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).


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7 ways life insurance protects your financial foundation

Life insurance has been called the foundational strategy of building and protecting your net worth. The initial stages of your financial strategy should include adequate life insurance coverage.


The following 7 tips will give you a template for your life insurance planning for a lifetime.

  1. Term life insurance is affordable protection when you are young When young, term insurance coverage offers the lowest cost per thousand dollars of coverage. It comes in various renewable periods of time, for example, 5-,10-, 20-year term and term to age 100.
    • Upon each renewal of term insurance, the cost can increase and may have a final term period ending at a certain age such as age 65, 75 or age 100.
    • Many term plans can be converted to lifetime insurance coverage without medical evidence, that will continue to cover you for the duration of your life.
  2. Life insurance can pay off large accumulations of debt  Many owe thousands of dollars on their credit cards or a large amount of business debt.
    • Replace the debt monkey with cash money Term life insurance often solves debt concerns. It can offer you the peace of mind that you will not be saddling your family with ongoing debt.
    • If you own a business You and your partners can enter agreements to redeem debt or buy business interests providing cash to your heirs.
    • Debt-free succession plans work better Infusions of cash into a business can help a succession plan to work well.
  3. Your life insurance plan can change to adapt to your needs Review your life insurance during each of life’s stages. Our circumstances change dramatically and so do our needs for life insurance. It may be time to review your life insurance and verify beneficiaries, policy amounts and any riders associated with the plans. As you evolve financially, so do your life insurance needs.
  4. You can protect your family when you have young children When you are newly married and starting a family, life insurance is purchased to provide tax-free capital in case one of the parents should die.
  5. When your children are going to college protect your liabilities Many of us tap into our savings to help meet their children’s tuition and housing expenses. We may purchase a child’s first car, or pay him/her an income for one or more years. If you die without providing continuing support, your young adult child may need to quit seeking a higher education due to a shortage of funds to pay for tuition and expenses.
  6. Special Estate Planning solutions When your estate will face a large tax bill, or you desire to leave a large sum of money to an heir or a charity, there are life insurance solutions. The proceeds of a death benefit can solve estate-related problems such as paying an estate’s tax liability on capital gains.
    • As you approach retirement, you may have accumulated assets that will be taxed as capital gains: such as a cottage, business, equity fund holdings, or a stock portfolio. Life insurance that continues for a lifetime, such as Term to age 100 or Whole Life (or Permanent Life)—can help pay the income tax due in your estate.
    • This can also replace an estate’s money used for paying taxes on remaining Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings, as these funds are fully taxable to the estate where there is no surviving spouse or dependent child.
    • It can also pay off large business debts that may be left as an ongoing liability, weighing on a surviving spouse’s financial security.
    • You may have an heir who will need a large sum of capital invested to provide a lifetime income from a trust fund. This is often the case with disabled children who may have special needs which can be expensive over a lifetime.
    • You may want to leave a significant sum of money to a charity of your choice.
    • You may want to transfer large sums of wealth in a controlled manner using life insurance beneficiary directives which may in some cases circumvent probate and notification to others when you desire privacy in your estate outside of your will.
  7. Your exact life insurance needs can be calculated Life insurance specialists use a calculating system referred to as “capital needs analysis”. Consider insuring the adults in your family. The breadwinner’s income can be replaced to protect your family’s financial security. You may have debts that you’d like redeemed. Final expenses can be paid. A mortgage can be paid off. Retirement money can be generated. There are many good reasons to strengthen your financial security with life insurance.

It is necessary to calculate the capital needed over any short or long period to meet any financial situation. Call for an appointment to have us review your life insurance.

Note: Talk to your advisor about potential tax exemption changes to investment components of life insurance.

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Life Insurance can solve the final RRSP/RRIF tax bite


Did you know that you cannot pass on your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings tax-free to your heirs? Once the second spouse dies, all monies in an RRSP or RRIF are taxable as income in your final tax return unless there are dependent children.

An eligible individual is a child or grandchild of a deceased annuitant under an RRSP or RRIF, or of a deceased member of a Registered Pension Plan (RPP) or a Specified Pension Plan (SPP) or Pooled Registered Pension Plan (PRPP), who was financially dependent on the deceased for support, at the time of the deceased’s death, because of an impairment in physical or mental functions. The eligible individual must also be the beneficiary under the Register Disability Savings Plan (RDSP), into which the eligible proceeds will be paid. 1

In most cases, significant tax may be due, depending on your marginal tax rate and final calculations in your estate. Consider talking to your advisor about buying a joint last-to-die life insurance policy timed to pay after you and your spouse die. It can equate to a small percentage of your RRSP/RRIF holdings per year to make up for the taxes due on what has become, for some, a small fortune.

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Can life insurance fund RRSP estate tax erosion?


When planning your estate. It is important to consider how taxation will affect the future distribution of your estate.  For individuals that are married, when the first spouse passes away, the assets generally are able to achieve a rollover free from taxation to the surviving spouse. However, when the last surviving spouse passes away, all assets are deemed to have been sold at the time of passing, and this includes your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings. 

Concerns leaving wealth to the next generation. Registered assets are taken into income in the year of the surviving spouse’s death, and taxes must be paid.  These taxes will be due after the death of the second spouse where there are no dependent children. An eligible individual is a child or grandchild of a deceased annuitant under an RRSP or RRIF, or of a deceased member of a Registered Pension Plan (RPP) or a Specified Pension Plan (SPP) or Pooled Registered Pension Plan (PRPP), who was financially dependent on the deceased for support, at the time of the deceased’s death, because of an impairment in physical or mental functions. The eligible individual must also be the beneficiary under the Register Disability Savings Plan (RDSP), into which the eligible proceeds will be paid. 1

Without an eligible dependent, a $500,000 RRSP or RRIF could be reduced to about half the sum after the death of the second spouse (assuming the highest tax rate).  How can this be avoided? How can you leave more of your wealth to the next generations?

A joint last-to-die life insurance policy may be a solution. A joint last-to-die policy insures two lives, usually two spouses for the purpose of paying for an estate’s tax liabilities such as capital gains on a cottage or business. In most cases where there also exists significant family wealth in RRSPs or RRIFs, taxes will eventually be due upon the second spouse’s death.  At that time, the entire remaining RRSP or RRIF funds are brought into income. Though this is not creating a liability as such, the taxation of large holdings of registered monies can deplete a family’s overall wealth.

By purchasing a joint last-to-die life insurance policy, the taxation of assets in a family’s estate plan can be offset by the significant life insurance proceeds.2 In the above example, a joint last-to-die life insurance policy for $250,000 would replace the estate value lost to taxation, therefore helping to preserve the estate’s net worth more fully for the family. This is especially true if the RRSP or RRIF owner is expecting to leave the entire amount to his or her heirs.

What about the life insurance premiums?  The premium for the life insurance policy to pay for the estate’s tax loss through RRSP or RRIF final estate taxation is usually a small percentage of a significant registered investment portfolio compared to the much larger tax bite. The death benefit may be partially tax-free. 2 A joint last-to-die policy can also be structured to pay back all of the premiums that have been paid into the policy, thereby minimizing the cost to the estate for a strategy designed to save money.

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2 Note: It is recommended that you get qualified tax advice concerning the taxation of your registered retirement plans if you consider this strategy.

Financial strategies affect your net worth

To know the state of your fiscal health, you must have a personal financial health check up. Your financial advisor will help put perspective on your diagnosis and how in shape you are for retirement.

Strategies can be designed to form a comprehensive plan to enhance your net worth as you move towards financial independence, secure in the knowledge that a retirement can become a reality secure with sufficient income.

Your annual net worth statement is the benchmark measure of your ability to become financially independent. Net worth means the same as net assets – the assets you have left after you subtract your debts.

Why do this annually? Time waits for no one. Retirement approaches faster than most people admit. Consider how quickly the last five years has passed. Double this time back ten years to the 2008 financial crisis which woke the whole world to the need for financial guidance.

How can I know my net worth? Simply add up your liabilities compared to your assets. Subtract your total liabilities from your total assets to give you your net worth.

You gain awareness of your debts. Debt totals warn against spending beyond our means. Compound interest on a growing credit card debt at 18 to 28% can strain your cash flow. Always set goals to reduce debt.

Investment planning results become evident. Your net worth statement reveals all of your accumulated assets, including your RRSP, TFSA, and non-registered investments, putting them all into perspective. You may find that you need to rebalance your investments. You will also see which are performing well, suited to portfolio growth. While employed, this gives you a retirement metric concerning your future income goals to help you see how close you are getting each year.

It reveals opportunities for further financial solutions. Picture each financial need in contrast to your net worth snapshot. What have you saved for each future goal? Where has your income been going? Do you have home equity built up or do you still have a large mortgage? Is a Home Equity Line of Credit (HELOC) eating away at your assets? It can reveal the importance of keeping your credit cards paid monthly.

Estate & Tax Planning can affect your final net worth. To draft a will, you need to know your ultimate potential net worth inclusive of business assets. Identify capital gains tax liabilities or tax on a vacation property. Your registered monies (RRSP/RRIF) will be fully taxed after the death of the second spouse (in most cases). Assess the final estate tax liabilities on your assets now. Consider that life insurance offers the easiest solution for projected estate related tax debts.

Business planning can be enhanced. Succession planning simplifies the transfer of a family’s business assets to the next generation. Often a simple life insurance planning manoeuvre can ease the effect of capital gains tax or provide for a future buy-sell agreement upon the death of the principal business owner.


Can life insurance offer my heirs capital security?

Life insurance has provided families with basic financial security for well over 100 years. For example, a healthy, non-smoking 40-year-old male can purchase up to $500,000 worth of insurance for approximately $50 per month. That life insurance policy would pay out a death benefit, the equivalent of up to 10,000 times the amount of one monthly premium payment.


In this case, the $500,000 could provide necessities such as groceries, shelter, home repairs, means of transportation, and education for dependents. In this sense, the value of life insurance is tangible. Contrasted against the assets and services such a large death benefit can purchase, we realize how small the premium cost really is.

When does life insurance begin covering my family’s financial risk?

Even if death occurs one day after the initial premium payment, the full benefit is payable tax-free, thus instantly creating new capital, sometimes far exceeding the insured individual’s net worth. Most accountants and financial advisors agree that life insurance is foundational for families with dependents to build financial security.

An immediate foundation of financial security. In addition to savings, life insurance is designed to immediately provide the capital necessary to create ongoing investment income for dependents after income taxes and other liabilities are paid.

When you are not financially independent Life insurance can make up the shortfall when investments assets have not yet grown to the extent that your net worth enables you or your heirs to live in total financial independence.

When your health is not the best Many people who are not in perfect health are surprised to find that they can also purchase life insurance to ensure their financial security.

Note: Life insurance premiums vary according to the policy type. In some cases, paying a little more premium offers enhanced benefits Be aware that tax-deferral strategies may change due to legislation.

Who is best suited to use Universal Life for the investment benefits?


The individuals who may gain the most from Universal Life are those who:

• plan to carry life insurance all your life;
• have considerable extra cash flow after you contribute to your Registered Retirement Savings Plan (RRSP) and (Tax Free Savings Accounts) TFSAs;
• have a tax bracket approaching the highest level;
• have a desire to earn interest without taxation;
• may have a future tax liability in your estate;
• have a consistently good cash flow with excess money to invest;
• have good future business prospects for large profits, increasing business valuation and capital gains;
• desire to enhance RRIF income in retirement;
• desire to pass wealth to the next generation or to a charity; and
• have large loans that reduce your potential net worth.

What are the administrative fees? First, you make deposits, similar to deposits made to a bank account. Then, just as your bank charges service fees to your account each month, the insurer subtracts charges to cover the various expenses in the policy associated with the cost of insurance, administration fees, policy fees, rider fees, etc. The account is then credited with any interest earned. This interest is without taxation while remaining in the plan. If you keep the policy long enough, some companies add a bonus percentile to the interest earned factor.

Why is Universal Life Insurance an excellent Estate Planning tool?

There are several reasons why people use Universal Life (UL) for estate planning.

  • The death benefit is adjustable. The amount of life insurance can be increased or decreased to reflect your changing needs. If the death benefit remains level, eventually the major portion of the benefit, over a long period of time, can consist of the cash reserve (CSV). As the need for the insurance shrinks, the cash can increase, providing the insurance cost doesn’t reduce the cash value and its growth. If the death benefit grows, the cost of insurance will increase with age, and continues to be paid from the cash value.
  • You can insure more than one life in the plan. You have the option of insuring yourself, your spouse, both of you, your children, or business associates using one or more of these policies. In some cases, the ownership can be transferred or lives added and the premiums paid from the original tax advantaged funds. Your death benefit can be payable after the first spouse’s death to provide an income for the surviving spouse. Alternatively, you can arrange to have the benefit paid after the second spouse’s death to maximize the value of your family’s inheritance or meet your estate’s tax liabilities.
  • UL works to protect you from the potential tax liability of your estate. Discuss your estate use of UL with a good tax advisor, CA, or financial advisor specializing in estate taxation. You may also want to seek counsel from an estate-planning lawyer. Make sure you, along with your financial representative, assess the estate’s need for life insurance and the various solutions. The best estate-planning solutions are most often insurance related because life insurance is designed to pay a large capital benefit at precisely the time it is needed.
  • Mitigate tax erosion of the value of a significant estate. If you own stocks and bonds, equity investment funds, a family cottage, a second residence, or business assets you may face capital gains taxation in your estate. Upon death, taxes will also be due on funds remaining in an RRSP/RRIF (after the death of both spouses in the case of a married couple). One policy can replace or pre-fund such taxes due. With a joint last-to-die policy, the insurance proceeds can be used to cover the estimated estate taxes. The advantage is that one’s entire pre-tax estate valuation can pass, as desired, to the family heirs.
  • Circumvent probate and/or estate administration tax (EAT). When the tax-free benefit is paid directly to beneficiaries, there is no need to probate this money or have it reviewed by the government. In fact, other beneficiaries have no recourse to complain about monies paid to heirs in this manner. Depending on the province, such legislation may be under review or currently changing.
  • Business owners can protect their asset value. The death benefit of a UL policy can create immediate capital to take a business through the transition of losing one of its leaders, or key employees, while allowing surviving partners to buy out the outstanding interests via a payout of the share ownership of the deceased partner. This is commonly done within the framework of a well structured buy-sell agreement.
  • Other tax advantages. A UL policy owner can earn and accumulate tax deferred interest to potentially increase the after-tax yield of your investments and policy cash value over the long term. The UL deposits are protected from secondary annual taxation on interest earnings until withdrawn.

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How can Universal Life help business-related estate planning?

Universal Life strategies can help business related estate planning in these ways:

  • Protect your business assets.

If you own a business and die, will your partners be able to pay for your share of the company? Why not insure your life, and the lives of the other partners and key employees?


The death benefit of the policy can create immediate capital to take the business through the transition of losing one of its leaders, while allowing surviving partners to buy out the outstanding interests (payout share ownership of the deceased partner, using a buy-sell agreement), pay off creditors or in the case of the key person, provide head-hunting monies to replace him or her.

  • Business owners can protect spouses.

If a spouse who was not active in your company survives, chances are he or she would rather be paid cash for the value of their shares and leave the running of the business to the surviving children or partners. It is difficult for executors to make sure that a wife, for example, is paid enough money to live on if she continues to share ownership.

In some cases, surviving spouses constantly need to be updated on the business’s finances, and performance and all too often have issues getting their due income. An insurance policy could rid the executors of the responsibility of ensuring that the company’s remaining owners pay the spouse. The insurance benefit could be paid directly to the spouse or flow through the business or the business partners as per a pre-established buy-sell agreement.

  • Who is the tax-advantaged plan designed for?

As with any life insurance policy, it is designed to pay beneficiaries a tax-free benefit upon the policy owner’s death. That is the main reason to buy such a life insurance policy.

The taxation scenario is a great secondary benefit, but the main purpose should be to ensure that needs are covered by the life insurance component.

8 reasons to invest in Segregated Funds


There are many reasons that make investing in segregated (seg) funds a significant strategy when creating wealth. See if these reasons appeal to you and discuss seg funds with your advisor:

  1. Simplified investing  You can select an industry or sector, for example, without having to hand-pick each security. The segregated fund manager does this selection process for you. You don’t have to be assessing which stock or bond may or may not be a winner. A fund manager is trained to weigh out all the market contingencies which can affect investor performance.
  2. Diversification A small monthly purchase plan can have you moving forward in your strategic fund investments in a day. Your money can buy a piece of many different investments held within one or more funds.
  3. Dollar-cost averaging Dollar-cost averaging allows you to buy more fund units when the unit values are down, less when they are high, giving you some benefit from downward volatility.
  4. Flexible access to your money You can sell your fund shares in one day. Your proceeds are available the next day if your money is needed in the short term.
  5. Portfolio balancing Choices include the full range of fund types and strategies are available to use, such as strategic balancing of your segregated fund holdings.
  6. Capital guarantees Segregated funds may offer certain principal guarantees at maturity and/or at death. In some cases, market gains can be locked in and guaranteed after a period of time. Some segregated funds have options to lock in a portion or all of the gains to date which resets a guarantee at a higher level after a defined period.
  7. Avoidance of Probate The proceeds of a segregated fund policy flows to the beneficiaries without going through probate which can avoid significant estate fees. It can also prevent these funds from being contested by disgruntled beneficiaries if the funds passed through a will.
  8. Potential Creditor Protection Creditor protection is offered because it is an insurance product, insofar as the investment is made before any creditor issues are apparent. Keep abreast of legislation with regard to creditor protection by discussing this with your advisor.