There are two types of life insurance, term which is renting your insurance and permanent which is owning your insurance. Let me explain the differences.
What is term insurance?
Term life insurance is temporary insurance (rented) which provides inexpensive protection for a set “term” such as 10 or 20 years. Term insurance has no cash value, rates increase at the end of your term and eventually the policy expires. While the primary benefit of term policy is its affordability, it’s important to note that once the term ends, coverage either stops entirely or the premiums increase significantly. This is a short term solution usually for income replacement purposes not for estate, legacy or tax planning.
What is permanent whole life insurance?
Permanent life insurance is insurance you own. These policies can be paid off over 5,10 or 15 years, policies have a permanent life insurance benefit and cash value that you can access if need be.
-
Death Benefit: Because the permanent insurance never expires, the death benefit payout is guaranteed regardless of when you pass away.
-
Cash Value: A portion of every premium payment you make goes into the cash value where it grows tax-deferred over time. You can borrow against the cash value, withdraw from it, or use it to pay your future premiums. This provides you flexiblity should you want or need cash in the future.
- Gurarantees. Each and every year as you get a policy statement, your cash values and death benefit is guaranteed. Unlike regular investments that fluctuate year by year, every year as your dividends are paid in, your cash value and death benefit is vested and guaranteed never to go down
Why do clients with grown up families, no financial obligations and significant assets own permanent life insurance?
Tax. Clients who have saved well over their careers no longer need life insurance for income replacement. However, they want life insurance for tax and estate planning. So lets understand how assets are taxed when you and your spouse/partner pass away.
-
- Registered assets (RRSP/RRIF) – The value of the RRSP/RRIF is taxed as income. The highest marginal tax rate is 53.53%
- Non-Registered Investments – Gains are subject to capital gains tax of 26.76%
- Vacation property/cottage – Gains are subject to capital gains tax of 26.76%
- TFSA – The value flows tax free.
- Primary residence – The family home flows tax free.
- Capital gain on the disposition of shares of a private corporation. Most private corporations are setup with a share value of $1. The deemed value of the corporation at the time of death is the fair market value of these investments in the corporation. This value will be taxed as a capital gain as the shares are deemed to have been disposed. For example, lets assume you have $5M in assets in your corporation when you and your spouse pass away. In this case, your estate owe at least $1,26M in tax.
Life insurance may be one of the most important purchases you will ever make. Insurance is not expensive, poor planning is.
If you want to review your insurance please reach out.
CLICK TO REVIEW YOUR INSURANCE
Elliott Levine, MBA, CFP at Levine Financial Group in Toronto
416-222-1311 I info@levinefinancialgroup.com