Tom Hyde
Estate planning tips

If I have the cash, why would I spend it on life insurance? There are many reasons it could make sense.

People are surprised to learn that buying a life insurance policy as a senior is quite possible and could be quite useful. If you are in good health and have cash, the benefits might surprise you.

With life insurance the amount you can purchase depends on the need. There must be a financial reason for life insurance, and protecting wealth is a good one. Or perhaps charity is high on your list for legacy planning. Another very basic reason may be to protect household income so that a surviving spouse can remain in the home.

Remember that Old Age Security (OAS) ends on death and Canada Pension Plan (CPP) is reduced to a survivor benefit that is often significantly less than the combined CPP of a married couple. This could result in a decrease of $15,000 or more in annual household income. A life insurance policy would protect against that lost income if premature death were to occur. The surviving spouse would be the beneficiary and the tax-free proceeds would be invested or annuitized to provide the replacement income.

If part of your legacy planning is to support charity, consider enhancing that gift using a life insurance policy. I had a client do that very thing and the amount given to the charity was far more than she had originally planned. She also received tax benefits every year until she passed away through the strategy.

Having resources available to leave as an inheritance to family can be high on the list for estate planning for some people. If you qualify for life insurance, you can spend your money with peace of mind and still leave a legacy to children and grandchildren. And the benefit can transfer privately outside of the will by-passing probate and estate fees.

Tax Free Savings Accounts (TFSA) were a new thing several years ago and many savers are taking full advantage of the opportunity for tax sheltered growth and tax-free benefits to their spouse and family. But life insurance can accomplish the same thing and has been around as long as Canada itself.

Tax-sheltered growth in a life insurance policy can be another investment diversification strategy you have not considered. The basic insurance policy has a guaranteed death benefit but there is also upside potential from policy dividends or investment options offered by the insurance companies inside the policy.

TFSA is more liquid than life insurance but there is a cap on the amount you can deposit annually into the TFSA plan.

Capital gains taxes are a hot topic right now and for good reason. Your family wealth has a target on its back! Whether it is business accumulated wealth or recreational property, capital gains taxes are a reality. The taxes are bad enough for well thought out plans, but those taxes may be worse if they are triggered by an unexpected death.

Buying life insurance to cover expected taxes can be a smart strategy, especially if the taxation can be deferred until the transition occurs. The life insurance cheque comes at the same time as the tax bill.

The bottom line is, if you qualify for life insurance at standard rates at any age the numbers can make sense.

Tom Hyde, CAFA, PAg is an estate and financial planner with Pallister Financial.