Need for Life Insurance
Life Inurance's most obvious and significant benefit is the lump sum payment it provides when the insured person dies. This lump sum is paid directly to the beneficiary designated in the life insurance policy and it's not taxable.
Proctecting Dependants
The most common use of life insurance is to protect a person's dependants. If that person dies, his or her dependants could have to deal not only with the loss of a loved one, but also the loss of that person's present and future income.
The tax-free, lump sum payment that a life insurance policy provides can replace the deceased person's earnings, pay debts and other liabilites, and cover education costs and daily living expenses.
Estate Preservation
Another use of life insurance proceeds is to pay debts, tax liabilities and other estate costs so the estate's assets don't have to be eroded or borrowed against to ccover these expenses.
Below are some of the financial liabilities that can threaten your estate and how life insurance can help protect the assets you worked so hard to build.
1. Capital Gains Taxes
Life Insurance can provide funding to pay for capital gains tax that you owe.
2. Registered Plans and Tax Liabilities
When you pass away any registered funds you own will create a tax liability of the estate. Life insurance offers an effective way to offset that liability.
3. Estate Taxes
You may be liable for estate taxes in other jurisdictions when your loved ones die.
4. Probate Fee and Other Estate Costs
Life Insurance can provide the funding that is estimated will be needed to cover probate cost as will as other estate costs. Other estate costs could include funeral and burial expenses, estate administration costs such as executor's fees, valuator or appraiser fees, and legal accounting fees.
5. Building and Preserving an Estate
As we all know, it's not easy to accumulate money and it's even harder to amass significant funds to leave behind.
Because exempt life insurance policy's proceeds are paid tax-free to the beficiary, life insurance can be an efficient way to create an estate and to transfer wealth to later generations.
Creditor Protection
Some people are interested in protecting their assets from creditors' claims. Life insurance can offer this protection, depending on provincial laws and how the policy is set up.
Withdrawals, Policy Loans and Leveraging
Once a significant cash value has accumulated within an exempt life insurance policy may be accessed directly through a cash withdrawal or policy loan. These transactions would be considered dispositions of the policy and are potentially subject ot taxation.
Leveraging is another option that allows the policy owner to access the value with the policy without triggering the tax consequences that often accompany a dispostion. It involves creating an income stream by using the life insurance policy as collateral security for a loan.
Collateral Insurance
Life Insurance can also help you get a loan from a lending institution. Lenders will often require a life insurance policy as collateral security for a loan.
Intergenerational Wealth Transfer
A life insurance policy can serve as a vehicle for transferring accumulated wealth to the next or succeeding generations while you are still alive. This is possible because, under specific conditions, ownership of a life insurance policy can be transferred without triggering tax consequences.
