Life Insurance and Your Estate: A Primer

It may also present a tax-planning opportunity. Generally, life insurance premiums are not deductible for tax purposes, but the death benefit paid to the estate or a beneficiary is not subject to income tax (although probate tax may apply to death benefits paid to an estate, in provinces where applicable).

There are differing types of insurance that can help to support different aspects of your estate planning. As we are often asked about the many insurance types, here is general overview:

Term Insurance

Term insurance provides protection for a specific period of time and only pays out a benefit if you die during the term of coverage, usually a 5-, 10-, or 20-year term (after which it may be possible to renew the policy at a new rate). Term insurance is generally the least expensive form of life insurance as it provides coverage for only a limited period.

For Estate Planning: Term insurance is typically used to fund a short-term estate need, such as paying off an

outstanding mortgage, protecting the estate from an immediate shortfall, or preventing financial hardship through income replacement.

Permanent Insurance

Permanent insurance provides protection for your lifetime and pays out a death benefit as long as premiums

continue to be paid. Many forms of permanent life insurance are considered exempt policies and have a cash value (also termed the “cash-surrender value”), allowing funds deposited into the policy to have the potential to grow, while not being subject to annual taxation. Here are some forms of permanent insurance:

Term-to-100 – This product is unique to Canada. It provides long-term protection in a “straightforward” manner. Premiums stay the same for your entire lifetime, never going up or down. The death benefit also remains level and never changes. Unlike other forms of permanent insurance, there is no cash value component to the plan, so this often helps to keep the cost of the premiums comparatively lower. Term-to-100 is commonly used in estate planning for those looking to purchase lower-cost insurance to cover more moderate estate expenses, such as funeral costs.

Whole Life – Whole life insurance generally offers a guaranteed minimum death benefit and cash value.

Generally, the premiums paid for participating whole life policies are deposited into a participating account, which is managed by the life insurance company. This account is impacted by returns earned on investments, death benefit claims and expenses. If there are earnings within the account, a share is credited back to each policy owner as a dividend payment (usually annually). Dividends can be kept within the insurance policy and accumulate to eventually be paid out at death on a tax-free basis. Another option may be to use dividends to reduce future premiums. The cash value to the policy may also be accessible during your lifetime, if required.

Universal Life – Universal life offers a combination of life insurance coverage and a tax-deferred savings

component that is managed by the policyholder for the potential to achieve long-term estate growth. Generally, with each premium paid, the insurance company deducts the amount needed to cover the costs of the policy and the rest is considered the “account value.” This savings component can then be managed and invested by the policyholder. Premiums may also be increased to raise the amount of tax-deferred savings (within certain limitations). The cash value of the policy may be accessible during your lifetime, if required.

For Estate Planning: Permanent insurance is often the preferred option when using insurance for estate

planning purposes. It can be used to help to cover estate liabilities, such as taxes, mortgages or debts on assets like a cottage or business, so that the assets do not have to be sold and can be passed along to beneficiaries. Permanent insurance can help to establish a fund to provide income for spouses, children or grandchildren. It can help facilitate business succession planning or estate equalization. It may also provide a tax-efficient way of making a donation to a charity.

Seek Advice

The type and amount of insurance coverage required to support your estate planning needs will vary depending upon your personal situation and estate planning objectives. We can help to provide suggestions, so please let us know if you would like to have a discussion.