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Life Insurance: Tax-Free Cash When It’s Needed

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:
corry@maritimewealth.com
902-444-7000


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