There is no greater tool on earth for estate planning than Life Insurance! Full stop. The proceeds of life insurance are tax free. I will say that again. TAX FREE!!
And for the crowd that proclaims, “I don’t need life insurance and they can sort it out after I die” – a crowd that formally included this writer – you don’t need to die to take advantage of the benefits of life insurance. Life insurance has been around for centuries and will be here long after you and I are gone. There are some benefits to some permanent life insurance that can significantly increase your net worth while you are still alive, and we will unpack it later in this chapter along with all the various types of insurance available.
Once we have figured out what it will cost us to die, and we have a will, we will know what we have and what we owe, we can start to plan. And when the plan is an estate plan, it means getting life insurance. And if you already have it, congratulations! We will make sure you have the right insurance for your needs and we will put that pesky insurance salesman to work for you and your family’s benefit.
Worried you won’t qualify? Well you can get life insurance up to 100 years of age! That should include most of us (but not all!). With a little forward thought (and some help from your agent – not all insurance companies are created equal), you should be able to find either coverage or an alternative for your beneficiaries.
Getting life insurance has never been easier. You can do it over the phone with no intrusive medical tests and no nurse visits. Just answer a few questions. There really is no reason not to have life insurance anymore. If you are interested in learning more about over the phone or online life insurance approvals, contact me here
There is simply no better instrument to transfer financial risk at death than life insurance. We’ve already learned from a previous post on this site how life insurance can help keep the cottage in the family, but it can help with so much more!
Types of Life Insurance
let’s look at the types of insurance:
There are essentially two types of life insurance. Term life insurance and Permanent life insurance. Permanent is sometimes referred to Whole Life insurance.
Term life insurance is often used to cover a temporary need over a specific period of time. A mortgage or a debt for example. Because the price of term insurance is based on the statistics hammered out by the company’s actuaries who predict the likelihood of dying at a certain age, or more importantly, during the term that you are insured, it is much less expensive. If you don’t die during the coverage period, it expires and that’s it.
Think of it like car insurance. You buy it for a year (term) and at the end of the year, the insurance is over. If you had an accident, they hopefully took care of all the repairs and headaches, and got you your car back, but at the end of the year, the insurance will expire, or be renewed at a new rate. If you did not have an accident, it is very likely your premium will be something close to the year before. If you did, it is likely that you should prepare yourself for an increase in premiums of some kind.
Term life insurance is very similar, but the term is usually 10 or 20 years, with a fixed amount paid to your beneficiaries if you die within that period of time. The fixed amount paid to your beneficiaries is known as the “face value”.
If you outlive the policy, congratulations! Your policy will either expire and your coverage is finished, or they will give you the option to renew for a new term, like with your car insurance. Since you are 10 or 20 years older, and therefore 10 or 20 years closer to death, the odds that they have to pay your beneficiaries a large cheque in the next term will have increased. If those odds are higher, then your premium will also be higher. So be warned. Premiums can be much higher upon renewal of term life insurance. It is the cheapest to get into, and most expensive to stay in.
There can be medical underwriting to get the policy but as discussed earlier, that is not a necessity anymore. For renewals and depending upon the options of the policy, you may renew without proof of insurability after the term, or they may want to see what kind of health risk you are before giving you a new policy. Term is great inexpensive insurance, and is very well suited to young families with the typical high debt that young families need to carry when they get started.
When you have dependants who are counting on you and your ability to earn and provide, this can be the cheapest way to cover the risk, when real life is pulling your dollars in every direction from mortgage payments to karate and ballet lessons.
But, it does expire.
And that brings us to the second type of insurance: Permanent life insurance.
There are not many guarantees in life, but permanent life insurance is guaranteed to pay and the only thing you have to do is pay the premiums, and then die someday. That’s it!
When it comes to estate planning, it is always better to be operating with a known quantity. Permanent life insurance will be there with a cheque when you die, and term life insurance might be, but term still infinitely better than no insurance.
Permanent life insurance is a little bit fancier than term also as it offers an investment component. Although both term and permanent insurance offer policies with several other options – known as “riders”- that can cover you for everything from critical illness additions to paying your premiums in the event that you are off work for a period of time, only permanent insurance has an investment option.
The investment option accumulates over the life of the policy, and you can access it in what is known as a “policy loan” or it will add to the face value of the policy. For this reason, permanent insurance can keep going up in value and that makes it very useful for estate planning purposes.
You may have bought a $100,000 policy 30 years ago, but it is now worth many, many multiples of that $100,000. That is the power of the accumulation component of permanent life insurance.
Permanent life insurance will also let you pay off your policy in a shorter period of time such as 12, 15 or 20 years. This means you pay the premiums for the 12, 15 or 20 years and then you are finished paying for life. This kind of policy is known as “paid-up” and they are wonderful. These policies keep appreciating in value for as long as you live, assuming you don’t draw on the cash value. Even if you do, you have guaranteed insurance for life. When you die, it will pay your indicated beneficiaries. Guaranteed.
Life Insurance Planning
Paid-up life insurance is a great option for a newborn child. You invest in a 20-pay permanent policy for a child and when the child turns 20, the policy is paid up and no other premium is ever due. The child now has life insurance for life that only increases in value and the investment component can help with the purchase of the first home or education or leave it in the policy to grow and grow! That is quite a gift for a young person just getting started in life.
As with all life insurance, the younger you are when you acquire the policy, the cheaper it will be. That said, paid-up life insurance policies are pricier than term or even regular permanent insurance, but they are worth it. They are a favourite of high net worth families, and with this kind of insurance, those families, will likely stay high net worth when someone dies and leaves a legacy.
Whatever kind you get, make sure you get some for your estate plan.
RRSP and RRIF Tax Planning
We all understand RRSPs and RRIFs are an important asset that many Canadians build up over their lifetime but they can trigger an even larger tax bill. From the time you started working and into retirement, all the way to age 71, you may have contributed, from time to time, to your RRSP. Lord knows there are enough commercials on TV and the internet urging us to do so. Especially around February of every year. Sound familiar?
We now know that any funds you withdraw from your RRSP will be taxed at the rate of your terminal income tax return, or possibly as high as 50% in some provinces. That’s a big percentage! In some cases your $200,000 RRSP that you built up over your professional career, will actually only be worth half of what it was, or $100,000 because the government will be waiting for their cheque before you can divvy up any part of it. It makes sense to plan for the inevitable tax bill
What if you had a $100,000 simple and cheap life insurance policy and indicated in your will that the proceeds were to cover the tax bill on the RRSP? Then the tax would be paid and the entire value or your RRSP would flow to your beneficiaries.
If you are interested in using this maneuver, be very sure not to indicate that your estate is the beneficiary of the life insurance. If you do, the proceeds of the policy will be subject to probate and taxed. It is far more efficient to indicate your beneficiaries on the life insurance policy as the same beneficiaries you intend to bequeath your RRIF or RRSP to. That way, the proceeds jump the probate wall and will land in the hands of those that you designated.
Now your RRSP tax bill is paid in full and your beneficiaries get to enjoy the full amount of your lifelong savings virtually tax free as you likely intended it. That’s planning!
What if you invested in a life insurance policy that pays the value of your RRIF or RRSP, then use the RRIF or RRSP to make the premium payments? If something happens to you, your beneficiaries will inherit the remaining proceeds of the RRIF or RRSP (after tax) as well as the entire life insurance policy which is of course, tax free! That is adding value to your estate. A word of caution here however, there is tax implication to making extra withdrawals from your registered accounts so consult an expert to see if this would be a good option for you and your family. You also have to live your own life, so make sure there is enough and don’t over extend yourself.
Life insurance is an excellent estate planning tool and now easier than ever to own. It is a tool you should consider.
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