Many people recognize that having life insurance is a necessary part of their estate planning. But life insurance can be hard to understand, so you’ll find answers to five common questions about life insurance here.
- What’s the main difference between term life, whole life and universal life?
Generally, there are two types of life insurance policies: term and permanent. Term life insurance provides pure life insurance protection for a specified period (the term). Both whole life and universal life insurance are forms of permanent life insurance and consist of two parts: insurance for your life plus an investment (cash value). The investment component of whole life policies is managed by the insurance company, while you manage the investment component of a universal life policy yourself (with the help of your financial advisor). In either case, the investments inside the policy are usually exempt from accrual taxes. This can provide the potential for tax-advantaged growth of non-registered assets.
- How does life insurance help with income replacement?
One purpose for life insurance may be to replace the income that you provide for your family to maintain their lifestyle, should you pass away. A financial advisor can help you determine the appropriate amount of insurance coverage you need and how that coverage would translate into income for your family.
- How does life insurance help with tax efficiency?
Permanent life insurance provides a tax-free death benefit payment to your beneficiaries. In addition, permanent life insurance policies allow account values to grow on a tax-advantaged basis — earnings are exempt from income tax while the investments remain in the policy.
For this reason, most permanent insurance policies include a feature that allows extra deposits, over and above the cost of insurance. These deposits are invested within the policy investment account(s) and, depending on the policy, they may help increase the total death benefit. This can significantly increase the after-tax value of your estate.
Many clients use these features for a range of purposes: to shelter additional non-registered assets, provide funds used to pay taxes due upon death, or transfer their excess assets to the next generation or to a charity.
- What is the link between life insurance and estate planning?
Life insurance provides money for your family when they need it most. When you pass away, various expenses will need to be paid, including funeral expenses, estate administration expenses, any taxes that may result from the “deemed disposition” of your capital assets, and any taxes that may result from balances in your RRSP or registered retirement income fund.
Your family will also need to pay off outstanding debts, such as a mortgage or line of credit. Life insurance helps to ensure that your family won’t need to sell other assets to pay for these expenses.
Some policies will also offer you a guaranteed estate value payout. This can then reduce some of the risk you are taking with your current investments, as you can have peace of mind knowing that your estate plan has been solidified.
- Is life insurance offered by MD from a third-party insurer?
Life insurance is accessible to MD clients through Scotia Wealth Insurance Services (SWIS). SWIS has partnered with some of Canada’s most reputable, financially stable and longstanding insurance providers to offer clients products with the competitive features, benefits and insurance strategies that help you build, protect and share your wealth.
Your MD Advisor* can help you identify your life insurance needs and can direct you to our trusted insurance experts.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
All insurance products are sold through Scotia Wealth Insurance Services Inc., an insurance agency and subsidiary of Scotia Capital Inc., a member of the Scotiabank group of companies. When discussing life insurance products, advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.