Three Unexpected ways to Use Life Insurance
You’ve maxed out your RRSPs and TFSAs, you have more assets than you will use through in your lifetime, and you want to efficiently give either to the next generations(s) or to registered charities that you support – using life insurance could be a useful tool to accomplish some of these goals efficiently as part of a long-term planning strategy.
Let’s look at three scenarios:
Scenario One
Lenny (age 70) is earning just over $15,000 in interest payments from the bonds she holds in her non-registered investment account each year. She uses $7,000 to fill her TFSA, but has no use for the remainder, and this excess tends to purchase more fixed-income. Lenny would like this money to be gifted to her adult children when she passes and is concerned about how much tax she’s paying on the interest income each year. Lenny purchases a permanent whole-life insurance policy for $8,800 annual premium which provides her with an insurance policy for $150,000 and a death benefit that will grow over the years (expected death benefit of $259,000 at age 90). Now Lenny’s interest income excess is being sheltered in the insurance policy, the funds destined for her children will be paid to them tax-free on her death, and she is not adding to her interest earnings each year.
Scenario Two
Carl’s registered accounts are significant and he will be unable to use the value of the accounts prior to his death. He also owns a cabin property that has appreciated significantly since he purchased it. If he passes at age 90, there will be a significant tax liability which will reduce the value of his estate. His goal is to gift to his family and to do so tax efficiently. Carl (age 64) purchases a permanent life insurance policy with a face amount of $375,000. He will pay $19,750 annually for 20 years, at which point no further premiums are required. Carl’s death benefit is expected to grow to $800,000 at his age 90, which is the tax liability his estate is expected to need to cover at the time of death.
Scenario Three
Margaret supports a registered charity she is passionate about. She has a large RRSP account and a sizeable pension she receives monthly. Margaret is concerned about her taxable income and wants to try to continue to manage her tax while she’s living. Margaret purchases a permanent life insurance policy, owned by the charity she supports, while Margaret pays the premiums. Margaret receives a charitable donation receipt for the premiums she pays; upon her death, the charity will receive the death benefit.