Life insurance comes in many different forms and is an effective way to provide money to your estate, after you have passed. For most, it’s a way to ensure their children or dependants will have enough to survive if the unthinkable should occur. For others, it’s used as a tax planning tool to ensure that there are enough dollars to satisfy the tax man in case of death; and for others it’s used as a tax sheltering investment strategy.
No matter which avenue might suit you best, it’s worth understanding the basics of this flexible product and how you can use it to further your estate plan.
While we don’t hold ourselves out as being insurance professionals, it’s not uncommon to address life insurance as a tool for our clients to use in achieving their own goals. What follows is a brief summary of how this product can be used to fill in the gaps to your future planning goals.
Leaving Enough For Your Family
Often the most common use of life insurance is to provide security for a spouse or child(ren) in the case of death. It can come in the form of ‘mortgage insurance’ (which is typically a life insurance that pays out your mortgage on death), or a typical life insurance policy, which pays a set amount upon death. Understanding your family’s financial needs will be an important exercise to determine just what kind of life insurance policy is suitable for you.
Ensuring You Are Covered In Case Of Injury Or Critical Illness
Another common factor to consider is the potential for serious illness or disability, which impacts your ability to work. While certain government programs offer financial support to those with disabilities, there are often insufficient means to provide the same quality of life to yourself or your family in these circumstances. Setting up a critical illness or disability insurance is vital to ensuring you will be financially stable if you should ever be unable to work.
While assets can be rolled over to a spouse after death without triggering capital gains, the same is not true outside of the matrimonial relationship. Even if you are gifting property or investments to your loved ones, the tax man will simply assume that it was sold for fair market value at the time of the transfer. This is what’s called a deemed disposition at fair market value. What’s the effect? On capital assets, such as properties that are not a primary residence, or investments, the capital gains income tax will be calculated as if the asset was sold at the market price.
Often times the tax bill is so high that there is no way to pay the taxes due from money left in an estate. This often forces the sale of an asset in order to satisfy the debt. For some, this might not be favourable. For example, you may want to keep the cottage in the family but the value has gone up and there aren’t enough dollars in the estate to pay them out. Or you may have bought each one of your children a piece of property, for which capital gains will need to be paid on death. In these cases, a life insurance policy can be obtained so that your wishes of retaining certain capital assets can be fulfilled.
Separating Your Estate
Life insurance proceeds will be paid out directly to the named beneficiary in the policy upon death. If the beneficiary is not your estate, then it will not be governed by the terms of any Last Will & Testament, or by the Succession Law Reform Act (if you die without a Will).
It is not uncommon, however, for us to plan for a potential conflict between beneficiaries or to simply wish to create a plan that separates one class from the other. For example, for blended families where children from a previous relationship are to receive the bulk of the estate assets, a life insurance policy may be a great way to provide for the spouse who is left behind. In this way, those named in the Will can act solely with respect to the assets left to the estate, while the spouse can share in the life insurance proceeds without being part of the estate administration tax process.
Maximizing Your Income
Life insurance is also used by some as an investment tool. For individuals who have a corporation, the corporation may take out a certain type of policy which allows money to be paid into a life insurance policy (therefore qualifying as a business expense), and also reinvested into a variety of investment options within the policy itself. The income generated stays within the policy and in the event the corporation needs some of the money back, a loan is taken out using the life insurance as collateral. While the funds remain in the policy, however, the investment income and it’s compounding benefits enjoy a tax sheltered environment. Upon death, the proceeds are then made payable to the corporation.
For individuals who own a corporation, life insurance is a great way to plan for the death of a shareholder. Most commonly, when there is more than one shareholder, a Shareholders Agreement may stipulate that the corporation is to pay for life insurance policies for the shareholders. In the event of death, the proceeds are then used to payout the deceased shareholder’s estate so as to eliminate the possibility of involving beneficiaries of the deceased’s estate with matters pertaining to the business.
For those who are the sole shareholders of a corporation, a policy may be used to satisfy the company’s liabilities in the case of death – leaving the business to run without debts, or simply to leave a certain amount within the corporate structure and therefore subject to less tax.
Whichever the reason may be, making a sound and comprehensive plan for your future including life insurance is a great idea. Contact your trusted insurance advisor or call our office for more information on how to get started on the right foot today.