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Personal Wealth and Finance


Understanding Life Insurance Planning 

January 1, 2020

 

Life insurance plans offer tax-free death benefits, which protect against lost income if one partner who is a wage earner were to die. It can also be used to pay off a mortgage, credit card or Home Equity Line of Credit (HELOC) debt.

Term life insurance

It is cheaper. It is often used to buy sufficiently higher coverage in the short term to protect the financial stability of young families as a foundation of their financial planning.

You can protect your family when you have young children. When you are newly married and starting a family, life insurance is purchased to provide tax-free capital in case one of the parents should die. Life insurance can also be used to pay off liabilities.

When your children are going to college Many of us tap into our savings to help meet our children’s tuition and housing expenses. We may purchase a child’s first car, or pay him/her an income for one or more years. If you die without providing continuing support, your young adult child may need to quit seeking a higher education due to a shortage of funds to pay for tuition and expenses.

The affordability of term insurance Coverage offers the lowest cost per thousand dollars of coverage. It comes in various renewable periods, for example, 5-,10-, 20-year term, whereupon renewal, the cost can increase. When you are younger having fewer assets, $250-500,000 coverage is generally affordable. More expensive term coverage periods such as to age 65, 75 or 100, may end and not renew.

The convertibility of term insurance Most term plans give you the option to convert to permanent insurance coverage without medical evidence, to continue to cover you for the duration of your life.

Permanent Life Insurance

It has significantly higher premiums, but they rarely ever increase. It has a higher premium per thousand because its long-term design offers the right tool for future estate planning.

Why it is more expensive A portion of the premium referred to as the cash surrender value (CSV) is invested to offset the increasing cost of insurance (COI). The CSV may allow for:

  • an increasing tax-free insurance death benefit value
  • funding of and cessation of premium payments
  • in some cases, the CSV may collateralize a tax-free loan
  • The CSV can be cashed in to provide funds (may be subject to tax)
  • In some cases, it may be used to buy an annuity 

Note: Some permanent policies may need to be sufficiently funded to achieve any one of the above options by paying premiums for several years.

This makes more sense when nearing or in retirement and fits well with capital gains tax planning in case both senior partners die. It also can cover last expenses when one partner dies. Wealthy seniors can mitigate a sizeable tax bill on capital gains or RRSPs due when the second partner dies. Permanent life insurance offers liquidity for the estate and more substantial gifts to heirs.

 

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