Life insurance helps Canadians manage risk, provide security for their families and businesses and is an important component of effective estate planning. Life insurance is a powerful financial planning tool available to wealth holders wishing to manage and transfer their wealth in the most tax-efficient manner possible.
At its core, life insurance is designed to provide tax-free liquidity to address a wide variety of financial needs that may arise upon death, such as:
- Capital gains tax liabilities
- Shareholder buyout obligations
- Income support for dependents
- Repaying debt
Life insurance can also be used strategically to capitalize on additional wealth protection and enhancement opportunities, such as:
- Enhancing the intergenerational transfer of wealth
- Supplementing retirement income
- Charitable giving
- Estate Privacy
THE BASICS OF LIFE INSURANCE TAXATION
Life insurance can be owned by an individual, a trust or a corporation, and in all cases the beneficiary receives the benefit tax-free upon the death of the insured. Ownership decisions are based on many factors, only one of which is income tax.
Most, if not all, insurance policies available today are considered ‘exempt’ policies, which means that funds are permitted to accumulate within the policy on a tax-exempt basis. This special tax treatment provides the opportunity to build a tax-free asset that can be used to address a wide variety of personal or business planning needs.
CORPORATE-OWNED LIFE INSURANCE
The are special rules for corporations that allow insurance proceeds to be received by the corporation and subsequently distributed to its’ shareholders tax-free, through a mechanism known as the Capital Dividend Account (CDA). Dividends paid from the CDA are tax-free to a shareholder and are an important estate planning tool that can reduce or even eliminate tax on the death of a shareholder.
2x
Enhanced legacy for the ones you love
Life insurance is among the very few assets available in Canada that is permitted to grow on a tax-exempt basis, providing an opportunity for individuals and corporations to achieve superior long-term results through the strategic allocation of capital.
2x
Enhanced legacy for the ones you love
Life insurance is among the very few assets available in Canada that is permitted to grow on a tax-exempt basis, providing an opportunity for individuals and corporations to achieve superior long-term results through the strategic allocation of capital.
Life Insurance as an Investment Asset
Life insurance is often overlooked as an effective investment. However, given its stability and tax favoured status, life insurance provides exceptional risk-adjusted returns when compared to other taxable investment alternatives. This is particularly true for individuals and corporations that are subject to high tax rates on their invested capital.
For high net worth families, life insurance provides a complementary asset class to their investment portfolio, enabling them to accumulate and transfer their wealth to the next generation on a tax-free basis.
Consider the following example for a family holding company, holding taxable fixed income investments. Below is a comparison of the after-tax estate resulting from a corporate investment in life insurance vs. a taxable investment.
Assumptions
- Male & Female, both age 65 – Non-smokers
- $250,000 annual investment for 12 years ($3 million total)
- Taxable portfolio return 5%
After-Tax Estate Value Comparison
Taxable investment value is eroded by annual taxation in addition to the tax on dividends as these funds are distributed from the corporation.
Flexible, predictable, cost-efficient.
Funding for Capital Gains Tax
Life insurance can efficiently pre-fund capital gains tax arising at death for pennies on the dollar.
Tax-Efficient Transfer of Family Wealth
Life insurance protects wealth and allows it to be transferred in a tax-efficient and private manner.
Insurance Assisted Philanthropy
Life insurance is a powerful tool that can greatly enhance a donor's capacity to make a meaningful difference.
Enhancing Retirement Cash Flow
Life insurance can serve as a tool to provide enhanced levels of tax-efficient income throughout retirement.
