intergenerational wealth.
In short: you may be borrowing against the very legacy you were planning to leave behind.
5. Risk 5: Tax Complications
Deductibility Isn’t Guaranteed
One of the touted benefits of an IFA is the potential deductibility of loan interest—but that comes with conditions. To qualify, the borrowed funds must be used for the purpose of earning income from a business or investment.
If the funds are used for personal reasons—like a vacation home, car purchase, or gifting—the interest is not tax-deductible. Worse, failure to keep proper records or misreporting the use of funds can trigger audits or Canada Revenue Agency (CRA) challenges.
Additionally, if the policy is ever surrendered, and its cash value exceeds the adjusted cost base, the difference could be treated as taxable income—adding a surprise bill to what was meant to be a tax-efficient strategy.
6. Risk 6: Complexity and Fees
IFAs Aren’t Plug-and-Play
Immediate Financing Arrangements are not a “set-it-and-forget-it” solution. They require constant coordination between your insurer, lending institution, and financial advisor. Structuring an IFA properly involves:
- Legal and medical underwriting
- Annual reviews to assess creditworthiness and collateral adequacy
- Ongoing loan management and interest payments
- Possible setup and advisory fees not disclosed upfront
The strategy can be difficult to unwind and is not ideal for clients seeking simplicity or short-term flexibility. If you value ease and independence over leveraged optimization, an IFA may feel more like a burden than a benefit.
7. When IFAs Still Make Sense
Despite the risks, Immediate Financing Arrangements remain a powerful tool when structured with care. For high-net-worth Canadians, incorporated professionals, and business owners with stable income and a long-term outlook, IFAs offer:
- Immediate liquidity
- Tax-efficient borrowing
- A way to preserve life insurance while investing elsewhere
When used appropriately, they allow you to build wealth without sacrificing protection.
IFAs aren’t inherently bad—they’re just not built for everyone. When misunderstood or misused, they can introduce cash flow strain, tax problems, and estate planning misalignment.
But with the right advisors, a clear financial roadmap, and realistic expectations, an IFA can be a strategic lever to amplify long-term wealth.
Our team of Stone Owl advisors is here to help you implement these strategies for the best outcomes. Schedule a Discovery Call with us below to ensure your financial plans are on track.
