The Role of Life Insurance
Life Insurance is a versatile and powerful asset that creates non taxable cash and liquidity at a time when that is what is needed most. Properly designed and set up it can often bring higher returns to beneficiaries and estates and in many cases result in significant tax advantages. Life insurance also offers an extremely effective way helping to create an estate that you yourself have not had time to create. It’s estate preservation benefits are second to none for simplicity and effectiveness. Insurance can be a tool in planning for many different life scenerios including:
Creating an Estate
In cases where the estate owner does not have enough assets to take care of his or her loved ones, life insurance can create an estate immediately available to them.
Paying Taxes at Death
Life insurance provides a fund source to pay for taxes at death, which are due, in most cases, within nine months after death. It is often time used as a strategy to maximize estate values particularly when there are large capital gains and\or RRSP\RRIF investments that will pass to the next generation.
A special kind of policy called Joint Last to Die can be very effective as an estate planning tool.
Creating Fairness at Inheritance time
Life insurance enables you to leave relatives and friends an equal amount of benefit without upsetting any of the parties involved. It is particularly effective as a means of providing for family members in second marriage situations.
Providing Retirement Income Funding
There are a variety of insurance products that can earn competitive returns and that may be available during retirement years. Additionally a little known strategy called Pension Maximization can sometimes be utilized to increase retirement income from a company pension plan while still assuring the spouse a survivor benefit.
Funding Business Buy\Sell Agreements
Life insurance can provide the liquidity needed to ease the transfer of a business and assure that funds are available for partner and shareholder buyouts when one partner or shareholder dies.
Gifting Money to Charities
Life insurance proceeds can be paid directly to charities in place of other assets, which will immediately benefit the charity. Charitable donation tax credits can also be arranged to encourage donations and provide tax relief to the policy owner.
Paying off a Mortage or Guaranteeing Loans
A term policy for the value of a mortgage can be an easy way to satisfy a mortgage for the beneficiary. Other types of loans can also be satisfied in a similar fashion. In business situations where the creditor requires that the loan be insured the business may be able to write off the premiums or part of them as a legitimate business expense.
Paying Estate taxes
With a very few exceptions the proceeds of all insurance policies paid out upon death are considered tax free payments to the named beneficiary or estate. This makes them ideal vehicles for use in estate planning situations as they do not add to the tax problems sometimes created upon death.
Types of Insurance
Term Life Insurance
Term insurance is designed to run for a specified amount of time such as 1 year, 5 years, 10 years, or up to a certain age. Premium rates and coverage may are usually fixed and guaranteed at issue, although premiums will increase at the end of each renewal period to compensate for the added risk due to the insured being older. Ultimately though, the policy will expire.
Some companies offer decreasing term coverage which like it sounds means that the coverage decreases over a period of years at a set rate. Premiums remain level throughout the period of the policy.
Many companies impose age restrictions for term policies. Due to the fact that they tend to have a short duration of coverage, most term policies do not have cash values, or the ability to borrow against it.
Whole Life Insurance
Whole Life insurance is traditionally a policy with level premium payments designed to remain in force over the entire lifetime of the insured. The way the policies work, early premiums tend to be higher than required to cover the probability of death. By doing this, the policy has a base reserve that increases each year. This reserve, along with accumulated interest and the premiums that continue to be paid, cover the years later in life when the insured is more likely to die and the mortality costs are significantly higher. Paying the initial higher premium enables the premium to remain level in later years. This also makes this form of insurance more attractive to carry on in later years for retired persons on fixed income.
Universal Life Insurance
UL as it is sometimes referred to is a flexible premium, adjustable benefit policy with a current interest rate applied to most of its benefits. In one contract it blends term insurance and a savings\investment account generating earnings from GIC and\or mutual fund like investments. Unlike a whole life policy, its premiums can be increased or decreased, paid when due or at unscheduled dates or stopped entirely and restarted at the owner's will, provided the policy value is adequate to maintain the cost of the insurance.
There are significant advantages from a cost and investment point of view that can be had through the use of this specialized product.