Life insurance Estate Tax Planning

When taking steps to secure your assets, a life insurance policy can come in handy. It’s not only there to protect your family in the event of an unexpected death but can also be used to offset taxes on your estate.


Below, we’ll explore this option, helping you create the best estate protection plan for you and your loved ones.


Using Life Insurance in Estate Planning

Life insurance can be used for a number of things, including:

  • An opportunity to pay down debts and taxes within an estate (i.e., mortgage)
  • Providing a lump sum to your family to help them relieve financial stress
  • Donating a considerable amount to a charity

Additional uses of a life insurance policy depend on the type of life insurance policy one has, as they provide different coverage for different terms.


Term Vs. Whole Life Insurance

Term life insurance only lasts for a specific term, usually costing less. It’s a great option for those looking for coverage that won’t cost them too much but will give them the security they need for their family.

Whole life insurance is one that offers coverage for the duration of the policyholder’s life. It not only provides a death benefit for a selected beneficiary upon death but also allows policyholders to grow a cash value over time.

Because both come with a death benefit, they are both useful when estate planning. However, when it comes to options to grow investments, it’s whole life insurance that’s more useful investment. Before using your life insurance policy for your estate planning, consider what it is you’re looking to gain out of your policy and then explore your options from there.


Securing your Assets with Life Insurance

All life insurance offers a death benefit that is paid out to a selected beneficiary upon the policyholder’s death. The total paid out is an agreed-upon amount at the time of the contract. Part of the amount received by policyholders may go to expenses for final wishes, though there may be a substantial amount left to work with.

By creating the right plan, policyholders can use their death benefit as a way to further secure assets, providing useful relief to their loved ones. For instance, things like mortgages, vehicles, personal loans, and debts are all considered part of one’s estate.

If the policyholder had an abundance of funds owed, their family could be left with very little to try to survive off of. Choosing a policy with enough coverage can help cover those costs, allowing the loved ones to keep more of the value of the estate and ensure that they can keep it in the family without having to struggle financially to do so.

Insurance policies are not only there to protect assets directly but can also do so by reducing the taxes owed on estates. We’ll discuss that in more depth below.


Taxes and your Estate

Taxes tend to drag down value, and in the case of one’s estate, the difference could be vast. One’s estate can include real estate, collectibles, investments, debts, and more. Once debts are handled and the estate is calculated, they must go through probate, where the estate is taxed.

The remainder is dispersed as per the policyholder’s wishes. Taxes in Canada on ones’ estate can take away anywhere from 5% to 10% of the value. That percentage could take away a substantial amount from the beneficiary, which is often a loved one.

Instead of letting ones’ estate get taken over by taxes, policyholders can use their life insurance policy as a way to offset them. Using the death benefit awarded to their loved ones at the time of their passing, they can pay down debts, taxes, and much more.

To find out how much of a policy is needed to ensure that your loved ones get the most out of your estate, it’s best to work with a professional that understands life insurance, investments, and how to use a combination of them to help secure your life’s earnings.


How Much Life Insurance is Enough?

When calculating the amount of coverage that you need, there is a lot that goes into it. Your insurer will take your age, health, and lifestyle into account when providing you with a policy. Your estate planning looks at your assets, debts, and the difference between them.

When looking to find the perfect coverage, you’ll also need to take all of those things into account, plus your budget. Deciding to have coverage for a term or choosing whole life coverage will also determine the cost, as one comes with a cash value and the other does not.

As you get older or learn of a serious diagnosis, the cost of coverage increases, which can take away from your estate. However, the older you get, the more critical it gets to secure your financial future for your loved ones. Because death is something we all need to prepare for, it’s critical to start doing so early to get the most benefit out of it in the future.


Start Securing your Future Today

Because there is a lot to think about when planning your estate, life insurance policy, and final life plans, it’s recommended to work with a knowledgeable professional. Sim has a unique set of skills that has given her the opportunity to help her clients secure their finances now and take care of their families when they are gone.

Her work with business owners and professionals has helped her understand personal investments, estates, and life insurance, and how they can all work together to provide financial relief to one’s estate.

A quick call with her will answer questions and get you on the right track as far as your options go. She can help create a plan to protect your finances that is tailored to you, your budget, and your family’s needs.

It’s never too early to start making plans for one’s life, ensuring that their lifelong earnings are secured and go to the loved ones they hold dear.


FAQs & Helpful Resources Regarding Life Insurance for Estate Planning


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