Life insurance provides a tax-free death benefit and is a necessary component of most financial plans. Let’s look at the Top 20 Insights on using life insurance to protect our assets and build wealth. 

Types Of Life Insurance 

Term Insurance: Term insurance is the most commonly used plan for young families. Originally designed to cover finite needs from one to twenty years, it is now available for terms up to age 100. It offers bare-bones premium costs and extensive coverage, but is generally not considered suitable for tax planning, wealth creation, or estate planning, particularly for long-term capital transfers between generations. Bear in mind that as you age, your premiums will increase at renewal, if available, at the end of each term.

Permanent Life. There are differing viewpoints on the use of life insurance. Some advisors recommend buying term insurance and investing the difference; others prefer whole life insurance for permanent needs. A compromise often utilized by accountants and wise insurance specialists is:

Universal life insurance UL is similar to whole life insurance, as it accumulates a cash value, though the rates of gain vary over time. The internal growth is tax-deferred. The advantages of a universal life policy include:

• Eventually, once the investment has grown substantially, the insurance premium can be paid from before-tax dollars, funded by the investment vehicles.
• Death benefits are adjustable.
• Premiums may become lower than for other types of life insurance.

Various Uses of Life Insurance

Life Insurance Provides Basic Capital Security. In this case, the main purpose of life insurance is to ensure that dependents would have enough capital from which to live if the breadwinner were to die. Most typically, a young family would need financial resources to invest, in order to create an annual income to pay for the basic household expenses such as groceries, clothing, vehicles, repairs, and gas; home maintenance and taxes; utilities; phone bills; dental work; orthodontists; college or university; dance or music lessons, to name a few. These are the things you work hard for and naturally do out of love for those dearest to you. They are the reason you live, and you rise daily to the occasion to work for their well-being.

It Can Take Care of a Permanently Disabled Dependent. You may have an elderly dependent parent or a medically dependent child who is unable to earn an income. Life insurance can create capital that can be placed in trust to look after these folks and meet their long-term living needs.

It Can Pay for The Estate’s Tax Liabilities. Let’s suppose you want your cottage to pass on to your children after you and your spouse die. Has the cottage gone up in value, creating a capital gain that will incur a tax liability in the estate? Life insurance planning can meet this liability precisely when the taxes are due, at the surviving spouse’s death. Use a joint-lase-co-die policy to cover this liability. The proceeds will be paid out tax-free, though probate fees may be due.

Life Insurance Can Subsidize Your RRSP/RRIF In Retirement. If you have maximized your RRSP, consider buying a Universal Life insurance plan. The cost of the pure insurance component is cheap (usually a one-year term). Premiums can include a substantial investment in vehicles such as GICs or segregated funds. Eventually, you can borrow against the cash buildup, and over time, the insurance costs inherent in the plan can be largely paid for by the before-tax growth on these investments.

Life Insurance Proceeds are Paid Out Tax Free. The upside of a plan such as UL is that the entire proceeds, including the tax-deferred buildup that remains in the plan, the investment portion, are paid out tax-free upon death to the specified beneficiaries. Now, life insurance is a valuable perk that many accountants like to share with their wealthier clients as a planning tool. With larger policies, the potential for accumulation of tax-deferred investments, plus the additional use of the death benefit to address estate tax liabilities, is immense.

Some Life Insurance Benefits Can Grow. A built-in inflation factor can allow you to purchase additional life insurance each year to help the face amount grow. This also allows one to invest more in the investment sections of UL policies. Even without the inflation rider, depending on investment returns, most policies funded to the maximum allowed premium level will grow significantly.

Replace the Income Tax Lost on Your RRSP/RRIF. Once you and your partner are both deceased, your children can receive the RRSP/RRIF funds as beneficiaries. Many retirees think they will leave their remaining capital in their RRSP/RRIF to their children. Not true. Unless the RRSP/RRIF is being left to a spouse or a dependent child, it cannot be rolled over tax-free. If you plan to leave all of your $250,000 RRIF to your son and daughter, you will need to purchase close to half that amount in life insurance to cover the income taxes in your final return. In most cases, the good news is that it only costs one to three percent per annum on the investment to pay for the annual premiums.

Passing Wealth to The Next Generation

Transferring Significant Family Wealth. Some families want to pass on millions of dollars to the next generation. One way is to create a life insurance policy that provides tax-free capital equivalent to, or exceeding, the individual’s pre-tax net worth. Others may want to insure the value of their entire estate, including any business they own, passes unencumbered. The objective is to at least cover all income taxes due at death and to buffer the amount, injecting cash into the heir’s pocket to help them carry on the family business. In one case, an $80 million policy was purchased for a wealthy family in Toronto. Good accountants can make this a tax-advantaged move for some.

Waiver Of Premium. If you become disabled, a rider called a Disability Waiver can provide that the life insurer will pay the premiums to keep your life insurance in force if and when you become disabled for any period of time (benefits usually last after three or six months).

Business Uses of Life Insurance

Life Insurance Can Pay Off Business Debt. Many businesses carry millions of dollars in debt against their property and assets. Permanent Insurance makes sense. For example, life insurance can be used to redeem the farm for the children and/or the spouse if enough coverage is carried on the owner(s). If two brothers own a farm, insure both lives. If the mother is alive, perhaps insure her and create an estate bond that can pay off all existing debt and inject new capital into the farm for the next generation.

Life Insurance Can Help Replace a Key Man. If you own your company, and you die, who will replace you as CEO and president? Your firm may need to search for and hire a replacement who may cost a bundle. Key Man Life insurance offers a tax-free death benefit to assist the company in replacing your skill set and still leave some profit for your family. If any other person who is valuable to your firm could incur losses, insure them as well.

Life Insurance Can Buy Out Your Shares in the Company. If you are a major shareholder in a company, Life insurance can be purchased to fund a buy-sell agreement. The death benefit pays for your shares. The money ends up with your wife and other heirs. There are various ways to set this up.