Life Insurance in Canada
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Protect Loved Ones Against Lost Income if you Die
The death of the main income earner for a family can devastate the family financially. This must be prevented and one way is to purchase life insurance for the person earning the income.
There are two types of insurance for this purpose:
1. Term Insurance – better for younger people interested in insuring a fixed period of time (10 or 20 years) at the lowest cost possible. Automatically renews at higher rates for another term every 10 or 20 years. Coverage expires by age 80 or 85 though premiums can be quite costly as you approach your later years.
2. Permanent Insurance – good for all ages, costs a bit more initially, provides insurance for a lifetime, less expensive than term insurance in the long run.
A Family CFO’s philosophy is that all personal financial decisions are linked and that by seeing your financial “big picture” that it will lead to better financial decision making overall.
How much insurance do you need?
The generally accepted rule is that you should buy 10 times your income. So if you earn $50,000 per year, buy $50,000 x 10 = $500,000 of life insurance. This $500,000 will provide an income to your survivors, pay your funeral costs and pay down your debts, leaving the family with more income and fewer costs.
Insurance to Minimize Income Taxes on your Death
At death, income taxes are now due on the entire value of your RRSP, RRIF and on the growth of your investment portfolio. Your RRSP or RRIF alone, if valued at $500,000, will trigger income taxes up to $225,000.
Life insurance pays out tax free on death and this money can be used to pay the taxes, leaving your heirs with a larger inheritance.
There are two types of insurance for this purpose:
1. Term to 100 Insurance – useful for people 40 to 100 who want a fixed premium for their lifetime and a simple policy to implement.
2. Permanent Life Insurance – useful for all ages; can actually be cheaper than term to 100; offers same fixed cost for your lifetime; offers extra opportunity to contribute more money into the policy and grow it tax free.
How much insurance do you need?
As Chartered Accountants, let us calculate your estate taxes at no charge. Then we’ll know how much insurance you will need.
Life Insurance to Save a Cottage or Business from Taxes on Death
A cottage that has been in your family for decades may trigger a six figure tax bill on your death. A family business that has been successful may trigger a million dollar tax bill on death. In either case, if your estate or family does not have the cash to pay the taxes, your estate may be forced to sell the cottage or business to pay the income taxes.
Life insurance is ideal for this situation. Purchase life insurance for the value of the taxes. Let the heirs pay the premiums. On death, the insurance payout is tax free and can be used to pay the taxes.
There are two types of insurance for this purpose:
1. Term to 100 Insurance – useful for people 40 to 100 who want a fixed premium for their lifetime and a simple policy to implement.
2. Permanent Life Insurance – useful for all ages; can actually be cheaper than term to 100; offers same fixed cost for your lifetime; offers extra opportunity to contribute more money into the policy and grow it tax free.
Life Insurance to Grow your Wealth
After paying your debts off and maximizing your RRSP & TFSA, contributing to a permanent life insurance policy can be your next best strategy to build wealth and minimize taxes.
With every premium dollar, part of it goes to pay the cost of insurance and part of it is invested in an investment side fund. This investment side fund is never taxed as long as the money stays within the contract until death. Otherwise, taxes may be triggered if the money is withdrawn or leveraged – it grows tax free and pays out tax free on death. This powerful method of growth can leave your heirs with more after-tax wealth than if you just invest money in a bond or GIC on your own.
Insurance for Children or Grandchildren
Buying life insurance on the life of a child can accomplish several goals:
1. Transfer some of your net worth tax free and without probate fees to the child on your death.
2. Provide life insurance for the child’s life at a very low cost and saving the child from ever having to buy their own.
3. If you build up a $50,000 cash value inside the policy when the child is age 18, the child can cash in the policy and use the money to pay for post secondary education costs.
4. It secures your child’s insurability while they are young and healthy.
Use Life Insurance for Supplemental Retirement Income
We would all like more cash flow in retirement, and we would all like to pay less income tax. A permanent life insurance policy can accomplish both goals.
Buy a permanent life insurance policy today. Deposit extra cash into the investment side fund. This side fund grows tax free, compounding growth at a faster rate than you could on your own.
In retirement, draw down your investment side fund as a loan. A loan is not income and therefore, not taxable to you. Depending on how the monies are leveraged (i.e. with the policy as collateral for a bank loan, or as a policy loan through the insurance company), there may be tax consequences. If it is a bank loan, then there is no taxation, however, if the monies are borrowed against the policy, they will be fully taxed as income once the Adjusted Cost Base (ACB) equals zero.
On death, when the insurance policy pays out, the loan will be repaid and your estate will receive the net proceeds. This extra retirement income attracts no income taxes and will not claw back your Old Age Security benefits.
