Whole life insurance policies can be used to create an inheritance for your beneficiaries or to protect your existing estate. Many individuals across Canada are turning to whole life policies to improve their estate planning and further provide for their heirs.
Life insurance policies provide benefits that are usually not subject to income tax. These benefits can be used as a financial cushion for loved ones or to preserve an existing estate. This article will discuss whole life insurance in the context of estate planning for those in Canada.
Whole life insurance is a type of permanent life insurance that lasts until the policyholder’s death. Premiums for whole life policies are fixed and determined at the start of the contract. While typically higher than term life insurance, premiums won’t change as the policyholder ages nor if their health condition declines.
Whole life policies also provide a cash value component for policyholders. This cash value accumulates with each premium payment. Cash value is not given out as a benefit upon death. It instead can be used as collateral for a loan while the policyholder is alive. It is also available for withdrawal, but this incurs fees and penalties that can affect the death benefit.
Whole life policies are used to protect one’s loved ones upon their passing. The death benefit is often used to pay for funeral costs, mortgage payments, education, health care costs, and more. Whole life insurance is one of the most popular life insurance policy types in Canada.
Estate planning is the management and distribution of an individual’s assets and liabilities upon their death. An estate plan is vital in carrying out the last wishes of the deceased, protecting their business/investments, and providing for the loved ones they leave behind.
Some aspects to include in your estate plan include property (intellectual and physical), vehicles, heirlooms, investment accounts, savings accounts, debts, and other assets or liabilities.
Life insurance policies are a crucial part of planning for an uncertain future. Some people include life insurance in their estate planning, while others prefer to keep their policy separate from their estate plan.
No matter which method you prefer, it is essential to name a beneficiary for your life insurance plan. A living beneficiary will receive 100% of the death benefit, which would not be subject to income tax.
The exception to this is if the policyholder owed money on a loan taken out against their cash value; in this case, the amount of the loan plus any interest would be deducted from the death benefit before distribution.
For those who don’t name a living beneficiary or who decide to name their estate as beneficiary, the death benefit would first be used to pay any debts owed by the estate, as well as any estate tax, and would later be distributed according to the deceased’s will or, if there is no will, according to Ontario law.
Life insurance as part of an estate plan can also provide liquidity for liabilities, establish funds to financially protect a specific individual, and provide donations to charities or causes that interested the deceased.
In an ideal world, the deceased would own property that was paid in full. Unfortunately, as of 2021, Canadians have record-high mortgage debt. Not only that, but Canadians owe more than $2 trillion in consumer debt, which exceeds the value of the Canadian economy. What this means is that more Canadians are dying each year with more debt, not more assets.
To alleviate this burden for beneficiaries, policyholders can use their whole life insurance death benefit to cover things like estate taxes upon death. These taxes include probate tax, paying any money owed on the deceased’s final income tax return, and the capital gains tax on the estate.
Capital gains tax is calculated by finding the difference between the deceased’s property value compared to the value it was purchased for. Half of this difference is taxable according to Ontario law.
Whatever is leftover from the benefit can additionally be used to pay off any loans or mortgages the deceased owed on their property, so that their heirs can inherit it without issue or liability.
Life insurance death benefits are most commonly used as a fund to protect one’s beneficiary. This fund may be able to be distributed in monthly payments if arranged before the deceased’s death.
Typically, this means that the money is in some sort of savings or banking account during the distribution process. While the beneficiary won’t have to pay income tax on the death benefit, they will be liable for paying taxes on any interest this account may garner while the payments are being distributed.
Life insurance funds can also be put into an insurance trust if the beneficiaries are minors. In this trust, the deceased names a trustee who can be someone familiar or from the state, to ensure assets are looked over and distributed to the underaged beneficiaries once they are of the legal age.
Life insurance policies also allow charities to be named as beneficiaries. You can split your death benefit between your loved ones and charities near to your heart or donate everything to charity if desired.
Some policies may even allow you to cash out your dividends annually to use as charitable donations while you’re living.
Meshing your life insurance policy with your estate plan calls for some executive decision-making. How much life insurance is enough? How many beneficiaries should you name? Should you name your heirs or your estate as the beneficiary on your life insurance policy? Once you have your life insurance policy, you’ll need it to coincide with your estate plan and will.
All of these determinations are best made with the guidance of a certified insurance professional. Sim Gakhar has years of experience in both investment advising and insurance policies, and she is looking forward to assisting you with your estate planning today.
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