Registered retirement savings plans (RRSPs) are great for helping you defer and reduce your taxes. But you are limited in how much you can save each year in RRSPs. And, once the money is deregistered, you can still end up paying a large amount of money to the government in taxes. Permanent life insurance can be a tax-efficient solution.
Benefits of life insurance at a glance
- There are no annual taxes on any growth or income from your investments while funds remain within the policy.
- Insurance proceeds are paid tax-free to your beneficiary.
- If you name your estate as beneficiary, the insurance proceeds can be used to pay your estate’s testamentary expenses (for example, a tax bill). It can also be used to fund charitable donations made by your will or legacies left to your beneficiaries.
- In some cases, you may have tax-free access to the accumulated cash value of the policy should you become disabled.
Permanent life insurance
Permanent life insurance can provide you with lifetime insurance coverage with a tax-free death benefit payment to your beneficiaries, along with many other benefits:
- Maximize the tax-advantaged investment within the policy.
- Take advantage of high deposit options to build even more cash value in early policy years.
- Match deposits to your preference and timeline: fixed deposit or variable deposit stream.
- Enjoy either a hands-off or hands-on investment approach.
Cash to pay future tax bills
The death benefit in your permanent life insurance policy can be used to pay the taxes arising on your death, such as taxes owing on the disposition of your RRSPs. Using the insurance proceeds to pay taxes means the rest of your estate can remain intact and be distributed according to your wishes, and can help ensure that taxes won’t become a financial burden on your family.
There are no annual accrual taxes to pay on the gains of your investments while they remain within your permanent life insurance policy, meaning you can reduce the tax erosion of your estate through tax-advantaged growth.
Even more flexibility
You have the flexibility to change beneficiaries and the coverage amount,1 so you have more control over how much wealth is transferred on a tax-free basis (and to whom). The cash values of a permanent life insurance policy also offer you flexibility to help you handle financial emergencies—like the costs of managing an unexpected disability or other personal need for liquidity.
Money goes to your heirs … not the government
Death benefit payments are tax-free when they are paid out to named beneficiaries,2 which enables you to transfer tax-advantaged cash to the next generation of your family, outside of your will and without incurring any probate fees. Probate fees3 are provincial taxes or fees, paid by the deceased’s estate to the government and are in some provinces calculated as a percentage of the gross value of the deceased’s estate.
Permanent life insurance provides many benefits to you and your heirs, so speak with your MD Advisor to see whether a policy is right for you.