Many people think that life insurance is only for emergencies — the most pressing emergency being the death of the policy holder. And it’s true that most people take out life insurance in case the worst happens, and they need the payout to replace income, pay off debts and cover their final expenses.
As the decades pass, and you reach your 50s, you may well feel that the reasons for having life insurance are no longer valid. Your mortgage is paid off, your kids are grown up and a bigger priority is boosting your retirement savings. If you bought term life insurance, which expires after a certain number of years, you’ll likely let it lapse, happy that you didn’t need it.
However, keeping your family financially secure should the worst happen is just the tip of the iceberg of what life insurance can do. Most people aren’t aware that life insurance can also be used for complex estate planning strategies. In fact, results ftom a recent IG insurance survey revealed that, while almost 90% of high-net-worth Canadians plan on passing their estate to the next generation, only 17% understand how life insurance can help them to do this.
If you have a financial advisor who provides holistic financial advice, including cash management, retirement planning and tax and estate planning, it’s likely that they’ll recommend life insurance over 50, if it will benefit your particular circumstances.
Here are a few ways life insurance over 50 could be a very useful financial strategy that goes far beyond dealing with emergencies.
Cover estate taxes
Life insurance over 50 can be a good plan of action if you intend to pass a big asset on to your kids, such as a cottage or shares in the family business. In this situation, your estate could get hit with a serious tax bill after you die. For instance, if your cottage has appreciated in value by $1 million and you’re in the 50% tax bracket, the tax on the capital gain could be as much as $250,000.
Your executor might have to sell the cottage or find cash elsewhere in the estate to pay the CRA. Having permanent life insurance over 50 could avoid this situation. After you pass away, your estate would get a tax-free lump sum of cash that can be used to pay off your estate’s tax bill. It’s one way to fund your final tax bill for the lowest cost.
Passing on a fair inheritance
Typically, people want their estate to be divided equally between their offspring. However, in many cases, dividing up assets equally is not a cut and dried process. For example, if you wanted to leave your business to your oldest child (who now runs it for you), how would your other children feel about their smaller inheritance?
What if you had a couple of large assets — such as your home and a vacation property — but three or more kids? This could make a fair distribution of your overall estate practically impossible.
Apart from the fact that these situations result in an estate plan that is unfairly distributed, they could also lead to litigation issues after you’re gone. Even if you clearly stated your wishes in your will, your surviving children could contest it if they feel it’s unfair.
You could avoid this situation by taking out a permanent life insurance policy and naming as beneficiaries those children who are not due to receive one of your major assets. There’s also the added benefit that life insurance doesn’t become part of your estate or even your will. This means that it can’t be contested and the proceeds are tax free, so it won’t adversely affect how you distribute the rest of your estate.
You can leave more to charity
If you’re passionate about a particular charitable organization, you could either leave money to it in your will or make it the beneficiary of a permanent life insurance policy. Some life insurance policies grow in value over time, so the longer you live, the more the organization could receive. Once your charity is paid, you can just divide your estate between your heirs.
An added bonus is that the charity will issue a tax receipt to the estate for the donated amount, which will help reduce the amount of taxes your estate will have to pay. You could also choose to get annual tax receipts when you donate the policy to charity during your lifetime, as you pay the insurance premiums. Your advisor can recommend the best approach for your particular circumstances.
Build a bigger nest egg
When you have enough money to fund your retirement but want to grow more wealth to pass on to the next generation, permanent life insurance can be used as a useful investment tool. Participating life insurance includes an investment component that allows you to grow your money on a tax-free basis, as long as the funds remain within the policy.
If you were to grow your money in a regular investment product, your estate would pay tax on its earnings, but money earned within an insurance policy is paid out tax free upon death. It’s an effective way of reducing your final tax bill by shifting a portion of your assets into a tax-free insurance policy.
Be sure to qualify as early as possible
There are a couple of key challenges when it comes to buying life insurance over 50: you might not qualify for it and, if you do, you might have to pay large premiums.
If you’re still relatively young and in good health, qualifying for life insurance over 50 shouldn’t be beyond your reach, but the older you are and the more health conditions you have, the harder it will be to qualify for affordable life insurance.
Taking out life insurance at a younger age would mean that you could get all of its benefits at a reasonable price.
Get advice on life insurance that’s right for you
An IG Advisor will consider how life insurance would fit in with your entire financial plan. They’ll weigh up your estate planning needs and work out whether life insurance will help you to distribute your assets in a fairer way, provide you with tax savings or leave a larger legacy.
If you’re considering life insurance over 50, talk to your IG Advisor first. If you don’t have a 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 Consultant.
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).