How is Life Insurance Used in Estate Planning?

Life insurance can be essential to provide for your loved ones. It can also be a vital part of preserving your estate.

Life insurance is frequently used in Canada to meet certain goals policyholders have when thinking about their financial legacy. Different forms of life insurance can do everything from circumventing types of taxes and paying off a mortgage to designating charitable donations.

Here’s a closer look at how life insurance can be used effectively in your estate planning.


Life Insurance in Canada

Canadians often have two main types of life insurance: term life insurance and permanent life insurance. Both offer designated beneficiaries significant financial relief after you die and can be bought by those within a wide range of ages, typically from 18 to 80.

Both can be used as part of estate planning.

But they have essential differences. Term life insurance has policies that last for set amounts of time, for example, 5, 10 year, and 15 years. The premiums are more affordable than permanent life insurance.

On the other hand, permanent life insurance premiums can last for your entire life if you chose, and you won’t have to renew your policy and avoid the potential rise in premium costs that come with renewal.

The differences continue when using term life insurance and permanent life insurance in estate planning. Term life insurance is better with shorter-term estate needs, like paying off the rest of your mortgage; it pays out the benefit but only if you pass away during your policy term.

Permanent life insurance can help more beneficial overall within general estate planning. While the premiums are higher, they give you the option of building equity within the policy. That equity grows tax-deferred.


Using Life Insurance in Estate Planning

Life insurance can do a lot for you and various aspects of your estate.

It can offer liquidity to pay off mortgages, taxes, and other liabilities, and can ensure that a business or cottage, among other no-liquid assets, will go to your beneficiaries instead of your estate having to sell them.

Importantly, life insurance can replace your income to make sure your family or other beneficiaries are well taken care of following your passing.

After your death, life insurance benefits can be used to cover and probate and legal fees, any debts and tax liabilities, and even your funeral costs. Life insurance goes a long way in keeping your estate intact.

Let’s take probate fees for example. Probate is the period when the validity of your will is confirmed by a provincial court. It can be a long process; assets for beneficiaries may be on hold for at least several months.

Probate fees can go up to 1.5% of your estate. If you have a large estate, your fees can be high, but your life insurance policy means your beneficiaries can cover most if not all of it.

The benefits are widespread and detailed. A life insurance policy often covers your estate taxes and avoids taxes tied to your bequests. Taxes can be significant on your final expenses, cutting into the value of certain benefits by as much as 50%.

In fact, life insurance is almost always the best way to cover taxes at death cost-effectively, even though life insurance premiums are not typically tax-deductible in Canada.

For example, while life insurance proceeds are usually tax-free, other assets you hold that may be part of your estate are not, including the sale of secondary properties and assets within your registered retirement income fund (RRIF) and a registered retirement savings plan (RRSP).

A will functions as a guide, click here to learn how to create a will, to who you want to receive assets and what they will specifically get, but estate planning works to lower the tax amount you’ll have to pay. Life insurance is further assurance that your designated assets are paid out exactly when they need to be and paid out quickly.

And if there is a desire to provide for a charity upon death, a life insurance policy can name specific charity beneficiaries. Such a charitable donation can yield a donation tax credit that can be used on a tax return to lower estate taxes that an estate is still required to pay.


How Much Life Insurance Should I Get?

It greatly depends on the needs and nature of your estate. Coverage needs always change over time. You may be in a very different place financially in your 40s than you were in your 20s.

One thing is constant: You should make sure a policy will definitely offset certain expenses like probate fees and income tax.

While many younger Canadians may take advantage of a term life insurance policy with desirably lower premiums, the switch to a permanent policy may be in order once financial goals are refined and there’s more family to provide for. It offers peace of mind.

While term life insurance can tap out at a certain amount, say $5 million, there are many permanent life insurance policies in Canada that go as high as $20 million.

If your estate is valued highly — through real estate, stocks, savings, or a supplemental investment plan — a permanent policy can greatly minimize taxes tied to your estate value.

And if you have many assets, life insurance can help you equalize inheritances easily, splitting values amongst beneficiaries exactly the way you want it and not putting the potential tax burden on just one beneficiary.


Getting Help With Estate Planning

With so many unique factors in play, using life insurance in estate planning in Canada can be complicated. That’s why it can be vital to work with an insurance agent and financial advisor to guide you through the process and make you your needs are met.

Sim Gakhar, a trusted adviser with HUB financial as her MGA, has been helping residents in and around Ontario, Canada, and British Columbia, Canada, with life insurance and estate planning for more than a decade.

All you need to do is reach out to Gakhar directly to get started today by calling 647-889-7290 or via email at [email protected]. Your estate planning will be in good hands.


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