Life Insurance in estate planning
- Suggesting life as well as disability insurance if a disruption of your income stream would mean your family couldn’t maintain their standard of living.
- Questioning the use of life insurance unless it’s necessary, proposing the alternative of investing the dollars you would otherwise spend in premiums.
Don’t jump to the conclusion that because I’m writing about it I’m a life insurance pusher.
I don’t sell it, don’t have any friends who do and I’m trying to convince my wife to drop insurance she continues to have on my life costing over $300.00 per month.
About 15 years ago my wife surprised me on my birthday with a Harley Davidson motorcycle. And a huge bottle of Crown. Wouldn’t you know but she also tripled my life insurance!
That was smart, even apart from my new risky mode of transportation. Had I bought the biscuit at that time of our lives, my wife would have been left with three children under 10 and an unpleasant financial reality.
Now, not so smart. Hopefully some tears, but there won’t be financial hardship if I kick off tomorrow.
And the premium of over $300.00 per month is a good chunk of change. If we put that into an investment earning a 5% return, that would grow to over $265,000.00 by the time I’m reaching life expectancy at age 85.
Life insurance companies make serious coin insuring people’s lives. The only way you “win” with life insurance is if you die some distance before you’re likely to, beating the odds that are already stacked against you so that the insurance company gets a profit margin.
On that basis, my personal view is that life insurance is to be avoided unless it’s necessary.
I’m going to review some common estate planning purposes for life insurance.
The first I’ve already talked about: If your income stream stops your family will not be able to maintain the same standard of living.
Keep in mind that there are a whole lot of other things besides death that can stop your income stream, temporarily or permanently. You’re much, much more likely to become disabled from work than you are to die. Ensure you have disability insurance!
Another purpose of life insurance in estate planning is to provide a bunch of cash to pay all the taxes that will have to be paid because of the deemed disposition of your assets.
I’ve explained what “deemed disposition” means, and what I referred to as Canada’s capital gains fairy in a previous column published February 18, 2024. Entering “Capital gains fairy” into a Google search pulled it up for me. Let me know if you have trouble and I’ll e-mail you a link.
That recreational property you purchased for $150,000.00 is worth $2 Million when you die. Your estate will pay taxes on that massive capital gain.
Yes, the property can be sold to come up with the money to pay the tax, but maybe you intend for the property to stay in the family. If so, the proceeds of a life insurance policy would help pay for that tax.
But we still have the problem that life insurance costs money. If you die at or near life expectancy, you will have done better by investing those premiums to provide a tax paying fund.
There is one life insurance benefit that might be particularly attractive to those who are vulnerable to creditors. Life insurance policies, including their cash surrender value, are immune from creditors if the beneficiary is a spouse, child, grandchild or parent.
There are types of life insurance that front load the premiums (my words) and include an investment component. That policy can represent a significant asset which will be protected from creditors.
I am not a financial advisor or life insurance broker. I am not qualified to advise you about the ins and outs of life insurance products and how they might fit into your financial plan.
And I have not provided an exhaustive review of the many ways life insurance can be utilized in estate planning, including several ways that might be very important in the context of businesses (incorporated or unincorporated).
Ensure that you consult directly with appropriate professionals about your financial and estate planning needs. A column is no substitute for advice given by a fully informed and qualified professional.
