As part of Financial Literacy Month, we’re offering advice to help you make wise insurance decisions. This week, we explain why life insurance is a crucial part of your estate plan.
Generally there are two reasons for purchasing life insurance: to support your loved ones financially in the event of your death, and to preserve the value of your estate for your beneficiaries.
Large or small, every estate costs money before it is “settled”. There are probate fees, taxes, debts that must be paid, assets that need to be liquidated and funeral expenses. All of which can quickly erode the financial settlement that would otherwise go to your surviving partner, spouse, children or other beneficiaries.
A life insurance policy can take care of these expenses, thus preserving more of the value of your remaining assets.
Probate Fees and Estate-Related Costs
Probate is a legal process that validates your Wiill and confirms the appointment of your executor(s). Fees are either flat or based on the value of your estate, depending on the province.
In addition to probate costs, there are burial and funeral expenses, and other estate administration costs such as executor fees, valuation and appraisal fees, and any legal or accounting fees.
Death and taxes
When a taxpayer becomes deceased, the Canada Revenue Agency (CRA) considers all of that person’s assets as part of the estate, and a final tax return is submitted. Taxes are paid to the CRA from the estate before an inheritance is awarded to the beneficiaries. A life insurance policy can help to replace funds paid out to the CRA.
If there are liabilities remaining upon the event of your death, such as a mortgage, it may mean that your assets need to be liquidated in order to pay them off. A life insurance policy can cover those liabilities and allow assets such as a cottage or a business to remain in the family.
The CRA considers that upon death, a taxpayer disposes of RRSPs and RRIFs for proceeds equal to their fair market value. This means the funds from these plans are fully taxable in the year of death.
If the RRSPs or RRIFs are left to a surviving spouse or partner, taxes will be payable by the beneficiary. Life insurance can fund the tax liability resulting from bringing registered funds into the income of an heir.
Upon the death of a taxpayer, the Canada Revenue Agency expects that any business property will be sold at fair market value. This property would include equipment, buildings and vehicles, as well as shares in a corporation, partnership interests, mutual or segregated fund units, and land.
Life insurance can help in a number of ways. Your insurance can pay capital gains taxes, cover the difference if market conditions are not particularly favourable, or fund the “purchase” to your beneficiaries so they can retain the property.
Protection from Creditors
If your estate is the target of creditors, your insurance policy can provide much-needed funds to your surviving beneficiaries. Provincial insurance laws provide that where a spouse, child, grandchild or parent is a beneficiary, insurance proceeds are exempt from seizure by creditors.
Life insurance benefits are paid directly to your beneficiaries, and as such, they are not considered part of your estate and are non-taxable. Your life insurance can provide the necessary funds to cover all of these expenses, increasingly the likelihood that your entire estate is awarded to your beneficiaries. Talk with your broker about including life insurance as part of your estate plan today.
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