Why does life insurance make so much sense? In a recent Globe and Mail article, personal finance expert Tim Cesnick explains.
Cesnick points out “If you’re primarily invested in real estate, a private company, or other liquid assets, where’s the cash going to come from to pay taxes owing when you’re gone? Life insurance can solve that problem.”
Kyle McDonald of Pivot agrees, “Life Insurance is the most efficient and least expensive way to obtain the cash needed to settle an estate, hands down! Out of the four potential methods to accomplish estate liquidity, only the use of life insurance avoids selling estate assets, borrowing, or maintaining large amounts of cash.”
When something happens to the primary bread-winner, life insurance can provide income in the form of an investment portfolio to help replace the family’s income.
“Life insurance can help protect the people who rely on you, and assure them that they will be taken care of if you are no longer there. It can be used to provide financial security and income for those you name as beneficiary.” Canada Life.
Equally dividing up an estate between several heirs often leads to conflict. Family members sometimes feel they have been cheated or not received their fair share. Cash from a life insurance policy can be used to ensure everyone is treated equally.
“With an effective life insurance strategy, you can leave the asset to one child and leave a monetary gift for other beneficiaries with the proceeds from a policy. Both term and permanent life insurance can be used as part of an estate-equalization strategy.” Convergis.
Upon your death, your life insurance policy pays out a tax-free lump sum of cash. Your beneficiaries receive the face value plus accumulating investments. Investments grown outside of your policy will be taxed upon your death if your spouse does not inherit the assets. Life insurance can eliminate that tax.
“As a beneficiary, life insurance proceeds are not included in your gross income, therefore, do not need to be reported and are not taxed.” Carlos Dias Jr. of Excel Tax & Wealth.
Buying life insurance on the lives of their children instead of themselves is an interesting strategy to get lower premiums. Once the children reach adulthood, the ownership of the policies and all accumulated assets can be transferred the kids, tax-free. The grandchildren can be named as the beneficiaries, providing a valuable, tax-free legacy for future generations.
“A life insurance policy can be the keystone in an intergenerational asset transfer plan. A client who wants to pass money to a grandchild can take out a life policy that insures the client’s adult child, with the grandchild as the beneficiary of the policy. The money in the policy will grow on a tax-free basis, presumably for many years until the grandchild’s parent dies, and then go to the grandchild. This will help ensure that the grandchild doesn’t come into the money at an early age,” says David Brown, a partner with Al G. Brown & Associates in Toronto.
With permanent life insurance policies (not term), a portion of the premiums you pay go into an investment pool. Over time, these investments grow, exempt from tax.
Tim Cesnick says, “If you’re accumulating part of your investment portfolio inside an insurance policy, holding all or some of your fixed-income investments in the policy will allow you to shelter what might otherwise be highly taxed interest income.”
We all want to donate to charity or help a worthy cause, but many times we find our cash flow doesn’t allow us to give as much as we would like. Proceeds from a life insurance policy may be the answer. You can donate all or part of your policy to the charity of your choice.
“Donating life insurance to a charity can be an excellent way to transform affordable premium payments into a substantial future donation. The charity receives the insurance proceeds like a regular beneficiary would, but the payments to the charity are considered a donation in the year of death.” Covenant House.
A business can be greatly affected when a key person suddenly dies. Life insurance can help keep your business running after you are gone. It can provide funds needed to cover overhead and train a replacement until the business can be stabilized.
“The loss of critical personnel can be life-threatening to small businesses; however, it’s a risk that life insurance often can mitigate. In fact, life insurance policies are frequently used in plans aimed at making it possible for a business to survive a change of ownership or the loss of a partner.” John E. Day, Business Monthly.
One of the most frequently asked questions about life insurance is “How much do I need?” The most common answer is “Enough to cover all your debts.” You don’t want to leave your loved ones with a load of debts, you want them to be financially secure.
Paul Russell of the Star says, “Repayment of debts. This includes a mortgage, ensure your dependants don’t have to sell the house and can maintain their standard of living.”
You can reap the benefits of your life insurance while you are still alive. Tax-sheltered investments from your policy can supplement your retirement income, however any cash withdrawals you make are taxable. You can also borrow against the accumulated value. Amounts borrowed can then be paid off with the some of the remaining proceeds after death.
“A whole life insurance policy’s cash value can provide a stable source of supplemental retirement income that is not impacted by short-term market volatility. The accumulation of your life insurance policy’s cash value is guaranteed, regardless of market conditions.” Mass Mutual Financial Group.
