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 seven common questions about life insurance here.
1. How much life insurance will I need?
The amount of life insurance you need depends on many factors, including the taxes that may arise on your death, debt (i.e., mortgage or line of credit) that must be paid off, what your dependents will need to maintain their lifestyle, and whether you want to use the tax-advantaged features of permanent life insurance to complement the investment portfolio in your financial plan.
2. How much does life insurance cost?
The cost of the life insurance you buy will be impacted by the nature of life insurance coverage you need (i.e., temporary or permanent coverage), the amount of insurance coverage you require, your age and gender, current health and medical history, smoking status and lifestyle (e.g., are you a recreational aircraft pilot?). Many insurance plans also offer additional coverage options at an extra cost, which will be included in the regular premium that you will pay.
3. What’s the difference between whole life and universal life?
Generally, there are two types of life insurance policies: term and permanent. Both whole life and universal life insurance policies are forms of permanent life insurance and consist of two parts: insurance component + 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. 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.
4. How does life insurance help with income replacement?
A key purpose of life insurance is 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.
5. How does life insurance help with tax efficiency?
Permanent life insurance provides a tax-free death benefit payment to your beneficiaries. In addition, the policy can be structured in a manner that allows you to deposit additional premiums into the investment portion of the policy. The accumulated values in the policy are usually tax-advantaged so long as they remain inside the policy. 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.
6. 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, there are various expenses that will need to be paid, including funeral expenses, estate administration expenses and any taxes that may result from the “deemed disposition” of your capital assets as well as any taxes that may result from balances in your RRSP or RRIF.
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.
7. Is life insurance offered by MD from a third-party insurer?
Yes. MD Insurance Agency Ltd., a CMA company, has partnered with some of Canada’s most reputable and longstanding insurance providers to distribute their products. This helps to provide you with competitive features, benefits and insurance strategies you need to 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.