June 28, 2024

Do you need life insurance if you’re wealthy?

By Kristen Mayne

Even for the most affluent individuals, life insurance can be an important part of financial planning. It can be used to help grow, preserve, and transfer wealth.

How to use life insurance to grow and protect wealth

Life insurance is something everyone can benefit from. However, it’s especially important for those with a high net worth. It can help provide protection for your family, grow your wealth, assist with estate planning and more.

1. Protect your wealth

If you have a life insurance policy and designate a beneficiary other than your estate, the full life insurance payout goes to your beneficiary. Creditors of your estate can't go after that payout.

2. Divide your estate

Estate equalization means balancing your estate among your heirs. However, dividing an estate equally may be a challenge. For example, let’s say you want to leave a cottage worth $900,000 to one child. And you also want to leave $600,000 worth of investments to another.

A life insurance policy could help solve this imbalance. It allows you to top up the lesser inheritance so both children inherit equal value. Remember tax, though, and speak with a tax advisor. The cottage may have appreciated substantially, so that much of its $900,000 value may be taxable capital gain. But assets in the $600,000 investment portfolio may have been sold and reinvested over the years, so that it’s possible that very little of its current value is taxable capital gain. Estate equalization becomes even more complicated when your client is also dealing with registered assets.

3. Tax-free payout

For the most part, life insurance payouts are not taxed in Canada. This means your beneficiaries receive the full amount you want to leave them.

4. Protect your estate

Life insurance can help protect the value of your estate. Here are three ways it can help with estate planning if you name your estate as the beneficiary of your policy:

  • The executor of your estate can use the funds to pay off estate debts or taxes owed as a result of taxable gains incurred from:
    • the deemed disposition of registered and non-registered investments, or
    • secondary properties like a cottage or an investment property.

Having funds available in your estate from insurance proceeds may avoid the need to sell part of your estate to raise cash.

  • The life insurance payout can be used to pay probate expenses. These are fees charged by the government based on the deceased’s estate value. The payout can also be used to pay for executor’s fees and other legal expenses. Of course, making the insurance policy death benefit payable to the estate will add to the probate fees owed.
  • The payout could help cover funeral costs.

5. Diversify your portfolio

Life insurance isn’t often thought of as an investment. But it has gained recognition as an alternative asset class. This is because the after-tax rate of return achieved by permanent life insurance often outperforms the rates achieved by more traditional investments. This includes GICs and government bonds.

6. Provide extra tax-free retirement income

Permanent life insurance can be used as an additional tax-efficient source of retirement income.

One way is to use the cash value of the policy as collateral for a loan from a financial institution. The financial institution gives you a series of loans, for which the insurance policy is collateral. Under the current laws, the loan proceeds are received-tax free.

It may be possible to set up the loan arrangement so that no interest is payable on the loan until death, although some lenders may insist on a loan repayment schedule. Upon death, part of the payout goes to cover the loan and the rest goes tax-free to your beneficiaries.

7. Fund a buy-sell agreement

A buy-sell agreement, often funded by life insurance, helps protect the value in your business for your family, and helps protect the business as a going concern for all the owners of the business. When a business owner dies, the insurance proceeds are used to buy out the deceased’s shares from their family. The value of the business passes to the deceased business owner’s family, and the surviving owners can continue the business.

8. Support a cause

Permanent life insurance can be a great way to support your favourite cause.

Here’s a couple of ways how:

  • One is to name your charity of choice as the beneficiary of the policy. To donate only a portion of the proceeds to the charity, you can name your estate as the beneficiary instead, and make a charitable bequest in your will for the desired amount. The charitable tax credit is used to reduce income taxes payable by the estate.
  • The other is a policy donation. This is where you donate a new or existing permanent insurance policy to a charity, allowing the charity to become the owner and name itself as the beneficiary. You then pay the annual premium and receive a tax receipt each year for that amount. Remember that this strategy is irrevocable. You can’t get your policy back, even if you later change your mind about the charity. If this concerns you, consider donating your policy to a charitable foundation.

Protect what matters most

Life insurance can protect the financial security of the people you love.

This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.

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