When you purchase a Universal Life policy you have certain amount of flexibility and accessibility to your money.
• Premium payments are flexible. You can pay what is referred to as a minimum premium. If you want to pre-fund the policy with more money, you may be able to increase your annual premium on a monthly, annual, or occasional lump sum basis, up to a specified maximum. A maximum premium is calculated and pre-set in order to keep your policy exempt from accrual taxation. Once your cash value increases, you may be able to reduce or skip premium payments altogether, without jeopardizing insurance coverage, while the cost of the premium (insurance, administrative charges, any additional benefits, and riders) is eventually paid from within the plan. A well-funded policy’s money reserve (cash account) can continue to grow even as it pays for the cost of insurance.
• Borrow against cash account’s reserves. The cash surrender value (CSV) is just another name for the remaining cash in the policy. For example, if you had $100,000 in a policy’s tax-exempt fund, you would be able to borrow against it or withdraw it with some potential taxation.
These insurance plans can offer emergency medical protection for visitors, immigrants, international students and residents who are not covered by government health insurance. Visiting guests can be covered by valid medical health insurance, which begins upon arrival here insofar as it is bought ahead of travel.
Emergency medical expenses While travelling outside your country or locality, your government health insurance may partially cover some costs. Daily or annual coverage is great if you travel to warmer climates in the winter or travel year-round.
What about travel coverage? International travel covers an insured individual with emergency insurance which pays for expenses related to an emergency medical condition (covered by the plan). These expenses may be a hospital stay, prescription drugs, ambulance transportation, etc. Please refer to the policy for more details.
Coverage can include these expenses:
Bedside companion travel and sustenance allowance
Ambulance transportation
Diagnostic (X-ray, lab tests)
Hospital (semi-private room)
Flight and travel accident coverage
Prescription drugs
Physician or surgeon
Return transportation to the location of travel departure if emergency medical attention is needed
Emergency dental treatment by a licensed dentist and associated cost of prescription drugs while the insured is travelling.
Accidental injury, dismemberment, or death by accident where the accident occurred during travel
Loss/damage of baggage and personal effects
Trip cancellation and interruption
Understand the details. It is better to fill in a form and get a copy of the questions and answers within a contract pertaining to any age-related or medical underwriting processes, if not in person, via a digital meeting and signature. File these documents in case of the need to claim against travel insurance. Avoid policy cancellation due to misinforming the insurer concerning medical questions, which must reveal all medical history and medications used, plus retain a hard copy as your proof.
Note: Refer to the policy, which may vary. Individual plans may be purchased outside of an employer’s group plan.
A spirit of independence and optimism is typical of many business owners. It is important to realistically plan for your financial security should you become disabled.
When you own your own business, you do not have the security of group insurance that employees have. After several years, you may find that you are drawing a substantial income from a successful venture.
Disability planning brings us face-to-face with a reality check. If you become disabled, would your business continue to generate the same profits? If not, how would you meet your mortgage payments and pay for your groceries? When we are independent-minded, we tend to be optimistic, to the degree that we might believe one of the following money myths.
Money Myth #1. I will borrow the money until I get well. Reality: Few people will lend money to a disabled person. It’s hard enough to borrow money when you’re in perfect health with a steady income.
Money Myth #2. I’ll live off my savings. Reality: How long would your savings last? Using up your savings at an age when you ought to add to your investments may ruin your retirement plan.
Money Myth #3. I’ll sell off some or all of my business assets.
Reality: How many assets does your business own, that are not required for its successful operation? Who will pay fair market value to one perceived as liquidating out of a dire need for cash? The timing may not coincide with market demand for your assets.
Money Myth #4. My business will pay me a salary. Reality: Your partners may need to hire someone to fulfil your responsibilities. Flip the perspective around. If your partner became disabled, how long could you keep paying him or her a salary in addition to the salary for the replacement? If you are a sole proprietor and disabled to the degree you cannot work, how could you hire and train someone to work hard enough to produce his own salary and yours?
Business Owner Disability Insurance Check-List
Income Replacement Insurance Pays you a cheque to cover a major portion of your present income drawn from the company.
Key-Person Insurance Pays a benefit to enable the business to hire a replacement.
Office Overhead Insurance Helps you pay for day-to-day overhead and salaries.
Buy-Sell Insurance Creates the cash to allow your partners to buy out your interest, or vice versa, based on a written agreement.
With a permanent Universal Life Insurance (UL) policy, there are many options and tax advantages available within the plan. Death benefits may vary, funds can be invested in tax-sheltered accounts, cost and types of insurance can be manipulated – all to the benefit of the consumer’s goals! What are the primary benefits of Universal Life (UL) for Estate Planning? The options abound:
• The death benefit is adjustable. The amount of life insurance can be increased or decreased to reflect an insured’s changing needs, and there are multiple options available when creating a plan. Typically, a person will choose an increasing death benefit that will pay out all life proceeds as well as any cash in the plan at time of death. Or, a person could choose a plan that pays out the death benefit as well as all premiums paid into the plan. This option ensures that family assets will not be eroded due to premium payments for the life insurance policy. A person may also choose a level death benefit, however the advantages of this structure are limited. Or, if a person eventually is insured, or does not require their current amount of insurance on their policy, they can simply reduce the death benefit. In the end, a policy’s death benefit can be structured to suit the needs and goals of the insured.
• Insure multiple lives in a UL plan Several lives can be insured or added to one plan, including a spouse and children. Business associates may also be named as multiple insured’s on a business policy.
• Special riders can be added In some cases, term riders can be added to the policy, allowing for a structured policy that addresses insurance needs now and in the future. For example, you can structure a policy with permanent Universal Life insurance as a base amount, then add a Term 10 or Term 20 rider.
• Disability riders can be added Policies may provide a disability rider called a waiver of premium. Upon disability, the policy premium can be waived until such a time as the person is no longer disabled.
• Create capitalized income for a surviving spouse Life insurance proceeds can be structured as an annuity, thereby providing lifetime income for the surviving spouse.
• Capital creation can be deferred Alternatively you can arrange to have the death benefit paid after the second spouse’s death to maximize the value of your family’s inheritance or meet your estate’s tax liabilities. These policies are typically called Joint Last to Die policies.
There are many compelling reasons to combine your investments in a tax-advantaged life insurance policy. Tax advisors have been pointing their wealthier clients to these unique policies for years. Let’s examine some of the tax benefits, investment options, overall features, and for whom they are best suited. Depending on the insurer, there can be many possible options, but all enjoy some of the following essential elements.
You can earn and accumulate tax-deferred interest. A tax deferral aspect of the policy allows that you may effectively increase the after-tax yield of your investments and policy cash value over the long term. The fund from which the cost of internal cost of insurance offers interest-bearing accounts over various term periods. Comparatively for example, if you are nearing a 50% tax bracket and your after-tax yield on interest-bearing term deposits is a low 2.5%, you would have to earn 5% pre-tax. The UL deposits conversely are protected from secondary annual taxation on interest earnings until taken out.
The tax savings can pass tax-free to your beneficiaries. This offers an estate planning advantage. With your first premium payment, you secure a substantial death benefit in relation to premiums paid. If you hold the policy for several years, you can begin to create tax-advantaged growth within the policy. If the policy’s cash value grows, your entire principal, plus untaxed interest, including the remaining life insurance value, pass totally tax-free to your heirs.
The cost of insurance is paid with pre-tax dollars. The cost of insurance can eventually be paid from this growing interest-earning side-fund. Once enough money is held within the fund, over a long period, the cost of insurance is paid from some of these untaxed monies. Depending on the insurer, the insurance in the plan can be an annual term, 10-year term, or term to age 100, or a combination of term periods. Premiums for this insurance relate to your age, health, and smoking status. The premium costs are initially calculated to pay for the insurance and to increase the reserve cash fund designed to build funds that can be used to prepay future ongoing premiums.
The premium payments are flexible. You can pay what is referred to as a minimum premium. If you want to pre-fund the policy with more money, you may be able to increase your annual premium on a monthly, annual, or occasional lump sum basis, up to a specified maximum. A maximum premium is calculated and pre-set in order to keep your policy exempt from accrual taxation. Once your cash value increases, you may be able to reduce or skip premium payments altogether, without jeopardizing insurance coverage.
The premium payment periods are flexible. Some policies may have a minimum annual premium for several years. A well-funded policy’s money reserve (cash account) can continue to grow even as it pays for the cost of insurance. If you want to accelerate your tax-deferred interest savings, you may be able to increase premium payments. If you choose to select a limited-pay premium period, and interest rates are low, you may need to pay for several more years to compensate for the low-interest rate. Conversely, if interest rates are high, you may be able to shorten your premium-paying period. Once you stop paying premiums, the insurance, administrative charges, and cost of any additional benefits and riders would continue to be paid (deducted) from your side-fund’s reserve account value.
There are additional riders and extra benefits. In some cases, term riders can be added to the policy, allowing for simple, low-cost insurance on the life of the insured and his or her children. Some policies provide a disability rider, which could provide income in the event that the owner is disabled. Additionally, a waiver of premium rider could possibly pay for premiums.
There is potential creditor protection on the cash value. Special insurance laws may protect these policies from creditors, which could preserve the cash reserves if a business faced economic turmoil. However, a business owner cannot quickly hide money in a tax-deferred cash reserve if he or she knew there was potential bankruptcy looming on the horizon.
You can borrow against your cash account’s reserves. The cash surrender value (CSV) is just another name for the remaining cash in the side fund. If you had $100,000 in that fund, you would be able to borrow against it or withdraw it with some potential taxation. If you cancel the policy later in life, you should receive most of this cash value. However, there may be taxes due on a portion of the funds when withdrawn or when the whole policy is cancelled. For this reason, alternatively, a loan against the cash value may make more sense; which would allow the money to stay within the fund without accrual taxation, on reserve, while continuing to earn tax-free interest.
Funds are accessible. It is essential that such policies are well funded and that you monitor your cash reserves to avoid the cost of insurance overly reducing them (the cost of insurance can increase the older one gets). The tax-deferred funds can then grow to become a considerable liquid asset and result in an increase in your net worth. By carefully managing the cost of insurance (and perhaps reducing the insurance as the funds rise in value), you can minimize the reduction of the value of the tax-deferred account. While funding the policy sufficiently you continue to pay for the upcoming insurance premiums with pre-tax dollars
The tax deferral is a long term strategy. If you withdraw too much money too early, there may be applicable taxes due, and a surrender fee may apply. Early withdrawal may reduce the functionality of the strategic advantage because any increasing insurance cost can deplete smaller reserves.
The long-term benefit is the potential tax-advantaged investment growth that can outperform similar investments held in a taxable interest bearing vehicle. Policies can allow for future withdrawals to provide for special financial needs or additional retirement income. Premiums are always paid with after-tax dollars from the fund (which includes the initial tax-paid principal used to make deposits). This allows a good portion of any future withdrawals, in most cases, to be paid out tax-free. Moreover, the major benefit is that the entire death benefit including the cash value passes to the heir’s tax-free at death.
Talk to your advisor about any legislation changes that may affect taxation.
Life insurance has unlimited tactical financial uses.
Life Insurance includes cash benefit payouts arising from personal life insurance, disability insurance, group life and group disability insurance; and income from annuity payments, which together have risen to approximately 40 billion dollars per year in the first decade of the new millennium.
For a person running a business, a disability insurance policy can replace up to 75% or more of the value of a disabled person’s normal working paycheque.
“Life insurance is the first foundation of wealth preservation.”
Personally owned individual life and/or disability insurance can:
Pay off a home mortgage if the family breadwinner dies.
Pay debts and taxes accrued in larger estates leaving heirs with financial stability.
Help small businesses using agreements pass the baton to new leaders.
Fund key-man insurance to replace a leader in a small business.
Help family businesses and farms stay in the family through succession planning while passing wealth (and paying off liabilities) to the next generation.
Pay off capital gains taxes on second properties such as a cottage.
Cover taxes due when remaining Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings.
Pay off large capital gains on investments at home and abroad.
Equalize estates divided amongst siblings whose parents own significant business assets, where some work outside the firm.
The use of life insurance is increasingly creative the more wealth preservation becomes necessary and can assist in this important strategic area of fiscal protection. It can pass substantial sums of cash to future generations using techniques such as estate bonds.
You may want to replace the income of the life insured—either you or your spouse. Ask your advisor to do a capital needs analysis. It is easy to calculate the capital needed over any short or long period of time in any situation if the life insured were to die. Many professional calculators allow advisors to prepare accurate life insurance assessments.
It may be time to review your Life Insurance at these life junctures:
After you have finished your career training and begin a new job, you will want to buy life insurance as you start the foundation of your goal-setting strategy to gain financial independence. Life Insurance proceeds can pay off any OSAP or car loans so that the family has no financial burden should you predecease them.
If you have recently married or are engaged, your finances take on a new scope of responsibility for spouses jointly planning to protect one another’s financial security. Also, review your Life Insurance needs together to protect your income if one of you die or become disabled. This is a key foundation for developing a sound financial strategy when you are young and newly married.
If either of you had a will, it might be revoked upon marriage unless it specifically states it was created in contemplation of marriage. When planning your Life Insurance together, consider how to set up your beneficiaries carefully. Often it is best to do so outside of a will.
If you work at a trade, make sure that you have Disability Insurance. This insurance is also called Income Replacement Insurance because it provides a paycheque if you become disabled. Your children and spouse are dependent upon your income. What if you became disabled – will that source of income dry up or become minimal?
When you have children, Life insurance is purchased to provide capital if one of the parents should die. A young mother would not be forced to work, reduce her lifestyle, or leave her children cared for by others.
When children go to college, many of us tap into our savings to help meet their tuition and housing expenses. We may purchase a child’s first car or provide 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.
Suppose you have a change of executor, lawyer, accountant, or guardian. If one of these key people dies or becomes incapacitated, or is replaced regarding your estate plan, it is wise to review that aspect of your plan, which may include an entire rewriting of your will as you appoint new people.
If you want to establish planned giving, Life Insurance works well. If you desire to leave money, for example, to a charity, church or religious organization, an art gallery, or a school, you will need to do some estate planning. Consider using advanced life insurance planning. Life insurance can assign a beneficiary, allowing the monies to go directly to the charity or foundation. Consider that your will may need to be changed if you use Life Insurance to circumvent your will.
If you have grandchildren, you may want to ensure that they are provided for, perhaps through life insurance planning.
If you have experienced a significant change in your level of wealth, replanning may be important. If you inherit money or inherit Life Insurance proceeds, you may want to talk to your advisor about implementing Life Insurance in your own estate planning. Also, look at Disability Insurance and Long-term Care Insurance to see if financial risks can be insured to protect or enhance your wealth. If your assets decline, consider altering your bequests and newly establish this in your will.
If special care is needed for a loved one, make sure to plan. When a spouse, parent, or child has become disabled and needs future care, consider: Long-term Care costs are very high if you want a private room or special personal attention (such as defining when you want to take a nap or go to the washroom or bath, versus a strict schedule), for yourself, your parent, or another.
If you personally anticipate requiring costly long-term health care, you may want to alter the specific bequests in your will to reflect this new reality.
If you appoint a new or revoke a previous beneficiary, review your beneficiary designations with your Life Insurance representative and your beneficiaries.
If you have sold or will sell a business, your Life Insurance will need a review. If your assets become more liquid upon the sale of a business, you may want to pass that benefit along to beneficiaries or charities; or enhance your retirement. If a partner has bought or is buying your business previously bequeathed in your will, you may need to adjust your estate planning while using advanced life insurance planning for business-related solutions.
Replanning your Life Insurance may be necessary when you want to use or change a trustee or trust institution. You may, at some point, want to assign others to be in charge of investments within a testamentary trust directive.
A change of legislation can affect your plan. Changed government legislation can affect your estate planning. The validity of your will may be affected by changes such as estate taxation or probate laws.
Capital gains taxation on a major asset will eventually come due. When you own an asset that has appreciated, such as a cottage or business, or equity investment, make sure the tax payable will not harm the estate. Affordable Life Insurance solutions can pay off your estate liabilities after death.
You may want to consider using segregated funds when the market is offering low snail-paced returns on guaranteed term deposits.
The following advantages, make investing in segregated (seg) funds simple:
Invest in stocks when interest rates are low Interest rates on term deposits pay a very low percentile return per year, whereas the stock market can grown rapidly.
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 seg fund manager is trained to weigh out all the market contingencies which can affect investor performance.
Low-cost diversification A small monthly purchase plan can have you moving forward in your segregated fund investments in a day. Your money can buy a piece of many different investments held within one or more funds.
Dollar-cost averaging Dollar-cost averaging allows you to buy more seg fund units when the unit values are down, less when they are high, giving you some benefit from downward volatility.
Flexible access to your money You can sell your seg fund shares in one day. Your proceeds are available the next day if your money is needed in the short term.
Portfolio balancing Choices include the full range of seg fund types and strategies which are available to use such as strategic balancing of your funds holdings.
Automatically invest You can automatically invest more in segregated funds at any time or use dollar-cost-averaging.
Professional management Segreaged funds have active professional management watching over your investment
Segregated funds also offer some certainties Some guarantees are offered or optional as far as principal retention goes or the investor, which are quite different than segregated funds, which may differ according to the segregated fund policy.
Talk to your advisor about how you might benefit from the use of seg funds in your investment planning strategies.
There are specific life insurance policies offered with attractive tax-planning advantages. Legal tax-exempt rights are allowed in our tax legislation with life insurers, enabling the possibility to accomplish the following.
Premiums over and above the associated costs of insurance and premium tax are invested and can accumulate tax-deferred within specific plans.
Tax-deferral of the investments continue until such time that withdrawals are taken out from the policy.
Tax is avoided on both the face amount of the insurance and any ongoing cash accumulation in the policy when paid out to the beneficiaries on the insured’s death.
Taxation details. Most of the cash received from a life insurance contract is not subject to income tax. 1 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). 4
Here are some uses within an estate:
Final tax liabilities in an estate such as on capital property or the remaining RRSP/RRIF value is taxed fully as income and can be pre-funded.
In some cases, tax-exempt plans are used as a pledge to secure a loan to create additional cash flow in retirement. Cash resulting from a loan is not taxable. Where the loan is later paid from the death benefit, payment can be deferred until death. Repayment of the loan is thus partly repaid using pre-taxed dollars.
Others may borrow directly from their policy subject to the policy terms.
Life Insurance Plans for Individuals Life insurance is a type of coverage that pays benefits upon a person’s death to designated beneficiaries. A small premium gives you immediate coverage and provides for a significant death benefit payable upon the insured’s death to provide capitalization to pay an income for dependents. In some cases, there may be a maturity date where the insured, if still living, can receive the proceeds.
Tax deferral is allowed with some types of life insurance to offer insurance with an investment component, allowing increased funds to pass to heirs. Tax specialists can maximize an estate’s value while using life insurance. And the investment after achieving growth can enhance retirement income.
Types of Life Insurance
Life insurance has two primary classes:
1. Term Life Insurance Term Life is less expensive, but most term periods are generally temporary. Many people choose term life insurance (or term rider on a permanent plan) when beginning a family, as they try to keep costs lower while covering many liabilities.
Term Life Insurance plans include: The death benefit coverage continues for temporary terms set in 5, 10, or 20 years; or a lifetime level term to age 100.
Other periods can run to age 65, 75.
The premium remains constant for these terms.
The low cost of insurance for a certain level of death benefit is the essence of this plan, generally with less emphasis on a cash value.
You can buy more term coverage for less premium, which does increase upon each term period renewal (for example, a five-year term rises in cost in the sixth and eleventh year and so on).
Term insurance can generally be converted to Permanent Life Insurance coverage without medical underwriting, but check with your advisor about renewal and conversion options when you plan to buy a policy.
2. Permanent Life insurance The coverage continues to the time of the decease of the insured or pay one a level or an increasing lump sum at a certain age of maturity (usually age 100), or offers cash value or premium pre-payment incentives. Where there are cash values associated with a Permanent plan, the insurance cost can be lowered as the increasing cash funds accumulating in the program replace the level of insurance needed.
Permanent Life Insurance plans include:
Whole Life, can offer a level premium and a cash value table in the policy in some cases, guaranteed by the insurer;
Limited Premium Payment, is a policy that can be paid up fully in a specific period of time (such as over 10 or 20 years; or paid up at age 65).
Endowment Life is where the cash value grows to a level equal to the insurance coverage.
Life insurance premiums vary according to the policy type. In some cases, paying a little more premium offers enhanced benefits. Tax-deferral strategies may change due to legislation.
There are many compelling reasons to combine your investments in a tax-advantaged life insurance policy. Tax advisors have been pointing their wealthier clients to these unique policies for years. Let’s examine some of the tax benefits, investment options, overall features, and for whom they are best suited. Depending on the insurer, there can be many possible options, but all enjoy some of the following essential elements.
