Table of Contents
Understanding Your Life Insurance Policy
Understanding your life insurance policy is important, especially when it comes to the financial benefits it provides for beneficiaries. After all, life insurance policies are an essential contingency plan if something untoward happens to you.
The death benefit of your policy can help your family to cover their financial expenses, pay off any outstanding debts, or to meet day-to-day finances. In short, your life insurance policy will act as a financial backup for your estate or beneficiary, especially if you were the only breadwinner.
However, you may be thinking about whether life insurance policies are taxable or not? Let’s find out:
Is Life Insurance Taxable in Canada?
Tax on life insurance payouts will depend on the type of policy. However, as a matter of fact, the majority of life insurance payouts are not subject to taxes. The beneficiary of a life insurance policy will not have to report the life insurance proceeds received by them on their tax return.
The beneficiaries are not supposed to pay any taxes on life insurance because it will come under the category of financial gifts and inheritance.
To make sure that your family gets tax-free death benefits, you will have to designate them as your only rightful beneficiary, this way no part of the benefit is paid to your estate. It is essential to do this because your estate can automatically be considered as the beneficiary, if not specified.
Importance Of Life Insurance
Life insurance death benefits can act as a safety net for the beneficiaries. They are not subject to taxes and are received as a single payment by the beneficiary. It can be used to help pay off any outstanding loans and debts, funeral expenses, and/or assist with mortgage payments and day-to-day expenses. A death benefit can be a lifesaver to the loved ones you leave behind.
Additionally, it can save your family from selling assets to meet financial needs. The recipient of the death benefit will not have to report it on their taxable income and will not file it in his/her Canadian tax return. This includes both, term life insurance policies and permanent policies.
When Can A Life Insurance Taxable Event Occur
The life insurance premiums you pay are invested so interest can be earned on it and over time your amount of cash increases. Permanent life insurance policies have huge potential to accumulate cash value depending on the cost basis.
And if for any reason you decide to surrender or do a partial surrender of your policy, the withdrawn cash will then be taxable and the amount of interest that you have earned over the course of the policy will then be subject to income tax.
Any interest earnings that your beneficiaries will receive will be a taxable benefit so a certain percentage will go into paying taxes.
Tax Reporting Rules for Life Insurance Payouts
Receiving life insurance payouts in Canada is very easy, thanks to the Canadian Revenue Agency. They have simplified the tax reporting procedure and these payouts are not to be reported unless there are interest earnings involved which are subject to taxes.
The insurance company will provide you with a T5 slip if interest earnings are included in the payout. Similarly, the beneficiary will have to report the interest earnings on line 121 of their tax return. Make sure to check out the policy for cash payments with your provider for further information.
How to make your life insurance more efficient for beneficiaries
People who have a habit of planning and those who want to secure a better future for their family and their future generations are always looking for opportunities to take advantage of. Investments, saving plans, and life insurance are a major part of their portfolio.
However, investing money in such financial products is an easy thing to do. The difficult part is figuring out how to manage and make them more efficient for the beneficiaries they are intended for?
You can work out a plan with your life insurance company or financial advisor to find legal ways in which taxes can be reduced on life insurance proceeds. You will have to check the tax rules and laws of your province. But most importantly you will have to make a will and designate beneficiaries.
Naming beneficiaries to your life insurance providers can help quicken the distribution of assets after your death. Your beneficiaries will get the payouts in privacy and will not be left at the mercy of your estate.
Remember to discuss the beneficiary payment options with your insurance company to get the best possible payment plan.
Can I claim life insurance on my income tax?
Life insurance cannot be claimed on income tax because the insured person pays the premium after paying all taxes.
Will my spouse/children pay my taxes after I die?
Your policy will be used to payout taxes after your death. The percentage deducted will be used to pay taxes owed by you to the government. These taxes are paid before the asset distributions.
In the case of an insolvent/bankrupt person, tax attributes will have to be adjusted.
When do I pay tax on life insurance?
All Canadian life insurance policies will require you to pay taxes when you partially or fully surrender your insurance policy. “You might also have to pay taxes if you borrow directly from the life insurance policy, and the amount that you borrow exceeds a certain amount called the adjusted cost basis of the policy. The longer you own a policy, the higher the cash value will be and, over time, the lower the adjusted cost basis will be.” So, in essence, the amount of cash accumulated on the adjusted cost basis will be taxed.
Life Insurance Providers Near Me
Life insurance policy proceeds can be the biggest asset for your loved ones after your death. If you are looking for an insurance policy that is suitable for you, or are looking for financial or tax advice then McIver Insurance Inc, based out of Halifax, NS, is certainly a great place to start.
McIver Insurance Inc. offers term insurance and permanent insurance policies all across Atlantic Canada. They also offer consultancy, guidance, and professional advice to help you make the best decisions when it comes to securing your financial future.