How to use permanent life insurance to protect your estate’s wealth

When you’re young, life insurance can be used to protect your family by providing money to replace your income.

A family enjoys the benefit of knowing permanent life insurance will protect their estate’s wealth.

However, as you approach retirement, there’s less need for income replacement, and the focus switches instead to wealth protection. Wealth protection is a permanent concern, requiring permanent solutions. 

In this article, we’ll discuss three of the main concerns when it comes to efficiently protecting your estate’s wealth (and that of your beneficiaries), and how permanent life insurance can provide solutions to these concerns.

Preserving your estate’s value

Let’s first look at estate liquidity. Let’s say, after your death, your estate has a large tax bill because of capital gains (when your assets, including second properties, increase in value). If that tax bill is more than your estate’s liquid assets (assets that are easily turned into cash) where would the money come from to pay it? Let’s look at your options:

Selling assets to pay for the tax bill

Selling assets could reduce your estate’s long-term income potential. Killing the goose that lays the golden egg is not a good long-term strategy. Also, there could be transaction costs and additional taxation involved in turning those assets into cash, which could reduce the effectiveness of this option.

Borrowing money to pay the tax bill

The first concerns are whether the estate is in a position to borrow that kind of money and who would be likely to provide the loan. Whichever way the loan is secured, it would have to be repaid — probably with interest — which would make it an inefficient solution.

Saving up for the tax bill

With this option, the main challenge would be knowing when you would need the money. How would you know how much to save each year? Also, tying up large amounts of passive investments may not be a good long-term investment strategy. 

Using permanent life insurance

In most cases, for a very small percentage of the tax value annually, permanent life insurance can provide a solution with three key benefits:

  • It provides the cash amount you need when you need it. The money could be received, ready to cover all the estate’s financial obligations, as early as 30 days after death.
  • The cash is tax-free.
  • If the deceased owned a private corporation (or had shares in one), insurance could be even more efficient. The corporation would receive a tax-free payout, which could then be transferred to the deceased’s estate on a mostly tax-free basis, using the company’s capital dividend account.

Ensuring your estate is divided fairly

Imagine this scenario: you own a unique and valuable asset that you want to leave to one specific person. Or, perhaps you have a blended family and you want your children from your first marriage to receive some of your assets. How can you divide your estate more fairly?

Many  Canadians buy permanent life insurance for this very purpose. Even if you’ve managed to preserve your estate’s value, the assets may not be distributed fairly. If one person (or beneficiary) is due to receive a disproportionate amount of the estate compared to the other beneficiaries, or if there is a blended-family situation with assets being distributed to a range of beneficiaries, permanent life insurance can deliver an ideal solution. 

Permanent life insurance can provide a tax-free, cost-effective way of ensuring that a specific amount of cash goes to other beneficiaries of the estate.

As well as providing a payout in the event of your death, permanent life insurance can also provide the potential for tax-deferred investment growth. Many permanent life insurance policies build up a cash value, which you can cash in on cancelling your policy, or use as collateral for a loan.

On your death, a tax-free amount is paid to your named beneficiaries; this money bypasses your estate, thereby avoiding probate (the legal process of distributing a dead person’s estate). It can also help address privacy issues, which may be important in blended family situations (beneficiaries of an insurance policy are not made public, whereas details of probated wills are available from the relevant courthouse).

Let’s suppose you own a private company, and the proceeds of your permanent life insurance are going to one beneficiary. There are ways to fund the insurance premiums through the company and use special shares to transfer the insurance proceeds to other beneficiaries.

Maximizing your estate’s value

Some Canadians have excess capital, which they know they won’t need during their retirement and which they want to leave as part of their legacy. In this situation, many people rely on traditional investments to increase the value of their estate, while others rely on real estate or business ownership. While these are useful options, they do have tax implications.

A more tax-efficient option would be to reallocate those excess funds to a permanent life insurance policy. An exempt permanent life insurance policy provides tax-deferred growth while you’re living, and pays out tax-free on your death to your named beneficiaries or your estate.

Also, if you have a private corporation, using this strategy can provide even more benefits. During your lifetime, contributions to permanent life insurance will grow tax deferred and can reduce your passive-investment income tax. Not only would the death benefit be tax-free, but the death benefit minus the adjusted cost basis would produce a credit to your corporation’s capital dividend account. Capital dividends could then be paid out to the shareholders of the company on a tax-free basis, adding to the estate’s value.

Does a permanent life insurance strategy make sense for you?

Contact your IG Advisor to discuss ways that permanent life insurance could lead to more efficient (and tax-efficient) ways to protect your estate’s wealth. They’ll be able to look at your full financial situation, within the framework of your IG Living Plan, to discover opportunities for you to benefit from life insurance. If you don’t have an IG Advisor, you can find one here.

Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Advisor.

Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).

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