Life Insurance: A Most Efficient Tool

Insurance comes in many different forms and helps people to protect themselves and their loved ones from risk. These risks include death, disability and the loss of property or belongings. Through the use of insurance people can manage the financial consequences of these risks.

Life insurance in particular affects financial planning by protecting against loss of human capital caused by death.

While life insurance is usually thought of as a last expense fund, there are many other reasons to consider a plan from our group:

  • Insurance can be used as a tax shelter.
  • Insurance can be used in a Buy/Sell Agreement
  • Insurance can be a most valuable tool when it comes to conservation of your estate. Life insurance is ideal for satisfying the tax liability that arises on death. It can provide the capital infusion to allow an individual’s estate to pay the taxes and avoid having to liquidate other assets. The Income Tax Act deems all assets to be disposed at fair market value on a taxpayer’s death. Disposition could result in capital gains and other income taxes.

One half of capital gains, referred to as “taxable capital gains” are included in income. On a deemed disposition, this can result in a loss of 20% of the value of some capital properties. However, it is possible to defer the capital gains taxes when property passes to a surviving spouse. Deferral also applies to registered retirement savings plans, pensions and depreciable properties transferred to the spouse.

If property does not go to a surviving spouse, then tax will arise on the death. If the property passes to a spouse, then the tax will apply on the death of the survivor. However, people usually want to conserve their estate so that it passes intact to children or other beneficiaries after the second spouse dies. Life insurance allows advance funding of tax liability.

Every situation is different and that is why you need to call a professional.