Pay Less Tax With Life Insurance – Here’s How
It’s tax time in Canada. That means gathering up paperwork and making sense of relevant events, investments, and more from last year. For individuals and business owners with personal or group life insurance coverage, there are opportunities to take advantage of tax credits and deductions now, while also planning for later.
Depending on your situation, here are three ways that life insurance can provide tax savings.
1. Providing tax-free benefits to loved ones
One of the most valuable benefits of life insurance is that the inheritance is paid tax-free to your beneficiaries (i.e., the person(s) you choose to receive your life insurance payment in the event of your death). The money is theirs to spend however they choose. So as you work on this year’s return, and find yourself thinking about your children and future grand-children, here are a few things you can do ahead of time to minimize any estate tax that could be owed after your death.
Purchase life insurance
If you don’t have life insurance, now is as good a time as any to get some. The younger and healthier you are, the more affordable a policy – so don’t delay when it comes to making this important investment. Find out how much life insurance you need.
Consider joint ownership
When you share a bank account with a family member, or you have joint ownership of a home or other asset, it can simply be passed along to the other person when you die – with no need for probate. This should only be done after getting qualified tax and legal advice. Scroll down to learn more about probate.
Savings and investment accounts such as registered retirement savings accounts (RRSPs) and tax-free savings accounts (TFSAs) let you designate beneficiaries and/or successor holders. You can also choose the life insurance version of a GIC, a.k.a., a guaranteed interest annuity, which is passed along to your beneficiaries immediately with no tax and no red tape.
2. The tax advantages of charitable giving
Registered charities in Canada issue tax receipts for all donations, so you can deduct that amount from your annual income. Many people are familiar with this approach to charitable giving and find it easy to make these simple deductions annually. However, you can also use life insurance to provide a charitable gift and either take advantage of annual tax savings or plan to lower your estate tax in the future. Here’s how:
Deduct life insurance premiums annually
When you purchase a life insurance policy in the name of a charity, the annual premiums can be tax deductible. This is a way of reducing your tax bill year over year.
Reduce estate tax down the road
Making a charity the beneficiary of a life insurance policy allows your estate to file for a tax return on the entire amount. The tax savings results in more money going to your loved ones. For more information, see Donating Life Insurance Benefits, or speak with a Serenia Life advisor about a charitable giving strategy that is right for you and your family.
3. Deductions for small business owners
Through salaries, contracts, and employee benefits, Canadian businesses provide financial stability to families and make up the lion’s share of our economy. That’s why there are tax incentives for business owners who pay for life insurance. The two most common are:
Providing group benefits to employees
As part of a group benefits plan, business owners may choose to pay the premiums for their employees’ life insurance. This can be deducted as a business expense when the policyholders are either corporate officers or employees, and the company is not named as the beneficiary on the policy. In other words, there are a few limitations. But generally, this is a common business deduction.
Using life insurance as collateral for a loan
Sometimes a lender will ask you to take out a life insurance policy that can be used to repay your loan if you die. If the insurance policy is mandatory, the premiums may qualify as tax deductions. For that to happen, you need to meet the following criteria.
- The policy must be required as collateral for the loan.
- The lender must be the beneficiary of the policy.
- You must be taking out a loan at a restricted financial institution (meaning a bank or credit union).
These are just two examples of tax-saving strategies for business owners. Always seek advice from your accountant or tax specialist to know all the tax benefits you may be eligible for.
Planning for probate
Before any of the assets in your estate can be legally transferred to your loved ones, a legal process called “probate” must be completed. It’s free in Manitoba and Quebec. Everywhere else, you can expect your estate to get hit with a probate charge, which varies widely by province and territory.
It’s difficult to know how long probate will take. The greater the size and complexity of your estate, the more time required, especially if you do not have an up-to-date will or powers of attorney. Serenia Life members are eligible for a free online will or, for more complex needs requiring a lawyer, a reimbursement of up to $150 every five years – a good motivation to draft or update these very important documents.
It’s always a good idea to ensure that your beneficiaries have the means to cover any out-of-pocket expenses while the estate settles.
Whether you are tax planning now or for the future, it’s important to understand your options when it comes to the tax benefits of life insurance. Reach out to your Serenia Life advisor for help. Don’t have an advisor? Fill out this short form and get connected with one.
This blog post contains general information only. Because each person’s situation is unique, it is best to speak with a qualified professional before making any final decisions. Serenia Life Financial does not advise clients on tax, accounting, or legal matters.
Subscribe to keep updated with the latest news.