Planning

Life Insurance for Estate Planning

Life insurance can play a significant role in your estate plan as it provides a solution to a wide range of potential objectives. In general, life insurance serves one of two purposes: either to create an estate for your heirs or to preserve your existing estate. Generally, life insurance premiums are not tax-deductible. Still, the benefit paid to the estate (probate may apply) or a beneficiary (probate would not apply) is also not subject to income tax.

 

USING LIFE INSURANCE FOR ESTATE PLANNING PURPOSES & REDUCING TAXES AT DEATH

 

Some common reasons you may wish to use life insurance include:

  • to provide liquidity in an estate to pay off liabilities such as taxes or mortgages. Life insurance will ensure that non-liquid assets, such as a cottage or business, do not have to be sold, but can be left to your beneficiaries.

  • to establish a fund to provide income for an individual you wish to support.

  • to equalize an estate for fair distribution to heirs

  • inter-generational transfer of wealth with less or no tax implications

  • to provide a charitable gift & legacy planning to eliminate or reduce taxes

 

Term life insurance can fund a short-term estate need such as paying off an outstanding mortgage or protecting the estate against an immediate shortfall; universal or whole life insurance is the preferred option when the insurance is for estate purposes.  In some cases, a combination of both provides the best solution.

 

The amount and type of coverage you require will depend on your estate objectives and current financial status. As you age, you may find that the coverage level you need declines or perhaps changes from short-term to permanent coverage. Determining exactly how much and what type of insurance is most suitable for your situation can be best assessed through a detailed needs analysis.

 

Life Insurance is a powerful – and cost-effective – way to keep your estate intact, plus you can set up Planned Giving to ensure that what you care about and your loved ones (rather than Revenue Canada) are your major beneficiaries.

Guaranteed Income Streams -
Annuities

An annuity is a simple retirement income option that provides guaranteed income with no market exposure.

 

HOW DOES IT WORK?

 

In exchange for a single lump sum investment, an insurance company will pay you income for the rest of your life or a chosen period.  This income payment will include the return of principal investment as well as interest. 

There are three types of annuities:

  1. Single Life Annuity 
    This type of annuity provides guaranteed income for a lifetime of one individual
    regardless of market conditions or interest rate fluctuations.
     

  2. Joint Life Annuity  
    This type of annuity also referred to as Last Survivor Annuity, provides guaranteed income for the lives of two people regardless of market conditions or interest rate fluctuations.  When the first person dies, the income is paid to the surviving individual.

  3. Annuity Certain 
    This annuity provides guaranteed income for a predetermined period or until you reach a certain age. 

Planned Legacy Giving -
Insurance Assisted Strategies

The Income Tax Act permit taxpayers to receive credit for charitable bequests up to 100% of their income in the year of death.  Having a life insurance policy becomes extremely economical to fund a donation which is ultimately deductible.

 

  1. Use premiums paid each year as a charitable contribution.  Donor is the life insured, charity is named as owner and beneficiary on the policy, donor pays the premiums and deducts the premiums as a donation for tax receipt purposes.  The charity receives face value upon the death of the donor.
     

  2. Existing policy with cash value.  Donor donates an existing policy with the cash value assigned to the charity by way of an absolute assignment.  The donor gets a tax receipt for the full cash value, and all future premiums are considered a charitable donation.  The charity receives face value at the time of the death of the donor.
     

  3. Donor owned policy with full face amount of insurance as the donor's contribution.  A gifting strategy allowing full face value of insurance on death to be considered a charitable donation when most taxes are payable on estate assets.  Donor has an individual or a joint second to die insurance policy established with donor’s estate as beneficiary. Upon death, estate gives insurance policy proceeds to their charity of choice as per will instructions and receives a tax credit for full face value of insurance up to the taxable income in the year of death and immediate proceeding year.  The significant donation offsets taxes on RRSPs, RIFs, investments, and recreational properties, etc.  Children and grandchildren receive full value of unused estate assets.  Charity gets significant lump sum donation using the “multiplier effect” of insurance.

WHY CHOOSE INSURANCE AS YOUR OPTION?

 

  • adjustable based on your cashflow

  • the cost to family minimal

  • the most effective way of implementing reduced tax strategies: “Magic of Insurance.”

 

Interested in a Complimentary

Insurance Quote?

Carolyn Melnychuk, CFP

Email: carolyn@securedfuture.ca

Phone: 780.446.2426

Fax: 780.456.5600

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