Whether your money is invested in a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF), any balance remaining will be taxed upon your death unless the RRSP or RRIF can be rolled over to a surviving spouse, common-law partner, or a financially dependent child or grandchild with a mental or physical disability. You can, however, fund that tax liability with the tax-free death benefit from a permanent life insurance policy.
For instance, let’s say your spouse is still alive at the time of your death. The income tax on your RRSP or RRIF balance can be deferred, provided that: (a) your spouse is your successor annuitant, or (b) your spouse is named the designated beneficiary of your registered plan and your plan balance is transferred directly to your spouse’s registered plan. But when your spouse passes away, your heirs stand to lose a substantial amount of the money to taxes.
A cost-effective solution
With the help of a financial advisor, you can determine the projected future value of the registered assets you own today. You and your advisor can then calculate the tax liability that will arise on your death in relation to those assets, and add other estate costs (including any capital gains) to determine the total funds your estate will require for taxes when you die.
When compared to alternatives, a permanent life insurance policy provides the most cost-effective method to help pay that tax liability. Upon your death or the death of your spouse, the death benefit on your permanent life insurance policy will be paid tax-free, and can be used by your executor1 or the beneficiaries of your estate to help pay any taxes owed.
Benefits of this strategy
- Working with your financial advisor, you can project the potential taxes and fees owing on your investments at your death and structure a tax-efficient plan to help pay for them.
- The proceeds from your life insurance policy pay a tax-free death benefit to your estate or beneficiaries to help pay for any taxes or fees owed by your estate.
- You can enjoy the retirement income from your RRSP or RRIF while you are alive. And, after you die, any after-tax remainder can go to your heirs.
Permanent life insurance in action
Imagine, for example, that you have a RRIF balance of $400,000. The entire balance of $400,000 will be considered taxable income in the year of your death. If you assume taxes on this amount at a rate of 45%,2 your heirs (or your estate) will have to pay $180,000 in taxes on the RRIF balance. If you designate your spouse as the successor annuitant or the beneficiary of the RRIF, they can transfer the balance into their own registered plan; however, this only serves to defer your tax bill, not eliminate it.
For a reasonable cost (compared to the actual tax bill), you may qualify to purchase a permanent life insurance policy that pays a tax-free death benefit of $180,000, which will help mitigate the tax burden on your estate or your heirs.
Gain more control and peace of mind
Permanent life insurance provides you with the flexibility to change beneficiaries at any time. That means you have full control over who your insurance proceeds are ultimately paid to after your death.
With permanent life insurance, you can also benefit from your RRIF while you’re alive, while covering yourself with enough insurance to pay the taxes on your RRIF when you die. This means you leave more money for your loved ones after you are gone.
Talk to your MD Advisor today to plan how you can cover your future tax liability with permanent life insurance.