Insurance Tax Tips from a Chartered Accountant
We believe that our clients benefit greatly from the fact that we offer tax expertise as Chartered Accountants while also being insurance specialists.
Here are several examples of where our tax expertise is essential to ensuring you purchase the right insurance product:
- Taxes on death can be massive, sometimes forcing an estate to sell a valued family cottage, house or business. Before selling a life insurance policy for an estate plan, we
do a draft calculation of the taxes that the estate will pay. Once we know the taxes due on death, we are in a better position to recommend the exact insurance you need. Insurance proceeds pay out tax free on death and will provide the money to pay any outstanding tax liabilities.
- Most disability insurance policies are structured so that the employee pays the annual premium using after-tax dollars (this means the employee effectively writes a cheque for the premium, instead of having the employer pay). By structuring the policy this way, benefits paid out will be received tax free. If the employer pays the premiums instead, any benefits received will be taxable to you. This tax difference can have a massive impact on your life if you are disabled and living off a partial disability income.
- Some insurance policies allow you to invest money inside the policy, tax free. This investment account inside the policy permits you to save more money inside the policy each year. There are two tax benefits to this feature:
a) In retirement, you can borrow against this investment fund to supplement your retirement income. And, because this is a loan against the policy, it may not be taxable income. You can greatly increase your retirement cash flow through this "save and borrow" mechanism of a life insurance policy. It is recommended that you work with a tax-wise insurance expert to understand all the tax implications of taking a loan within an insurance policy, before you proceed with this strategy.
b) On death, the tax free growth and payout of your savings within the insurance policy can result in more money to your estate than if you maintain a simple investment account of bonds or GIC’s. Saving extra money inside an insurance policy can be a solid tax shelter and an effective wealth building tool – perhaps more effective than traditional investment products.
- Individuals or business owners that own private corporations can benefit by owning their insurance inside the corporation. If your corporation pays income tax at a lower rate than you do personally, it will cost the corporation less to pay the insurance premiums than you.
- Critical illness insurance benefits pay out tax free when you are stricken with a life threatening major disease. This money may be more than you can accumulate on your own and may be essential to maintain your quality of life or pay for essential drugs or emergency surgery in the U.S.
- An insurance policy that pays out on death into a corporation can provide low tax solutions for the corporation to “buy out” or redeem the shares of the deceased shareholder. This can provide the family with money from the business that has been removed from the company with little or no taxation. This “low tax” solution of dealing with deceased shareholders is only possible by using life insurance within a corporate shareholder agreement.