Life Insurance
Life insurance buys time; it is the only investment that does. This is its basic function and should be the first outside investment an individual or Family should make. Life Insurance pays a lump sum Tax Free Dollar amount to your beneficiaries when you pass away.
Life Insurance in Ontario is a contract between an insurance policy holder and an insurer (Insurance Company), where the insurer promises to pay a tax-free death benefit to a designated beneficiary upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. To obtain this coverage, the insured individual is required to pay a premium (monthly, semi-annually or annually), the amount of which is based on the insurance company’s anticipated cost of covering the risk. While insurance is available in a variety of forms, there are essentially two basic categories:
Permanent Insurance: Permanent life insurance is a ‘Permanent’ Solution to your Insurance needs. It is a policy that provides coverage for the insured’s entire lifetime and is far more superior than Term Life Insurance. It includes: Whole Life, Universal Life, and Term 100. These Plans are usually a combination of death benefits and a savings portion. The savings portion or ‘Cash surrender value’ can be quite significant and can be withdrawn by the Life Insured at any time. Permanent Life Insurance plans sold in Canada are extremely favorable from a tax perspective & the growth of the cash value is tax deferred. These types of plans do not expire and do not need be to renewed, and can be paid up in full over a short period of time (10-20 years on average). If you purchase $1 Million of Whole Life Insurance as an example; you will never have to worry about your monthly premiums increasing & your premiums will be refunded back to you should you decide to surrender/cancel the policy in the future. You also have the ability to borrow cash from your policy at a low interest rate and or use it as collateral for a Bank Loan since the bank would consider the Cash Value in the policy as an asset. We strongly recommend Permanent Life Insurance to the Majority of our clients since it is a long term solution for your Insurance needs and is guaranteed to pay out the full amount tax free to your beneficiaries or estate.
Term Insurance: Term life insurance provides protection against financial loss resulting from death during a specified period of time or term. The policy only pays if the insured dies within the given period named in the policy. At the end of the period, the protection ceases unless the policy is renewed. Term life insurance is often referred to as temporary insurance because it is ideally suited to cover temporary risks: risks that have an identifiable duration. Most common Terms include: Term 10, Term 20, Term 30 & Term 100.
Legally the Beneficiary must be over the age of 18 to receive the proceeds. We have created a ‘Beneficiary’ category on our website under the ‘RESOURCES’ section which discusses the beneficiary subject in detail.
Key Person Insurance provides Life Insurance or Disability Benefits to your Company or Corporation if it suffers the loss of a ‘Key Person’. A Key person can be anyone directly associated with the business whose loss can cause financial hardship or strain to the business. For some businesses there may be specific people, such as a skilled tradesman, a director or an executive, whose skills and services are critical to the success or survival of the business. The death of a key person could result in significant loss of revenue or services to the business. The company would need to hire and train a replacement for this Key Person. A Life Insurance Policy owned by and payable to the company or corporation, on the life of the Key Person, would provide the cash required to replace the lost income and fund the expenses resulting from the Person’s death. This would help keep the business running and would help compensate the business for lost revenues resulting from this person’s death.
Coporate Owned Life Insurance A corporation may own a Life Insurance policy for many reasons. Some of those reasons include: Key Person Insurance, Buy-Sell Funding, Funding Capital gains tax on the corporation or business at death, business loan protection, retirement funding, executive compensation, wealth creation etc. The Capital Dividend account or “CDA” allows tax free amounts from a Life Insurance Policy received by certain corporations to be flowed to the shareholders tax-free. Capital Dividends are not subject to income tax in Canada.
Buy/Sell Agreements Funding with Life Insurance to Preserve your shares in the Corporation
Whenever a corporation has more than one shareholder, it is commonly recommended that the shareholders enter into a buy/sell agreement to operate in the event of a shareholder’s death, disability, retirement, or conflict with other shareholders or many other specific circumstances. There are numerous objectives for such an agreement. The agreement can provide for a smooth transfer of the business interest, avoiding potential disputes about the need for the sale/purchase, the price and other terms of sale. Most importantly the buy/sell agreement creates a degree of liquidity for the normally illiquid shares of a private corporation. Failure to facilitate this smooth transfer could jeapordize the financial well-being of the departing shareholder and his/her family. It could also jeopardize the financial health or even the viability of the business. By providing for a sale, the likelihood of a confrontation between the departing and remaining shareholders will be minimized. Employees, customers, suppliers and creditors will be reassured about the continuity of the business. Where appropriate funding has been mandated in the agreement, creditors will also be reassured about the financial health of the business and the remaining shareholders after the buy-out.
Funding a Buy/Sell Agreement with the Purchase of a Life Insurance Policy for all shareholders
Business Advisors generally agree that Life Insurance is the most efficient means of funding a buy/sell agreement on the death of a shareholder. This Tax Topic describes the basic methods of buying out a shareholder at death and outlines a number of issues involved in deciding whether to fund a buy/sell arrangement with corporate-owned or personally owned Life Insurance.
How Much Insurance do I need?
This answer depends on various factors. To determine how much Insurance you need, an Insurance needs analysis needs to be completed by an Advisor to assess your Financial picture. This will depend on any outstanding debts or Loans you have, annual income to provide for your survivors, Final expenses, estimated personal and estate taxes owed at death based on existing assets & investments, education fund for kids or Grandkids, transferring wealth or business interests. You may also want to donate a significant amount of money to your favourite Charity or to create a legacy. At Life Protection Canada, we would recommend 7-10x your gross annual income and 15-20x for high net worth individuals and business owners.
Protecting your Estate and preserving your assets requires paying taxes at death in order to avoid the liquidation of the assets in your estate. RRSPs & RRIFs are fully taxable at 100% on the death of a surviving spouse and any other non-registered investments and investment properties will be subject to a capital gains tax of 50%. If there is no liquid cash to pay for these taxes, your estate will be liquidated. Having Life Insurance in place will provide the cash your estate requires to absorb the tax burden and maintain your assets rather than having to sell them or borrow the funds. Why pay your taxes out of principal? The basic purpose of Life Insurance is to create CASH, nothing more or nothing less!
Applying for Insurance: In order to qualify for Life Insurance, you must apply for it through a Licensed Insurance Broker, Agent or Advisor. We must approve the application before a contract of Insurance can be completed and agreed upon by both parties.
The applicant and the Insurance agent complete the application together. Usually, the agent must ask the questions and records the applicant’s answers on the application form. The applicant or Life Insured then reviews and signs the application. A Licensed Agent can also help complete an Insurance application over the phone (Phone applications) depending on the product and Insurance amount applied for.
The application contains information regarding the type of Insurance applied for, the reason for the Insurance application & amounts applied for, the financial and business situations of the applicant, the health status of the life to be insured, and the name of the Primary/secondary or contingent beneficiaries. Legally a Beneficiary in the Province of Ontario must be 18 years of age or older to receive the proceeds. We have created a brief article entitled ‘Naming a Beneficiary for your Life Insurance Policy’ under our ‘Resources’ section https://www.lifeprotection.ca/resources/beneficiary which discusses the Beneficiary subject in detail. Any further questions should be discussed with one of our qualified Insurance Advisors. Call us toll free at 1-888-968-9188