Blog Article

18 Jan 2023 | Life Insurance

Here are 10 ways you can use Life Insurance.

When you decide to invest in a Life Insurance policy it’s important to understand what you’re trying to accomplish.

  1. Providing for your dependants. This is the primary reason why people have a Life Insurance policy. If you suddenly pass away the loss of your income would/could create a financial hardship for your family. Life Insurance fills that gap.

  2. Funding for a specific purpose. With Life Insurance, when you receive the money, you have complete control over what you want to do with it. Do you want to set this aside for a child’s education? Do you want to use it to cover the cost of a funeral and the other fees associated with this? For you to have the necessary funds available so that you’re not put in a position where you have to sell your home or investments because you can no longer afford to live there.

  3. Building a retirement savings. Since I was little, I was always told to put some money aside for retirement. The mantra was ‘it’s coming faster than you think.’ The reality, for a lot of people, is that life gets in the way. With proper planning it’s possible to accumulate investments inside a life Insurance policy on a tax-sheltered basis and to then access these funds in retirement. You can do this by either making withdrawals from the policy or borrowing against the policy using it as collateral for the loan.

  4. Equalizing an inheritance. I’ve had the good fortune of meeting many successful business owners. In a lot of cases their children want to continue with the business they’ve built. In many cases the children want nothing to do with the business. Using the funds from Life Insurance allows you to make sure that your children are all treated fairly from a financial standpoint. This just takes proper planning.

  5. Paid off your debts, in particular Tax debts. Having available money from a Life Insurance policy ensures that your personal or business debts are paid of when you pass away. If you don’t look after these, creditors, including the Canada Revenue Agency in the case of tax debts, may go after any asset that you leave to your heirs.

  6. Covering taxes owing. By working with your accountant (if you need a referral, I know a great firm) they should be able to calculate the taxes owing upon your death and your spouse’s death. As you’re probably aware, if you or your spouse are leaving assets to each other upon death, then taxes are deferred until the second spouse dies. When those assets go to the next generation, that is the moment when taxes rear their ugly heads.

  7. Eliminating taxes at death. With proper planning you could, for example, insure the lives of your children. This will allow you to accumulate investments in those policies. You can then transfer ownership of the policies to your adult children tax-free upon your death, or at any time for that matter. Transferring investments might otherwise be taxable if they were outside of a policy.

  8. Donating to Charity. You can make a significant donation to your favourite charity when you pass away. You could name a charity as the beneficiary, transfer ownership of a policy to a charity, have your estate donate the insurance proceeds or buy a policy specifically for a charity. The benefits of this are numerous. First and foremost is you are helping an organization that you truly care about. The second is how it will help you. When you give this to a charity the charity will then issue a charitable receipt to your estate. You can then use this receipt for your final tax return, potentially lowering the amount of taxes to be paid. This just takes proper planning.

  9. Funding a buy-sell agreement. Many shareholder agreements facilitate a surviving business partner buying out the deceased partner’s share upon death. It always amazes me how many business partners have a partnership/shareholder agreement on paper but have not put a funding tool in place. I’ve had business owners tell me that if one passes away that they will pay out what is owed from the on-going business cash flow. There are multiple challenges with this. Is the company in a financial situation to be able to afford this, not only today but for however long is needed? This may take needed cash flow away from the company for its day-to-day operation, potential expansion, or potential acquisition of another business. The larger challenge is this. Normally, upon death, the shares of a business go to the spouse and/or children. The remaining partner now has a “new” partner in the business whether they like it or not. Someone, or multiple people, that may not have contributed to the growth of the business now have a say in the operation. Having a Life Insurance policy, that is used to purchase the shares and redeem them back to the company, is the quickest, cleanest way of doing this. The company pays the money to the spouse and/or children. They in turn return the shares to the company. The company can then either sell those shares to the remaining partner(s) or sell them to a brand-new partner. For, literally, pennies on the dollar the surviving business owner can save a mountain of headaches.

  10. Providing Key-Person protection. Who is or are the key people in the operation of your business? There is a business that I work with where there is one, majority owning partner, that drives all revenue yet there are three minority partners that do not contribute to any on-going revenue. If that Key-Person were to die it would obviously have a negative impact to the business. By installing a Key-Person life insurance policy (so that you are aware this is just a normal Life Insurance policy the difference is who will be the beneficiaries) the business will receive the insurance proceeds. At that point the remaining partners have several options. They can be made whole from their initial investment. The family of the Key-Person is made whole by redeeming the shares for the fair market value. If the partners, spouse and/or children are in agreement, they can find a new Key-Person to carry on with the business.

By: admin

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