Is a Life Insurance benefit taxable?

The advantages of life insurance are well known: It is foundational to a sound financial plan to ensure peace of mind for your family if anything were to happen to you.

A policy’s death benefit, payable to your estate or beneficiary when you die, maintains financial stability. The family can pay final expenses, any debt such as credit cards or business debts, and cover ongoing costs.

Is the death benefit taxable?

Most of the cash received from a life insurance contract is not subject to income tax. Your beneficiaries — spouse, children, grandchildren or other beneficiary allocated will not need to report life insurance benefit proceeds on their tax return as taxable income. However, if you have assigned your estate as the beneficiary, the death benefit could be subject to tax. Moreover, fiscal gifts or inheritances generally are not taxable. 

Beneficiaries or heirs do not owe estate inheritance tax or death tax. It is the estate of the deceased that pays any such tax due to the government. If the policy owner’s estate is the policy’s beneficiary, the death benefit may — in some cases be subject to tax. 2 

When could a taxable situation arise?

When you own a permanent life insurance policy, accumulating interest or equity investments made to a policy’s cash value, taxes will be payable on that growth gained above the cost base of money invested. 3 

Upon your beneficiaries receiving any investment earnings from the policy, along with a death benefit, the increase on investments, not the death benefit, would be taxable as income.

Likewise, you will pay taxes on any increase in cash value based on the investments in the policy fund — should you surrender the policy and receive its cash value in return. 

Tax Reporting Rules for Life Insurance Payouts

The Canadian Revenue Agency (CRA) makes receiving life insurance proceeds easy for beneficiaries relative to tax reporting. Unless the tax is due on the above-stated earnings, these amounts do not need reporting as taxable income on a tax return.

What if there is an increase in the cash value? 

These amounts don’t need reporting as taxable income on a tax return unless some tax is due on interest earnings. If there are interest earnings, it will be reported to the beneficiary by the insurance company on a T5 slip, reportable on line 121 of the beneficiary’s return (or of the policy owner when surrendering the cash value of the policy).

1 Canada.ca 

2 Turbo Tax

3 Turbo Tax

4 Canda.ca

 

How can indebtedness jeopardize a business?

Business Banking relationships are important. If a business owner who has a good relationship with his bank were to die, chances are the bank may call the loan if the business begins to experience financial duress and defaults on repayment. Many businesses have no option but to acquire a bank loan collateralized by the full value of their assets to survive financially.

  • Avoid collateralizing personal assets. The prospect may not be favourable when the loan equals or exceeds the value of the business assets and/or personal assets.
  • Following established rules, a bank may ask a business owner to collateralize a loan, not just with business assets and land, but with additional personally owned assets, which may encumber a spouse’s co-owned assets.
  • Add to that a possible collateralizing of any assets of a son or daughter (and spouses), who also share in family business ownership.
  •  Family members of small business owners can also lose their financial security if the business defaults on loan repayments.
  • If you own a business, avoid being held financial hostage by the lending institution or forced into liquidation.

Can life insurance reduce the risk associated with family businesses debt? You can solve this to a degree in a family business such as a farm by insuring the oldest and succeeding generations using joint-first-to-die life insurance policies or individual plans. Where there are non-family businesses, each owner/partner should be insured to cover the debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans and essentially win back ownership and discharge any liens of personally owned assets.

What if there is a Critical Illness?  Also, for the same reason, consider purchasing a Critical Illness Insurance policy on each principal business owners and key persons. This product could provide a substantial sum of money to pay off debt if one were to experience a major illness such as a heart attack or stroke. If an individual were to be incapacitated, he or she may need to be bought out by a partner or an heir (there should be a buy-sell agreement in place). The risk of a loan being called increases when an owner-manager is critically ill, and the bank manager loses confidence in the stabilizing influence of that owner.

Group Benefits and Employee Addictions

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Ten percent of the Canadian population report symptoms consistent with substance dependency. In the USA, the ratio is similar.

Source: Statistics Canada

Employers may watch for:

  • regular absence patterns
  • late for work
  • poor focus affecting production
  • confused about directives
  • appearing tired or stressed, or lazy
  • not collaborating well with other employees
  • a short temper
  • increased mistakes or wrong interpretations of duties

Have a policy for your employees who may suffer from substance abuse. Employers may have to find ways to approach, address, manage and/or get counsel for an addicted employee. The policy can also advise that your company suggest accessing an organization’s employee assistance program (EAP).

For an employee who suffers from an addiction to be eligible for group benefits, a group benefits plan may require that the employee disabled by addiction be introduced to a treatment program.


 

Group Critical Illness Insurance

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Group Critical Illness Insurance 

News of a critical illness can be very upsetting to a plan member. When you can offer them financial support during a difficult time with a Group Critical Illness Insurance plan, the employee can manage with the extra resources better.

Group Critical Illness Insurance Allows the critically ill to focus on recovery rather than worry about finances. It pays a lump sum amount when a plan member is diagnosed with a covered life-threatening illness.  The insurance benefit payment can be used as the plan member chooses. It is available to plan members and dependants.

Once a claim is approved for someone diagnosed with a covered illness, he or she is paid a lump sum. The money may be used however the person chooses, such as private nursing or medical care, modifications to a home or childcare costs, allowing the person to focus on recovery and managing the illness.

You can offer Group Critical Illness Insurance to plan members and their dependants while giving them an option to purchase additional coverage for themselves and their spouse. Benefits can be structured as either a flat amount (i.e. $25,000 to $100,000) or a multiple of the plan member’s salary.

Covered illnesses

Most standard plans cover these common major illnesses:

  • Heart attack
  • Stroke
  • Coronary artery bypass surgery
  • Cancer

Dependent on the plan, it may cover the illnesses above, plus:

  • Alzheimer’s disease
  • Aortic surgery
  • Benign brain tumour
  • Blindness
  • Coma
  • Deafness
  • Heart valve replacement
  • Kidney failure
  • Loss of independent existence
  • Loss of limbs
  • Loss of speech
  • Major organ transplants
  • Motor neuron disease
  • Multiple Sclerosis
  • Occupational HIV
  • Paralysis
  • Parkinson’s disease
  • Severe burns

Business employee retirement planning

Employee Retirement Plans incorporate the following:

• Analysis of available investment vehicles and associated yields
• Investment tracking and reinvestment alternatives
• Individual financial and investment consulting
• Establishment and management of individual registered and non-registered retirement savings plans such as:

• Self-directed RRSPs, group RRSPs, & RESPs with the following investment alternatives: investment funds, segregated funds, and labour-sponsored funds.

Group Retirement Options

When your employees retire or are approaching retirement, they will need help through this period of change. Professionals are available to educate your employees about all available retirement income vehicles.  We offer the expertise and services to ease the transition to retirement for your retirees:

• Retirement consulting
• Retirement income projections
• Establishment of retirement income vehicles such as RRSPs, RRIFs, LIRAs, LIFs, annuities

Individual Group Investment Products

Whether you are making investment contributions to save for future expenses or retirement, the Group Investment Program allows you to take control of your personal portfolio and achieve your financial goals with peace of mind.

• Lower investment management fees
• No front- or back-end sales charges
• No deferred sales charges
• No minimum investment
• Self-directed RRSPs
• No annual administration fees
• Consolidated statements

Group Retirement and Savings Plans

Group Retirement & Savings Plans  

We endeavour to deliver unparalleled service in group retirement and savings plans.

Canadian Defined Benefit Contribution plans and Group RRSPs have continued to play a growing role in Canada’s retirement landscape. We can help employers streamline and improve their retirement benefits for employees.

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Pensions in Canadian Retirement

Statistics Canada recently released some good information on retirement savings trends in our country.  For families in which the major income recipient was aged 55 to 64, 8 in 10 held either RRSPs or employer pension plans (EPPs). It is noteworthy that at each age level, median pension holdings were substantially higher, at $244,800, than those who only hold RRSPs.

A company that has a pension plan or assists employees to achieve their retirement is an employer of choice, particularly among high-quality seasoned and experienced employees.

We will work with you to develop the Group Retirement & Savings Plan best suited to your organisation’s needs.

Source: Statistics Canada

What options does Buy-Sell Insurance give business owners?

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When a co-owner/partner dies, the surviving business owners usually have five options in dealing with the deceased owner’s business interest:

1.   Buy-out the heirs of the partner with Life Insurance proceeds: This is usually the most preferred option. After all, the surviving owners/partners know how to run their business. It usually makes sense to buy out the heirs who are not engaged in or lack expertise in the business and carry on business from there.

2.  Keep the heirs in the business.  This would only be advisable if the heir was actually involved in the business for some time, or has skills that can advance the cause and profitability of the business.

3.  Take on an outsider who purchases the deceased’s business interest. A good buy-sell agreement can circumvent the need to have an outsider buy into your business if that arrangement would harm the current business partnership or the business. In some cases an outsider may already have an investment in, have expertise in, or a common business goal with your company that would mutually benefit everyone in the business. In this case, advance planning could allow such an individual to be part of buying side of the buy-sell agreement. The same individual may need to be a beneficiary on the insured lives of all the partners, in tandem with being written into the agreement.

4.  Selling to the heirs may be an option. This may be an option when some of the heirs are involved and successful in the same line of business with primary senior family members of the earlier generation who began your business. In this case the considered heirs, should receive funding from the proceeds of a well-planned fund to cover capital gains taxes, and fund operations, and pay for the owners shares.

5.  Liquidate the business or sell it to a third party. If this is the main goal, it is wise to involve discussions with the potential buyer long before one dies. If the business is large you may need to hire a firm that specializes in valuing and selling businesses. It is wise to estimate your capital gains exposure and cover any tax liabilities, as well as redeem business debts with the proceeds of life insurance which can be paid out tax-free.

In most cases, option #1 offers the business owners the best choice, with a small expenditure to buy life insurance that makes a payment to heirs with the use of a buy-sell agreement.

Living Will: Advanced Medical Directive

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The Living Will (or Advance Medical Directive) is a document in which you state your wishes regarding the continuance or refusal of extreme medical care, or just how much life support intervention you want prior to death as you age or if you become seriously ill. It comes into play only if and when you cannot make those decisions yourself. If you become incapacitated, with no possibility of recovery from mental or physical disability, would you prefer to live or die? This hard question, once answered, will determine the directives you set forth in your Living Will.

How to talk about dying An article in the New York Times by Ellen Goodman, How to Talk About Dying, looked at this question in retrospect from a child’s perspective recalling her own mother’s health decline:

Yes, my mother and I talked about everything — but we didn’t talk about how she wanted to live toward the end. The closest we ever came to discussing her wishes was when she would see someone in dire straits and say, “If I’m ever like that, pull the plug.” … Gradually and painfully, my mother lost what the doctors call “executive function,”… Eventually, she couldn’t decide what she wanted for lunch, let alone for medical care.

The same person that you are today, or you know today such as a parent, may not be able to make both financial and health care-related decisions due to a decline in health. You can decide in advance what medical treatments and care are acceptable and for how long. For example:

• If you heart stops or you stop breathing do you want to be resuscitated?
• If terminally ill, do you prefer to stay at home or be hospitalized?
• Is special care or medicine for a rare disease affordable?
• Is owning Long-Term Care (LTC) or Critical Illness insurance important to your future well-being as you age or if you become critically ill?

Everyone over age 18 should have a Living Will

Many government jurisdictions are writing new laws recognizing Living Wills. Even if not yet legally binding, a Living Will allows you to indicate your wishes providing guidelines for your family physician, family members and friends—those who would be asked to make health care decisions on your behalf.

Formulate your Living Will with a lawyer (or on your own) and discuss it with your potential decision-makers. Give each of them a copy, updated when necessary, for reference. Have at least two of them witness each copy.

The Living Will alleviates the heavy burden of a son or daughter or sibling, deciding to allow a loved one to die. By setting forth your request in advance with a clear mind, you intentionally share in that great responsibility, thus lessening any feelings of fear, guilt or indecision that these people may have to face. In the same article mentioned above, Ellen Goodman reflected on her mother’s situation in light of historic health decisions and recalled her earlier statement about what she didn’t want to endure:

In some recess of my mind, I still assumed that death came in the way we used to think of as natural. I thought that doctors were the ones who would tell us what needed to be done. I was strangely unprepared, blindsided by the cascading number of decisions that fell to me in her last years….I had to say no to one procedure and yes to another, no to the bone marrow test, yes and yes again to antibiotics. How often I wished I could hear her voice in my ear telling me what she wanted. And what she didn’t want.

Ellen’s reflections may help us think about our own reality, our own health care directives which in most cases can’t be thought out if someone is mentally incapacitated, or if an emergency health crisis ensues – then it may be too late – when the burden falls on our loved ones.

My own sister, a nurse, felt she had to make the right decisions to keep my own beloved mother alive. More than once she was faced with the frightful case of dialoguing with doctors about reviving my 81-year-old mother, who had taken a serious fall causing internal bleeding of the brain. Mother went through three years of being in several hospitals, then and Long Term Care homes. I vividly recall mom saying of a woman who sat muttering incoherently in her LTC home, in her own humorous words: “if I get like that, let me go”. I agree with Ellen Goodman’s statement:

When my mother died from heart failure and dementia, I began to talk with others. It was extraordinary. Everyone seemed to have a piercing memory of a good death or a hard death. Some of these stories had been kept below the surface for decades, and yet were as deep and vivid as if they’d just happened…Too many people we love had not died in the way they would choose. Too many survivors were left feeling depressed, guilty, uncertain whether they’d done the right thing…The difference between a good death and a hard death often seemed to hinge essentially on whether someone’s wishes were expressed and respected. Whether they’d had a conversation about how they wanted to live toward the end.

Talk to your life insurance advisor about Long Term Care, which is appropriate for your advanced medical directives. Also, talk to your lawyer about creating a Living Will to develop advanced medical directives while you are coherent and able to do so. Then let your loved ones know your wishes and give them a copy.

by Glen Jackman, Editor of Adviceon Media, copyright of Adviceon

Can life insurance collateralize business bank debt?

How banks view lending money to business owners.

Banks follow established rules, which include asking a business owner to collateralize a loan, not just with business assets, but also with personally owned assets, such as a principal residence and cottage. Collateralization can include requesting a spouse’s co-owned assets to be collateralized, even if the business is incorporated.

Add to that a possible collateralization of any assets of a partner or adult child (and their spouses) who also share in ownership. Small business owners can lose their shirts if they default on a loan.

What if an owner dies? It is unwise to assume that a good relationship with the bank will continue if the heir of a small business, or a partner, is not in favour with the bank manager. Bank managers can change or apply strict policies while reassessing leniency shown to previous owners or administrators.

Eliminate any doubt in a family business, such as a farm, by insuring the oldest owners and succeeding generations using joint-first-to-die policies or individual life insurance policies. In the case of a non-family business, each owner/partner should be insured to cover the company’s debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans and, essentially, win back ownership and discharge any liens of personally owned assets.

What if there is a critical illness? For the same reason, small business owners should consider purchasing a critical illness (CI) insurance policy on each of the principal business owners and key persons. CI insurance could pay off a considerable bank debt if one were to experience a major illness such as a heart attack or stroke. One could end up incapacitated and may need to be bought out by a partner or an heir (there should be a buy-sell agreement in place). The risk of a loan being called increases when an owner-manager is sick and the bank manager loses confidence in the stabilising influence of that owner.

How do I protect the finances of the Successor of my Business?

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Here are ways to protect your successor financially.

  • Allow the potential successor to get involved in managing important team projects. Try to increase the successor’s financial insights and his or her general responsibilities over time. Allow independence while ensuring that the right professionals assist the successor such as a good accountant and insurance agent.
  • Consider visiting other family businesses that have transferred their business through continuity planning.
  • Establish mentors and advisors for the successor. Consider setting up a board of directors if one is not in place. Implement leadership training programs.
We do not suddenly become what we do not cooperate in becoming.— William J. Bennett

Protect your assets during Succession in the following ways:

  • Cover your key persons Use life and disability insurance to cover the cost of replacing an owner, successor, contingent successor, or a key executive in the event of death or disability.
  • Ensure debt redemption Life insurance proceeds can pay off bank loans and other liabilities—paid at the time of the owner’s death. Also, consider critical illness insurance, which would pay up to $2,000,000 if the proprietor were to become critically ill.
  • Provide income replacement insurance (Disability insurance) benefits can provide income to an owner, successor, or key executive if disabled over certain periods of time. The income paid as a benefit to a disabled insured places less payroll burden on the company.
  • Fund a buy-sell agreement Life and disability insurance proceeds can fund a buy-out upon death or disability, where there are two or more owners in business (effective for current owners or succeeding generations).
  • Fund a stock redemption Where other members of the family own stock, you can buy life insurance on the owner, and make the successor the beneficiary. This will provide cash upon the owner’s death to allow the successor to buy the stock of say, sisters or brothers, based on a pre-determined formula related to equalizing the estate.
  • Fund capital gains tax liabilities Where large capital gains will impair the company or reduce personal assets, or disallow a bequest of a cottage or other asset, use a permanent life insurance product, designed to pay off all capital gains liabilities.
  • Create capital to equalize your estate Where one child will inherit the company, life insurance can be purchased on the owner and/or spouse, to pay the non-involved children a tax-free cash benefit in predetermined amounts, clear of probate. Avoiding resentment, you can inform these children that they will be treated fairly in the overall estate.
Let him who would move the whole world, first move himself. — Socrates

Maintain relationships during succession

  • Keep your banker informed What would your banker do if something happened to your firm’s current owner? Who else knows of the loans or the true financial status of the company? Introduce your successor (and the succession plan) to your banker and go over all the liabilities of the company. Reveal to he banker your life insurance planning that can offset liabilities in the balance sheet.
  • Sustain client relationships Introduce your successor early on, to your key clients. Perhaps host client appreciation events.
  • Harmonize the successor with the constituency The key players will help the company survive, including key suppliers; influential family within and without; shareholders whom you hope will seek minimal dividends in lieu of future growth; employees, especially those holding company stock; and the key executives.
  •  Diversify sources of retirement income Keep your retirement investments separate from your business Avoid investing all of your profits into the business with disregard to developing your own independent retirement resources. Thus, you will not need to rely on the company to create an ongoing retirement income, though you may indeed receive dividends and income from the business. Consider purchasing segregated funds, separating your personal assets from the company, while reducing exposure to creditors.
  • Move towards financial independence of your business Though you leave a legacy to your successor(s), you can ensure that the legacy will have sufficient funds to survive during and after the succession. Drawing from your retirement savings can reduce the need to depend on business income (or dividends).