The Role of Life Insurance in Estate Planning in Canada
What does life insurance have to do with estate planning? A lot, actually!
While estate planning is an essential process that allows individuals to better preserve, manage, and distribute assets both during and after their lifetime, life insurance is the tool that protects and safeguards wealth for future generations.
If you want to learn more about the role that life insurance policies can play in estate planning, especially here in Canada, you have come to the right place.
We at McIver Insurance fully understand that estate planning can be emotional and overwhelming at times. That is why we have compiled this short guide to help you understand the importance of estate planning and how life insurance can play a major role in its execution.
What Is Estate Planning? – An Overview For Canadians
Estate planning is a process that allows individuals to lay out an actionable plan that helps them manage, control, and distribute assets and liabilities during their lifetime and after they die.
Upon death, a well-thought-out estate plan can ensure the smooth distribution and transfer of assets to loved ones while preserving the maximum amount of wealth possible.
Estate planning is also intended for everyone, not just wealthy individuals. Despite what many think, almost all Canadians have an estate. This is because the term ‘estate’ includes everything one owns whether that be vehicles, real estate, their home, investments, bank accounts, life insurance policies, or even personal possessions.
As such, to make sure assets and other valuable personal possessions are passed down to the people or organizations you most care about and as per your long-term goals and objectives, you need careful estate planning. Without a strategic estate plan in place, the distribution of your assets will have to be settled in accordance with the law, which can lead to family disputes and also result in higher taxes and legal fees.
What Is Life Insurance? What Are Its Different Types?
Life insurance, on the other hand, is a financial product that is a legally binding contract between a life insurance company and a policy owner.
A life insurance policy guarantees that the insured will be paid out a sum of money by the insurer upon their death, in return for the premiums they have paid out during their lifetime.
Depending on your insurance provider you can choose from a variety of different types of life insurance with the two most common types being term life insurance and whole life insurance (permanent life insurance).
The Role Of Life Insurance In Estate Planning
Life insurance plays a major role in estate planning as it helps compensate your dependents, loved ones, and/or beneficiaries financially in the event of your death.
The death benefit paid out by a life insurance policy can be used to cover funeral costs, pay off debts, cover estate taxes, and pay for monthly expenses.
Moreover, life insurance payouts aren’t tax deductible and the payouts are often granted immediately upon submitting the claim; without any deductions such as legal fees and other expenses.
By adding life insurance to your estate plan you can have the peace of mind knowing that your loved ones will be taken care of financially even after your death.
4 Ways Life Insurance Is Used In Estate Planning
While there are many benefits of life insurance, when it comes to estate planning, life insurance is often used in conjunction with a will or a trust in the following ways:
To Ensure Proceeds Are Tax-Free
The distribution, transfer, and selling of assets upon your death can be a complicated affair depending on the nature of assets and total net worth. Liquidity can become a concern for family members who may need cash urgently to meet financial obligations.
This is where life insurance becomes critical, as unlike real estate, stocks, FDs, and other investments, that come with maintenance expenses, legal complications, stamp duties, and capital gains tax, a death benefits payout is tax-free and paid out promptly without any deductions. The liquidity of a life insurance policy is a major advantage and that’s why life insurance is often a fundamental component of estate planning.
To Preserve Family Assets
Canadians who have family-owned and operated businesses can have a life insurance policy that allows family members to “cash out” their share of the business with other family members if they choose to do so. This helps keep the business within the family while also preserving family peace which is good for the viability and continuity of the business.
To Assist With Estate Equalization
Selling estate assets and distributing the money released to loved ones can often take a considerable amount of time depending on the size of the estate and the nature of the assets within it. In the event of one’s untimely demise, loved ones might need money urgently to cover funeral costs and pay off any business debt.
To ensure your family members aren’t put under immediate financial burden, or are forced to liquidate assets or use their own money to pay for expenses, a life insurance policy is used as a means to provide immediate liquidity.
To Disregard The Need For A Probate
Most Canadians use life insurance as a way to pass down money immediately to designated beneficiaries upon death; without having to go through the complications of a probate process.
Not only is the death benefit paid out in relatively quick time, but it is also distributed tax-free and can’t be touched by any potential debts or creditors!
Consult With Trusted Life Insurance Experts – McIver Insurance
While there is no denying that life insurance is a critical component of estate planning, it is always vital to consult with an estate planning attorney, a tax advisor, and a life insurance broker to consolidate the best estate plan possible for your family’s needs and current financial situation.
We at McIver Insurance specialize in all types of life insurance policies and work diligently with all our clients to understand their specific needs and financial objectives. If you would like to learn more about how life insurance can assist with estate planning please give us a call at 1-902-220-3279 or email Pat McIver, at [email protected]
