Life insurance is generally purchased to
provide tax free cash exactly when needed; for example: income replacement,
debt elimination, mortgage cancellation, education costs, or simply maintaining
life style for survivors.
While people purchase a life insurance
policy for one reason, the reason they continue to hold onto the policy may be
for something completely different. For example, you might buy a policy to pay off
the mortgage if you die prematurely, but after the mortgage has been paid, one
might keep the policy to leave the grandchildren something for education.
But then comes retirement. We will often
see clients come into the office and say “we are retiring and don’t need the
policy any longer.” In fact, we also find that others have suggested cancelling
the policy because “the kids are self-sufficient and don’t need it”.
On the contrary, there are many different
reasons people either hold on to their insurance or even buy additional
insurance as they retire.
Here are a few reasons in no particular
order:
You are retired but still have money in
your RRSP. If you and your spouse die before age 71, the balance of the RRSP may
potentially get paid to your children but only AFTER income tax is paid on the balance remaining. If your RRSP is significant,
you can use the life insurance proceeds to pay the tax, so that the full RRSP
amount can be paid to the family. Having insurance proceeds pay the tax is
always less expensive than paying the tax with cash from personal assets.
Say you own an income property or cottage
which has been enjoyed by the family for years. Your death will trigger a
taxable gain because it is not your principal residence. If your estate does not have a bag of cash to
pay the tax at your death, the cottage may have to be sold to raise the capital
to pay the tax. A life insurance proceed could be used to pay the tax so the
cottage does not have to be sold, and the children can continue to enjoy the
hot summers at the cottage.
Let’s say you have an asset like a family
home, a cottage, a rental property or even a small business. Three of your
children don’t have an interest in owning the asset after your death; however
one child really has an interest in keeping it for their family. On a $200,000
asset if you split the asset among the 4 children, each would get $50,000.
However, is it fair to give one child $200,000 and the others nothing? A
solution would be to have a policy for $150,000 so that one could keep the
house, and the others would still get their fair share. (tax not included in
this example.) You can adjust the numbers until you agree on what is fair in
this case.
When you retire with a pension you often
have a choice of income guarantees. Let’s say option A is to take $1,000 per
month until your death, and zero to your spouse after your death. Option B is
to take $700 per month until your death and then $600 per month to your spouse
until their death. One option is better than the other, but it
depends on how long you live. As an option, if you take $1,000/mo., and also
own a life policy; the policy can be designed so that the death benefit can
serve as an income supplement for your spouse after you are gone. This way, you maximize your pension for both you
and your spouse.
These are only a few examples, and every
personal situation is different. A conversation with an insurance advisor may
help conserve the estate, and/or allow you to receive more spending cash in
retirement!
If you are in Nova Scotia and would like
some insurance advice, please contact Corry Collins:
902-444-7000
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