Life insurance is an important part of your financial plan. Whether you want protection for your family against capital gains taxes, are looking for another way to enhance your retirement income by deferring taxes besides your RRSP or simply need cash now, your life insurance policies could help.

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Use Life Insurance to Protect Your Estate

You’ve spent a lifetime accumulating your assets – not only for your own enjoyment, but for your loved ones as well. If you’re like most people, you probably haven’t thought a lot about what will happen, after you die, to the estate you’ve worked so hard to build.

If you’re not sure about why you need to protect your estate, here are a few questions to consider:

  • Where will your heirs get the money to pay the taxes – which could be quite substantial – on the assets they inherit?
  • If your heirs are unable to pay these taxes, would they need to dip into their investment portfolios, or sell off legacies such as the family cottage, a business or stocks?
  • Wouldn’t you rather plan ahead for these eventual costs, and make sure your loved ones can enjoy their inheritance?

Did you know…

  • Under current tax laws, when your assets transfer to your children, a significant percentage could be subject to substantial capital gains taxes, and all registered assets could be taxed as income.
  • Today’s tax laws require that capital gains taxes be paid on 50% of the value of the capital gain. The gain is the difference between the price you initially paid for the asset and the fair market value of the asset at the time of your death.

Here’s a real life example…

A family cottage is the kind of asset that could be subject to capital gains taxes when you die.

If the cottage was bought for $70,000 and is now worth $270,000, then $100,000 (50 per cent of the $200,000 capital gain) would be taxed at your estate’s marginal income tax rate. If that rate is 45 per cent, then $45,000 in immediate taxes would be due.

To make sure your heirs don’t find themselves faced with that kind of tax liability incurred by the estate, you can purchase enough life insurance to pay the taxes in full. The payout from a life insurance policy is tax-free*, so you can provide the money your heirs need, without any further taxation. You can even have the premiums paid by your heirs, during your lifetime.

*Note that probate fees are applicable if you have not designated a beneficiary and the proceeds of your policy become part of your estate.

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How Universal Life Insurance Can Enhance Your Retirement

With financial experts estimating that Canadians will need approximately 70% of the average of their last five years of income to retire comfortably, it’s possible you might experience a shortfall in your retirement income.

If you’re worried about your retirement income, you might want to consider the benefits of a universal life insurance policy.

Here are a few things to keep in mind:

  • A tax-exempt* universal life insurance policy can provide you with an opportunity to accumulate funds without being taxed on its earnings.
  • You can also use a universal life insurance policy to generate tax-free** retirement income.

Here’s how it works:

  • Investing the maximum allowable amount in your universal life insurance policy can allow you to take full advantage of the tax-deferred accumulation of earnings that these plans offer.
  • Universal life insurance policies usually increase in value over time, and like many other assets, can be used as collateral for a loan from a financial institution, such as a bank, credit union or trust company. When you retire, you can use your policy as collateral to apply for a series of financial institution loans. According to current tax laws, this type of collateral loan arrangement can be arranged without tax implications.
  • At the time of your death, the loan amount and accumulated interest on the loan can be repaid to the financial institution through the tax-free** death benefit of the insurance policy. That means you won’t be leaving your heirs to deal with your unpaid loan.

* Current tax laws limit the maximum amount of funds that can be invested in a tax-sheltered insurance policy.

**Note that probate fees are applicable if you have not designated a beneficiary and the proceeds of your policy become part of your estate.

Disclaimer: This material provides only a general overview of how universal life insurance can be used to enhance retirement income. We recommend that you consult a qualified tax professional when doing your planning for retirement.

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Choosing Universal Life

Does it really pay to buy a term policy and invest the difference?

In the past, many have assumed that a term insurance policy coupled with an outside investment would achieve higher values than those found inside a universal life policy. The problem is, term life insurance will eventually end, and you don’t receive any benefits if you outlive your policy term. In addition, unless you invest in your RRSP, any growth in your investments will be taxable in the year it is earned.

Universal life insurance may be the answer. It provides the protection you need, control over your investments to help you achieve the growth you’re looking for, and tax-sheltering that few other investment options provide.

What is universal life?

Universal life insurance is a life insurance plan that helps protect your financial future, and provides you with unique tax advantages. You decide how much insurance protection you need and how much you can contribute to your investment account, and you pay that amount. Provided certain conditions are met, your investment account earnings grow tax-free*.

How does universal life work?

In a universal life policy, you have full control over the investment portion of the policy. You can choose from a number of investment options, depending on your investment goals and your sensitivity to risk. The investment portion can be allocated between different options such as fixed-interest income or market-related index options. You can even select a fully guaranteed investment in the long term interest account and earn interest within your policy. In a 50% marginal tax rate environment, this is equivalent to doubling your investment return in a fully taxable investment alternative.

What’s more, it’s easy for you to transfer funds between accounts as your investment objectives change. Upon death, accumulated funds in your policy can be paid over and above the face amount of the policy, tax-free*. (Even the most efficient deferred capital gains investments cannot match the tax efficiency of a universal life insurance policy that offers tax-free accumulation and tax-free* pay-out at death.)

*Note that probate fees are applicable if you have not designated a beneficiary and the proceeds of your policy become part of your estate.

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Family Split Dollar

Sharing wealth with your adult children and building an estate

Family Split Dollar helps you and your adult children protect an estate, while maintaining or even improving your own lifestyle. All it requires is a universal life insurance plan that’s designed according to your family’s individual financial capabilities and objectives. It’s simple – and it allows you and your children to share in the contributions and the rewards.

You share the contributions

You and your children determine how much each of you can invest annually over a specified period of time, for instance, 10 years. With these funds, you can purchase a joint-last-to-die universal life insurance plan with your children named as the beneficiaries.

You share the rewards

By purchasing a universal life insurance plan, you and your children have created an immediate estate that will grow over time. The universal life proceeds are paid to your beneficiaries at death, and your children inherit an estate that they helped create and preserve.

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Using Your Life Insurance Policy to Access Funds

Using a universal life insurance policy as collateral for a bank loan works much better than making direct withdrawals or borrowing directly from the policy cash value.

The reason is that direct withdrawals and policy loans incur immediate taxation, based on your marginal income tax rate, to the extent the amount borrowed exceeds its adjusted cost base. Direct withdrawals can also negatively impact the current and expected growth of the policy cash value.

If you use your universal life insurance policy as collateral for a loan, you can access funds tax-free*, while allowing your cash value to continue to grow untouched, on a tax-deferred basis. At the time of your death, the loan amount and accumulated interest on the loan can be repaid through the tax-free* death benefit of your insurance policy.

*Note that probate fees are applicable if you have not designated a beneficiary and the proceeds of your policy become part of your estate.

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Using Universal Life Insurance to Fund a Child’s Education

In most cases, a Registered Education Savings Plan (RESP) is the preferred way to save for a child’s education. Any growth of the money invested in a plan is sheltered from tax until the funds are withdrawn. When the money is withdrawn, the growth is taxed at the student’s tax rate, which is likely to be lower than the tax rate of the parent, grandparent or other person who invested in the plan.

However, the amount of money that can be invested for any one child in RESPs is limited. As a result, many people look to universal life insurance as an alternative.

Reducing the student’s tax burden

When money is paid into the investment portion of a universal life insurance policy, its investment growth is sheltered from tax. To take advantage of this, a parent or grandparent can purchase a policy on the life of a child and contribute to the policy until the child turns 18 (or 19 in some provinces). At that time, the parent or grandparent can transfer ownership of the policy to the child, with any taxes on investment growth deferred until the child withdraws the funds.

With proper planning, there should be enough invested in the policy to pay the premiums on an ongoing basis after the transfer. In addition, the student can use the funds in the investment portion to pay his or her educational costs. Like an RRSP, these withdrawals will be taxed at the student’s lower tax rate.

Author: car health