If you’ve got a house, a spouse and young kids, or any combination of the above, you likely have life insurance to protect your family in case you’re not around to earn money anymore.
“It’s what we call an income replacement strategy,” says Sheryl Troup, director, tax and estate planning with IG Wealth Management. “If you die, you still need to pay the bills and put the kids through school.”
Your insurance owning days may not be over yet. Indeed, many people after 50 do buy life insurance, but for entirely different reasons than they did when they were younger.
As the decades pass, your mortgage will get paid off, your kids will grow up and your attention will turn increasingly more towards retirement savings. If you bought term life insurance, which expires after a certain number of years, you’ll likely let it lapse, happy no one needed it.
However, your insurance owning days may not be over yet. Indeed, many people after 50 do buy life insurance, but for entirely different reasons than they did when they were younger.
People take out a policy because it can help with complex estate planning, says Mike Thomas, Vice-President of Insurance Distribution for IG Wealth Management, though the average boomer doesn’t typically think of life insurance for this purpose. “Most of the time it’s an advisor who brings up the issue,” he says.
Here are a few ways life insurance can help in your later years.
Cover estate taxes
If you plan on passing a big asset to your kids, like a cottage or shares in the family business, your estate could get hit with a serious tax bill after you die. For instance, if your cottage appreciates by $1 million and you’re in the 50 percent tax bracket, the tax on the capital gain can be upwards of around $250,000, says Troup. Your executor may have to sell the cottage or find cash elsewhere in the estate to pay the CRA.
Instead of selling, consider buying permanent life insurance. After you pass away, your estate will get a tax-free lump sum of cash that it can use to pay off taxes associated with that asset. “It’s a way to fund the tax for the least cost,” says Thomas.
Everyone gets the same inheritance
In most cases, people want their estate to be divided equally between their offspring. But in many cases asset splitting isn’t as cut and dry as people would like it to be. Maybe one child runs the family business, while another wants the house. What if you’ve remarried and you’re worried the new spouse may unintentionally give your kids less than what they’re entitled to?
Designating a permanent life insurance policy to the children who might need a top up, or to the state with specific instructions on how to dividend the funds, can help level things out. “It’s not always entirely equal in value, but it’s to provide something to them,” says Troup.
Leave more to charity
If you have a charitable organization you feel passionate about, you can leave money to that organization in your will. Another option, though, is to purchase a permanent life insurance policy, and make the charity the beneficiary. The policy may also grow in value over time, so the longer you live, the more the organization will get. Once your charity is paid, you can just divide your estate between your heirs.
Another bonus: When the charity gets its money, it will issue a tax receipt to the estate for the donated amount, says Troup. That receipt will help reduce the amount of taxes your family will need to pay upon your passing. (You can also choose to get annual tax receipts when you donate the policy during your lifetime to the charity, but you continue to pay your premiums; your advisor can help choose the best approach.)
Build a bigger nest egg
When you have enough money to fund your own retirement, but want to tuck away more for the next generation, permanent life insurance can be used as an investment tool. You’d want to consider buying participating life insurance, which includes an investment component that allow you to grow your money on a tax-free basis, so long as the funds remain in the policy, says Troup.
If you were to grow the money in regular investments, your estate would pay tax on them, but money you earn within an insurance policy is paid out tax free upon death. “It’s a way to reduce your overall tax bill by shifting a portion of your assets into an insurance policy,” says Troup.
While buying insurance later in life can have myriad benefits for your estate and your family, there’s a caveat: you have to qualify for it and pay potentially big premiums. If you are still relatively young and in good health, that might not a problem. The older you are and the more health conditions you have, the harder it will be to qualify and get affordable premiums.
Insurance is complex, so you need to work closely with an advisor to assess your needs, find the right insurance product, and crunch the numbers. Ideally, look at insurance as early in life as you can. “Remember that it’s hard to buy house insurance when the house is already on fire,” quips Thomas. “Buying life insurance can work at any age. But the earlier you start, the better.”