“You don’t buy life insurance because you are going to die, but because those you love are going to live.” — Unknown author
Of the four tax-free options that the Canadian tax law permits, the use of tax-exempt life insurance is one of the least known tax strategies. You’re likely familiar with the other three options — Principal Residence; Tax-Free Savings Account (TFSA); and Lottery Winnings.
Under section 143(3) of the Canadian federal income Tax Act, assets accumulate within a tax-exempt life insurance contract free of annual accrual taxation.
When you pass away, any proceeds of the policy are distributed to your beneficiaries on a tax-free basis outside the scope of your estate, bypassing its associated costs.
Insurance is a no-brainer tool that allows for:
- Tax-deferred growth, similar to registered pool of capital in an RRSP (Registered Retirement Savings Plan)
- Potential for tax-free income during retirement
- Tax-free distribution upon your death
“Fun is like life insurance; the older you get, the more it costs.” — Frank Mckinney
In another article, I will discuss how you can leverage insurance and create other streams of income using insurance.
Despite the tax and other benefits that the use of insurance provides, most people resist buying one. There are potentially many reasons for this, but here are my top 5 reasons:
1. Lack of Knowledge
This is probably one of the biggest reasons why people don’t consider life insurance as a tax planning tool or even as a tool to protect the financial welfare of their loved ones.
There is so much misinformation about insurance and in the midst of this kind of information, it’s challenging for most to see the real benefits of having insurance as a great financial and tax planning tool.
“I detest life insurance agents: they always argue that I shall someday die, which is not so.” — Stephen Butler Leacock
2. Insurance is expensive
Truth be told, insurance is expensive, particularly the kind of life insurance (whole life and universal life) that is suitable for tax planning purposes.
With the ever growing costs of keeping up and managing family budgets to pay for things like food, clothing, housing, day care, car payments, kids’ education, etc., insurance is just outside of those “necessities” when money is tight.
3. Insurance provided through your job
Many people are offered life insurance as part of their employee benefit package and often, decide not to get additional insurance.
They forget that coverage provided by these kind of employer-provided insurance is often not sufficient. In addition, if you leave the job, it’s typically the type of insurance that doesn’t “move on” with you.
4. It is intangible
For those like me that prefer to buy things that are real, paying for insurance that we don’t see will seem like a waste of your hard earned money.
All you get from buying an insurance policy is pages and pages of contract that you don’t understand and will likely never read.
A mindset shift is required here to see insurance as an investment, as protection for rainy days and as a hedge for risk.
5. Life insurance — it’s on my list…eventually
There’s no deadline on life insurance, no mandate from the government on purchasing it.
Your parents may have never talked to you about its importance, and it’s certainly not the most invigorating topic for conversation. As a result, most never get to it.
“If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.” — Suze Orman
Conclusion
Consider the benefits of insurance, particularly as it relates to wealth planning and tax optimization. Start by educating yourself. Review your existing policies, if applicable, and engage a knowledgeable professional that can guide you and provide a plan that will match your unique situation.
