Life Insurance – Page 14 – Adviceon Library

What is the purpose of life insurance?

Individual life insurance is primarily designed to protect against the financial loss that can occur with the death of a loved one. While individuals are typically very good at insuring their car or their home, they frequently do not insure their most valuable asset; their ability to earn an income. Life insurance provides a death benefit that can provide much-needed income to support your family, your business, or to send your children to college. Additionally, life insurance may offer many tax advantages.

There are two types of individual life insurance: Term life insurance and permanent life insurance. Both term and permanent policies offer an income tax-free death benefit to the policy beneficiaries. There are, however, several key differences to keep in mind when purchasing the right life insurance. It is one of the most important decisions that you can make.

How does life insurance protect my income in the future?

In the event of the death of the insured, life insurance is designed to create capital precisely in the unpredictable event of death. It provides a precautionary financial strategy to stabilize the financial security of loved ones reliant on your income or your capital provision.

Current one-time capital uses are provided by life insurance, such as:

Pay off liabilities such as credit cards, bills outstanding, loans, and/or estate taxes upon death.
Pay for the final expenses associated with a funeral and burial.
Create money to pass on to heirs such as children or a spouse.

An ongoing future use of capital is provided by life insurance, such as:

Investments can be purchased from which to create an income to cover the living expenses of a family; often providing for the retirement of a spouse.
Funds can establish a trust, from which family can acquire income.

What if an insured lives and cannot work due to a disability?

The individual should include some form of disability coverage to replace his or her income. Talk to your advisor about the following other types of insurance:

Income Replacement Insurance: This covers a percentage of your income in the event that you cannot work for a certain period of time due to a disability; some allowing coverage for a lifetime.
Critical Illness Insurance: In the event of a critical illness such as a stroke or heart attack, a significant lump sum benefit can be paid, depending on the plan’s coverage.

Check your group insurance benefits at work which should be considered when buying the above insurance.

Can insurance protect my financial security if I have a critical illness?

Our provincial health plans do not allocate funds to help patients who face a critical illness, to recover financially. They are established, not to build or replace wealth, but to provide basic health care. If you have little or no income, these plans would pay you only a small disability benefit if you meet specific situations. ¹

1. Lump-sum benefits are paid: Critical illness insurance offers a lump-sum payout of cash if you are diagnosed with a critical illness covered by the policy (such as stroke, heart attack, or cancer). Its purpose is to provide a considerable amount of money (referred to as a living benefit).

2. Allows time to convalesce: The critical illness insurance capital can help you convalesce over longer periods and in the company of loved ones, without a concern that the expenses related to a previously enjoyed lifestyle must be immediately eliminated. After all, there may be an extended time necessary to recover before you can return to work.

3. Money for exceptional health care: Critical illness insurance can fund expensive drugs or out-of-country health care. You may need to employ a private nurse to live in your home, hire a nanny, receive physical therapy and/or renovate your home to meet accessibility needs related to the illness. Critical illness insurance can help pay these bills.

4. Critical illness insurance enables a career change: Due to medical advances, many people totally recover from critical illnesses and re-enter the workforce. Unfortunately, many others live the rest of their lives partially disabled, unable to do the same work. There may be a need to finance training for a career and search for new employment. Before you establish a new source of income, where will your money come from? Critical illness insurance keeps you financially stable through a critical illness.

¹ Canada Disability Benefits – Canada.ca

How do you insure your estate taxes?

Your heirs will inherit certain assets tax-free, but not all. Life insurance can cover estate liabilities which would otherwise leave your beneficiaries with debts rather than an inheritance.

“Are you kidding? I thought I would inherit.” Hopefully your children won’t need to utter these words upon your death. Cash bequests, the house, life insurance proceeds, and heirlooms generally pass to the heirs tax-free. However, capital assets are assumed to have been sold at fair market value immediately before death. Each of these deemed dispositions of capital assets such as a cottage occur even if the asset is willed directly to an heir. But the tax liability remains in the deceased’s final tax return and reduces the value of the estate.

Here is the downside. If there is insufficient cash to pay the taxes due, assets your heirs may expect to inherit must be sold. After the death of a second spouse this can include assets such as: an old homestead property, a family cottage, a residence, your farm, an art collection, furniture, or business shares.

Consider taking out life insurance to cover any estate liabilities that could reduce the value of bequests that you want to make to your loved ones. A death benefit is paid out tax-free. Life insurance proceeds can circumvent probate if they are payable directly to a named beneficiary. If the estate is the beneficiary, the life insurance coverage should be raised to cover any probate fees.

Can life insurance solve tax liabilities in my estate?

There are many ways to reduce your estate liabilities. You work hard to earn a living, save for retirement, and own property. It is important to know what your estate liabilities are in relation to: capital gains, mortgage debt, car loans, unpaid taxes, and business-related liabilities. Consider reducing these liabilities:

Reduce the impact of income taxes. Here are some methods to reduce taxes due upon your death:

Use the spousal (and disabled child) rollover provisions of RRSPs or RRIFs.
Leave assets that have accrued capital gains to your spouse to defer tax.
Leave assets without capital gains to other (non-spouse) family members.
While you are alive, gradually sell assets having capital gains, to avoid dealing with the gains all at once in your estate.
Purchase life insurance to cover capital gains taxation in the estate.
Taxes may be payable on gains in relation to:
º income-producing real estate, a second residence, or cottage.
º any other assets left to surviving family members, such as shares of a business.
Consider charitable donations to lessen taxes in the estate.

Reduce probate fees. Probate fees will be based on the value of assets administered through your will. Here are some ways to reduce probate fees:

Establish a spousal trust during your lifetime to hold assets or property for the sole use of your spouse.
Own assets jointly with your spouse.
Distribute assets or cash while alive.
Name a beneficiary (not the estate) on life insurance policies.
Include an alternate beneficiary on your life insurance policies in case your initial beneficiary predeceases you, or dies simultaneously (that way, probate fees will be avoided on the proceeds).

Why is inflation a risk to my retirement income?

Statistics Canada releases inflation figures regularly to determine the health of the Canadian economy. Increasing inflation indicates that the economy’s overall prices are rising. On the upside, this means there is good economic growth pushing these numbers higher. Some inflation is necessary to a vigorous economy. Fast increases in the index percentile can spark the Bank of Canada to raise our interest rates to keep the costs of goods and services in check.

When you go to the pumps or to the grocery store, ask yourself, “will my retirement investment portfolio create sufficient income to pay for all these rising expenses?” Only by accumulating assets in your pre-retirement years, will you be able to increase your net worth, which can lead you to financial independence. The cost of our basic retirement needs will increase.

Investing to beat Inflation is a constant battle.

The importance of the economic fact of inflation may not be obvious. “What does the fish know about the water in which it swims?” asked Albert Einstein. Over the years, inflation has radically reduced our buying power. Interest rates when increasing as a policy to combat (reduce) inflation can also increase our debt repayment load as a percentage of income putting a strain on our budgets. In this respect, both inflation and interest on the debt are the foremost enemies of wealth creation.

How inflation is calculated Canada’s national statistics are weighted to reveal increases for the basket of goods and services in the Consumer Price Index (CPI).¹ Consumer spending patterns for 12 months up to October 2021, can be seen by visiting Statistics Canada.

Three of the eight major components saw unprecedented growth in their basket weights, the statistics agency said, led by shelter representing soaring house prices during the pandemic–the highest-weighted major component, which grew to 30% as a share of the basket. The share of the household operations, furnishings and equipment component grew to 15.21% and alcoholic beverages, tobacco products and recreational cannabis went up 4.86%. The Bank of Canada targets overall weighted inflation at 2%, with a 1%-3% control range. ²

You can get ahead of inflation now by investing. A healthy investment fund portfolio can give you a sense of financial security, earned by continued discipline and adherence to the principle of saving, which adds to our sense of personal dignity.

Saving on a month to month basis while purchasing investment fund units can help you realize your goals and objectives in life (such as acquiring a home, making major purchases, travelling, putting children through college or university, or going back to school yourself). Finally, your investments must outpace inflation—the rising cost of goods and services—the investor’s worst future enemy. Ask your financial specialist to do a complete analysis of your retirement income potential.

^{1 StatsCan}

^{2 Reuters}

Does your business need an Estate Freeze?

If your business assets possess the potential for significant capital gains, and you have children who might take over the company, an estate freeze may be worthwhile considering. An estate plan can assess the fair market value of an estate and the potential tax on the capital gains that will be due.

The company’s value can be reasonably pre-established with your input, as opposed to your executors and lawyers negotiating with Canada Revenue Agency (CRA) after your death. Ask your tax accountant how an estate freeze would affect your business and if this is the most viable option to consider when transferring or selling your business to your heirs.

Estate planning will help you determine who will be the beneficiaries of your estate, who will take over the company, or if you should sell your assets currently.

An estate freeze or a partial freeze is a way to transfer all or a portion of the new growth in the value of the company to the new owner-heirs. You exchange all or a portion of your existing equity for a class of non-growth voting preferred shares. These preferred shares allow for a fixed income in retirement and the maintenance of future control, enabling a fall-back contingency for the freezor to assume a takeover (to save the company from poor management by the new heirs or to sell the company etc.).

Due to the technical complexity of an estate freeze, and potential changes to tax legislation professionals must be consulted when considering this option.

Estate freezes coupled with the intelligent use of life insurance can help reduce the effect of a massive tax-bite on your estate. Such planning can also free up capital for retirement because life insurance can pay the tax bill versus using any money saved for retirement.

What are my Retirement Income Options?

Retirement Income Options are strategies that provide you with a retirement income paycheque from the funds saved during your working years.

Registered Retirement Income Funds The most common retirement income option is a retirement income fund (RRIF). It is like a registered retirement savings plan (RRSP) in reverse. It has the same tax-deferred growth, flexibility and choices you had in your RRSP, with the added benefit of being able to withdraw a retirement income and have the flexibility to determine the amount of income you withdraw each year (where a minimum annual amount is determined by a federal government schedule).

When you need to begin receiving income, or at the latest by December 31st of the year you turn 71, you must convert your RRSP to a RRIF. A RRIF is designed to provide you with income while keeping the assets retained in your RIFF tax-deferred.

What are the types of Locked-in Retirement Savings Plans (LRSPs)? Locked-in RSPs originate from Registered Pension Plans (RPPs) which are plans where funds are set aside by an employer, and/or employee, to provide a pension when the employee retires.

If you are a member of a fully vested Registered Pension Plan (RPP), once employment is terminated, the proceeds of your RPP will be considered ‘locked-in’ and must be transferred into certain ‘Locked-in Plans’ which include the following Locked-in RSPs and Locked-in Retirement Income Options:

LIRAs and LRSPs Locked-in Retirement Accounts (LIRAs) and Locked-in RSPs (LRSPs) are registered retirement savings plans which are established by the transfer of locked-in pension fund assets from a Registered Pension Plan (RPP) or another locked-in retirement savings or income plan (such as a LIRA, LRSP, Life Income Fund (LIF), Prescribed Retirement Income Fund (PRIF) or Locked-in Retirement Income Fund (LRIF).

Tax on the interest you earn in these plans is deferred until you withdraw the funds, and are only accessible prior to retirement age under certain conditions. Upon reaching retirement age (most are at 55), you can transfer the plan to one or more eligible Retirement Income Options available for a regular RSP.

LIRAs and LRSPs must be converted to a Retirement Income Option such as an Life Income Fund (LIF), Locked-in Retirement Income Fund (LRIF), or a Prescribed Retirement Income Fund (PRIF) before December 31st of the year you turn 71.

Life Income Funds (LIFs) Life income funds are purchased with a Locked-in RRSP (LRSP). You are required to roll over your LRSP assets into an annuity (Life Annuity in some provinces) or a Life Income Fund (LIF) by the end of the year you turn 71. You will have the ability to withdraw an income and you maintain the flexibility and choices you need within prescribed limits similar to a registered retirement income fund (RRIF). However, the minimum and maximum withdrawal schedule for a LIF is calculated differently and changes each year.
Locked-in Retirement Income Funds (LRIFs) Locked-in Retirement Income Funds are purchased with a Registered Pension Plan (RPP) or a Locked-in Retirement Account (LIRA).

A LRIF is different from a Life Income Fund (LIF). The maximum payments are based on the investment returns, not your age or current interest rates. And there is no requirement to purchase an annuity at age 80. LRIFs are only available in certain provinces.

How can I avoid Financial Internet Scams?

Online Identity theft is any Internet fraud that results in acquiring your data, such as unique Logins and Passwords, usernames, banking information, or credit card numbers. Moreover, it is theft of your financial identity!

How to avoid donation scams Be on guard if you receive an unsolicited email message from a charitable organization asking for money concerning a news event such as a natural disaster, a national election, or a significant change in the world financial system. Don’t open any attachments or click any links. Manually type the charity’s web address into your browser’s address bar and make sure the request is legitimate before donating.
Phoney links in email If you see a link in a suspicious email message, don’t click on it. These links might also lead you to .exe files, known to spread malicious software on your computer.
Fake Alerts and Threats Some thieves use threats that your Hotmail, Google, Facebook or bank account will be closed if you don’t respond to an email message? Internet criminals often use threats that your security has been compromised.
Spoofing popular websites or companies Scam artists use graphics in email that appear to be connected to legitimate websites like Facebook or your bank. How do they achieve this? Using fake logos to request your Login and Password, you are directed to phoney scam sites or legitimate-looking pop-up windows to ask for your financial information.
Fake web addresses Internet criminals also use slightly altered web addresses that resemble the names of well-known companies.
Lies about your computer software Internet criminals might call you on the phone and offer to help solve your unknown computer problems warning of viruses or speed-slow downs. They might try to sell you a software license or an agreement to assist you periodically. In most cases, neither Microsoft nor Apple make unsolicited phone calls to charge you for computer security or software fixes.

Source: Microsoft

Designating your charitable contributions

A charitable contribution is a gift, and, like any gift, is an irrevocable transfer of a donor’s entire interest in the donated cash or property. Hence the donor’s entire interest in the donated property is transferred, and it is for the most part (except for “designated” uses) impossible for the donor to recover the donated property.

Undesignated contributions Most charitable contributions are undesignated, meaning that the donor does not specify how the contribution is to be spent. An example would be a church member’s weekly contributions to a church’s general fund or a contribution to the United Way or World Vision. Undesignated contributions are unconditional gifts and there is absolutely no legal obligation to return undesignated contributions to a donor under any circumstances.

Designated contributions A donor can make a “designated” contribution to a charity, where the donor designates how the contribution is to be spent. Where such contributions are held in trust for a specific purpose, and insofar as the charity honors the designation, or plans to do so in the foreseeable future, it has no legal obligation to return a donor’s designated contribution.

Where designated contributions will not be used for the specified project, and donors can be identified, they should be asked if they want their contributions returned or retained by the charity and used for some other purpose. Ideally, donors should communicate their decision in writing to avoid any misunderstandings. Charities must provide donors with this option in order to avoid violating their legal duty to use “trust funds” only for the purposes specified.

A charity should send a letter to donors who request a refund of a prior designated contribution informing them that (1) there may be tax consequences, (2) they may want to consider filing an amended tax return to remove any claimed deduction, and (3) they should discuss the options with their tax advisor. Charities should consult with an tax attorney when deciding how to dispose of designated funds if the specified purpose has been abandoned or is no longer feasible.