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Tag: Life Insurance Guide

  • Should you buy life insurance to pay for tax owed upon death? – MoneySense

    Should you buy life insurance to pay for tax owed upon death? – MoneySense

    Capital gains tax, Nazim, might apply to some of your assets. If you own non-registered stocks or a rental property, for example, they might be subject to a capital gain on your death. Your home would likely be sheltered by the principal residence exemption. A tax-free savings account (TFSA) is tax free, whereas a registered retirement savings plan (RRSP) is not subject to capital gains tax, but is subject to regular income tax. Your RRSP, unless left to a spouse, is generally fully taxable on top of your other income in the year of your death.

    The tax is payable by your estate, so although it reduces the inheritance left to your beneficiaries, it’s not payable directly by them. It can be paid with the assets that make up your estate.

    Hard versus soft assets

    You mention that your estate is made up of hard and soft assets, Nazim. I assume by hard assets you mean real estate. And by soft assets you mean cash, stocks, bonds, mutual funds and/or exchange-traded funds (ETFs).

    Your soft assets can be very liquid and used to pay the tax that your estate owes. That tax is not due until April 30 of the year following when your executor files your final tax return. If you die between November 1 and December 31, there is an extension to six months after your death for your executor to file your tax return and pay the tax owing. So, there’s always at least six months to come up with the funds required to pay income tax on death, and there’s more than six months when a death occurs between January 1 and October 31.

    Since soft assets are considered sold upon death, there is generally no advantage for your beneficiaries to keep those assets rather than turn them into cash or into other investments of their choosing.

    Your hard assets, Nazim, are obviously less liquid. If there is a special property, like a family cottage or a rental property, they choose to keep, I can appreciate how you might want to make sure they can do that without being forced to sell.

    Should you buy insurance to cover tax owed upon death?

    Your cash and investments may provide sufficient funds to pay taxes owed upon death. Or your beneficiaries may choose to sell one or more of your real estate properties. You could buy life insurance to pay the tax, but I find this strategy is oversold or misunderstood. I will explain with an example.

    Let’s say you are 62 years old, and your life expectancy is another 25 years, based on your current health. If you buy a life insurance policy that requires a level premium of $5,000 per year for life, and you pay that premium for 25 years, you will have paid $125,000 to the insurance company. If you instead invested the same amount each year at a 4% after-tax rate of return, you would have accumulated $216,559 after 25 years.

    Jason Heath, CFP

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  • Should seniors cancel their life insurance policies? – MoneySense

    Should seniors cancel their life insurance policies? – MoneySense

    It’s got to be your decision. To help you decide, I will give a quick review of why purchasing insurance makes sense and the two types of insurance available. You can then relate the reason for purchasing insurance to your current need for insurance. 

    Why do Canadians need life insurance

    Ultimately, Canadians buy life insurance because they want to take care of others should something happen to them. They want to protect their survivor’s lifestyle or maximize the inheritance with insurance when they pass away unexpectedly, or naturally after a long, healthy and happy life.

    There are two financial needs to consider when determining the amount of insurance needed: How much income would be needed, as well as current and future debts. Current debt may be a mortgage, and future debt may be children’s university expenses or future taxes.

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    How much life insurance would you need?

    A simple method in determining the how much insurance you need to replace your income is to divide the income needed by a safe investment return.

    If you need to replace an annual income of $50,000, and you think you can safely earn 5% on the invested insurance proceeds a year, then divide $50,000 by 5%. This gives you a need for $1 million of insurance, or $1 million minus your existing investments. That is earning 5% a year on a $1 million gives $50,000 a year.  

    You could argue that you don’t need the $50,000 annual income replacement for life because, your expenses will be lower as you age, you will have other income such as the Canadian Pension Plan (CPP), Old Age Security (OAS), and so on. That’s all true— but this calculation does not take into consideration inflation. Over time inflation will whittle down the value of that $1 million.

    Does life insurance cover debt?

    Yes, and once you know how much insurance you need to replace income, then just add on the debt.

    Maybe when you purchased the insurance your situation looked a bit like this: A $750,000 mortgage and anticipated post-secondary expenses of $250,000 for children, if any, means upping the insurance from $1 million to $2 million.

    Allan Norman, MSc, CFP, CIM

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