Life Insurance and Estate Planning: Things You Need to Know



According to several studies, many Canadians have not made estate planning a priority, and as a result, there is a good chance that many people will not have their estates distributed as they wish — and that the beneficiaries of their estates will not only receive less than they could, but be saddled with more taxes than they expect.

Most people put off estate planning because it can be complex, and because it can be challenging to make some of the major decisions that are inherent in the process. However, if you take the process systematically and focus on a single aspect at a time, you can complete the process and feel confident that not only will your estate be divvied up according to your wishes, but also your loved ones will be taken care of after your death. With that in mind, one of the first things to consider is life insurance.

Life Insurance 101

Life insurance, also known as final expense insurance, is a type of coverage in which the insurer pays a designated sum of money to a beneficiary upon the death of the named insured. There are two major types of life insurance: Term insurance and permanent insurance. Each type of insurance has its own benefits and drawbacks, as well as costs (
get free life insurance quotes here), so it is important to explore all of the options.

A term insurance policy is one in which the policyholder pays a premium for a specific amount of insurance for a specified amount of time. The benefit is paid in a lump sum upon a specific event, usually death, although some policies will cover incapacitation or certain illnesses. In a term policy, when the term is up, the insured has the option of allowing the coverage to lapse, or continue coverage at potentially higher rates.

Many people use permanent coverage as an investment, as these policies build value over time. With a whole life policy, the insured pays the premium (which is usually higher than a term premium) which the insurance company then invests to build cash value in your account. The policy remains in effect as long as you pay the premiums, up to your death.

A universal life insurance policy shares some similarities, except that it is a more flexible policy in the sense that you can change your premiums and death benefit as you go. The major advantage of permanent life insurance is that you can borrow money from the value of the policy to help with major expenses; if you do not pay it all back before death, your death benefit is reduced by the amount you owe.

Both types of policies have benefits to your estate planning. However, in order for your loved ones to actually receive those benefits, you need to take some important steps.


Adding Life Insurance to Your Estate Plan


When you purchase a life insurance policy, the most important step to take is designating a beneficiary. Even if you draw up a last will and testament to distribute your property, the law states that the official beneficiary designation on the policy supersedes any designations in the will. This also underscores the importance of keeping beneficiary designations up-to-date. If you forget to change your beneficiary after remarrying, for example, your former spouse will receive the proceeds of the policy regardless of what your will says.

Who you designate as a beneficiary is also important. Life insurance payouts are not subject to income tax, but only if you name an individual beneficiary. If you name your estate or a trust as the beneficiary of your policy, the payout will be subject to taxes and probate fees. Naming a beneficiary can also protect the payout from creditors, provided that the beneficiary is a spouse, child, grandchild, or parent. 


Charitable Giving

A life insurance policy can also help you give to charity. Not only is the value of the policy tax-free, but when you designate a charity as the beneficiary of your policy, you may be eligible to deduct the premiums on your annual tax return.  

Because the process of purchasing life insurance and including it in an estate plan is complex, and laws vary by province, it is best to work with a qualified agent and financial advisor to ensure that you do not make mistakes that could cost your loved ones after your passing — or lead to your wishes not being carried out. Take the time to make estate planning a priority today and have the security of knowing that your family will have everything they need when you are gone.


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