The Case for Life Insurance

When it comes to most forms of insurance, many people understand the importance of having coverage. Whether it’s your car, your home, or other valuable possessions, having insurance means that you’re financially protected should disaster strike.   One of the first things you do when you buy a new car is to make sure it is protected before you drive it off the lot.  Why? Because if you are involved in an accident chances are good you would suffer financially.

But, what about life insurance?

Although this form of protection works the same way as all other types of insurance, many are reluctant to open the conversation.  Perhaps one reason is that life insurance involves the planning for the worst-case scenario – your death.  The truth remains however, that if someone, your family or your business for example, would suffer a financial loss due to your death, life insurance is the answer.  In fact, life insurance is one of the smartest ways to provide for both yourself and your loved ones.

For today, take stock of your current situation and consider these important reasons why life insurance is needed:

Protect your future insurability

 Even if you are just starting out, perhaps single, with no immediate dependents, life insurance should still be considered.  If your future includes having a family and all the obligations that go with that then your continuing insurability is important. Selecting an insurance plan now that guarantees your ability to purchase more coverage in the future regardless of your insurability will go a long way in protecting your future family. For young people, the cost of life insurance is minimal and could also provide a long-term saving plan growing tax-free that could be utilized later.

Insure your debts

Unfortunately, debt is a natural part of modern life for most Canadians.  The Bank of Canada reports that for every $1 of income earned by Canadians, $1.70 is owed. So, chances are good that you have significant debt, whether it’s tied to credit cards, a car payment, or a mortgage. Ideally, you’ll be able to pay off these debts long before you die. However, should the worst happen, much of that debt will pass to your loved ones.

If you don’t want to burden your family with debt, having a life insurance policy is a wise choice. Not only can the death benefit cover any debt you already owe, but it can help alleviate additional costs, such as funeral expenses.

Provide for your family

If you are married and/or have children, then you owe it to your family to have life insurance.  This is especially true if you are the primary breadwinner in the household. Although most people don’t want to think about what may happen if they pass on at a relatively young age, the fact is that you need to make sure that your family is still looked after financially if that does occur. A life insurance policy can offer peace of mind, knowing that your spouse and children will be provided for no matter what.

Benefit from the tax advantages

If you want a more pragmatic reason for getting life insurance, what about the fact that the death benefit is tax-free?  This fact is the reason why life insurance is used to provide estate liquidity in paying taxes that become payable as a consequence of death. In addition, there are several ways that you can make your policy a haven for any funds that you don’t want exposed to income tax.

If you invest in permanent, cash value life insurance such as Universal Life or Participating Whole Life, the investment growth in the policy is tax-free should you die.  The cash value may also be accessed while you are living.

Transfer assets to children and grandchildren

Establishing cash value policies for your children and grandchildren is a recognized method of both guaranteeing their insurance future while you control the investment portion which is growing tax-free on their behalf.  When the time is right for you to transfer the policy to them, the change of ownership occurs free of income tax.  This is truly a tax-free intergenerational wealth transfer.

Save for retirement

Although life insurance is typically paid out when you die, there are options to take advantage of the money in your policy while you’re still alive.   If you have exhausted other retirement vehicles (e.g. RSP’s, TFSA’s), investing in a Universal Life or Participating Whole Life policy is a method to augment your retirement savings.  Universal Life policies will perform based on the equity or other asset class investment options you select.   Participating Whole Life policies provide stable, increasing returns which are favourable compared to the risk.

Using cash value life insurance for building wealth to be accessed in the future, is a strategy consistent with proper diversification of assets.  The fact that the investment growth in a life insurance policy is tax-advantaged is a definite bonus.

To protect your business

 If you own or operate a business, you most likely are aware of the corporate need for life insurance.    All significant corporate debt should be insured.  In fact, many lenders will insist upon it.  Just like all machinery and fixed assets of a business are insured, so should the key people who contribute to the profits be life insured as well.  If the company or partnership has a Shareholders or Partnership Agreement, they should be funded with life insurance to provide for the transfer of shares or partnership interest from the beneficiaries of the deceased to the firm.

Using cash value life insurance in a private corporation avoids the punitive tax levied against any passive investments in the corporation which, depending on the province, could be higher than 50%.  Tax-free benefits can be paid out of the corporation upon the death of the insured for the benefit of the surviving shareholders or family.

Remember that in addition to you and your family, there may be employees who are dependent on the continued success of your company for their livelihood.  Life insurance owned by the business goes a long way to guarantee this.

To equalize your estate

If your estate includes shares in a business that you may have designated one of your children to inherit in lieu of another child, consider equalizing the bequests by life insurance.  Another example of where life insurance could be used for estate equalization is leaving your primary residence or other real estate (such as a cottage) to a specific child instead of one or more of his or her siblings.  If the other assets being left are not enough to compensate, life insurance should be considered.

To donate to charity

You can provide significantly for your favourite charity using life insurance.  Whether it be by taking out a policy to benefit the charity, by transferring an existing policy you no longer need to a charity, or by just naming the charity as a beneficiary to a life insurance policy prior to your death, you or your estate will benefit from significant tax credits.  Your legacy will be remembered by the fact that your generous act contributed to the charity’s humanitarian endeavors.

Consider how life insurance can fit into your financial plan

Even though some people have a reluctance to think about life insurance, no matter how you look at it, life insurance is a necessary part of modern life. Without it, you could be condemning your family to financial instability. Whether it’s debt, last expenses, guaranteeing your children’s education, providing for income for your family, protecting your business, or tax and estate planning, life insurance provides tax-free dollars when it will be needed the most.  You buy life insurance, not for what it is, but what it does.

Protecting Estate Values When Your Investments Decline

The total net value of your estate represents what you will leave to your family when you die. It may include the following:

  • Your residence;

  • Cottage or other recreational property;

  • Investment real estate;

  • Stocks, bonds, mutual funds and commodities

  • Life insurance;

  • Any other assets you wish to leave to your heirs.

After paying off any liabilities, taxes arising at death, last expenses etc., what is left over is what your family will use to maintain the lifestyle that you created for them.

Two easy ways to make sure debt and investment losses do not impact the estate you leave for your family

  • Insure your debt

  • Insure against market drops and other investment losses

Consider life insuring your debt and investment declines so that your heirs are not burdened by outstanding liabilities and market fluctuations.

In 2008, many investors experienced a decline of 40% to 50% in their equity portfolios resulting in a significant reduction in the amount of the estate to be left to their beneficiaries.

A greater problem was experienced by those that had used bank loans to leverage their investments.  The value of those investments may have declined by up to 50% but the loan balance didn’t decrease at all.

Even if the investments are not leveraged, there is always a risk to the estate should the equity markets decline.

Be Prepared – The risk of waiting to insure for losses

Of course, you could always top up your life insurance when the market declines right?  Not necessarily.  If you have lost all or part of your insurability due to health that could be a problem.

Consider hedging against possible future decreases in your investments by purchasing life insurance specifically for this reason.

For hedging purposes, any form of life insurance can be used. Term insurance is an inexpensive way to insure for shorter terms such as 10 or 20 years.

Participating Whole Life Insurance should be considered for protecting your investments through diversification and building in stable returns. It is the only type of life insurance that is guaranteed to increase in value and death benefit regardless of equity market conditions.

Other benefits of Participating Whole life include

  • Can be used as an investment in place of bond or GIC-type investments.

  • The cash values of these policies grow on a tax-deferred or tax-free basis.

  • If funds are required for unforeseen expenses or to make additional investments, the policy can be borrowed against either from a lending institution or directly from the insurance company.

Using Participating Whole Life insurance satisfies two objectives – providing a hedge against equity values declining prior to death and adding additional stability and less volatility to the overall portfolio.

Summary of how to manage the risk of estate shrinkage due to adverse equity market conditions:

Hedge the estate value of your investments

Select a percentage of your equity investments that you wish to protect if you die when market values have fallen.  Purchase life insurance for this amount.  For example, if you have $2,000,000 of equity investments and you wish to hedge 40% consider buying $800,000 of life insurance.

Life insure the loan in a leveraged investment strategy

It’s always a good idea to life insure debt. This is particularly the case when insuring leverage loans to protect against investment values falling prior to death while the loan is still outstanding.

Consider Participating Whole Life as a method to optimize your estate

Unlike equity investments, the values of a whole life policy cannot decrease.  As long as the premium is paid the cash value and death benefit will continue to increase.  This provides stability in your investment portfolio and reduces volatility.  The increasing death benefit will optimize the value of your estate for the benefit of your family and heirs.

Combining your investment portfolio with an effective life insurance strategy to maximize the value of your estate is a prudent means to provide for your family.  Great comfort comes with the knowledge that even if your investments decline your family will be adequately provided for in the manner you wished them to have.

Connect with me if you wish to discuss this further.  As always, please feel free to share this with anyone you think will find it of interest.

The Need for Corporate Life Insurance

Life insurance is used for two general purposes in a private corporation – managing risk and creating opportunities.  The risk management function is satisfied as life insurance provides the corporation with a tax-free payment in the event of the death of an owner or someone vital to the success of the business.  As life insurance also allows for the tax-sheltered build up of cash value additional planning opportunities are additionally created.

The primary needs for corporate owned life insurance to satisfy the risk management purpose are as follows:

Key Person Life Insurance

Any prudent business would insure its company facilities and equipment that is used in creating revenue.  It follows then that the business should also insure the lives of the people that run the company and make the decisions which contribute to its profit.  Any owner, manager or employee whose death would impair the future growth and success of the company is a key person and should be insured as such.

The proper amount of key person life insurance should be determined through discussion with the company’s management, life insurance advisor and accounting professionals. This discussion would analyze and estimate the amount of the loss that could occur to the company should a key person die.

Funding the Shareholders or Partnership Agreement

When more than one person join together to own a company or partnership, it is common business practice that there be a Shareholder’s or Partnership Agreement.  These documents set forth the terms and conditions under which the parties co-exist in the business venture.  It also spells out the financial interest that each hold in the concern and how much would be owed to the heirs of a shareholder or partner should that individual die.  The use of life insurance owned by the corporation for this purpose guarantees that sufficient funds will be available to trigger the agreement.  If there was no life insurance in place and no agreement covering how those funds were to be used, the future existence of the company could be in jeopardy.

 To Repay Debt

Like an individual insuring debt to avoid burdening his or her family with outstanding liabilities in the event of death, a business owner should also consider providing life insurance to cover the corporation’s obligations.  This would ensure that the net value of the company is optimized when it passes either to the heirs and beneficiaries of the owner or to a successor owner which might be a family member.

One of the advantages of corporate owned life insurance to retire debt is the existence of the Capital Dividend Account.  Should the insured business owner die, the life insurance proceeds are received tax-free by the company.  The death benefit less the adjusted cost basis of the policy is credited to a notional account – the Capital Dividend Account (CDA).  Even if all the life insurance proceeds are paid by the company to the creditors to retire the outstanding debt obligations, the credit remaining in the CDA can still be paid tax-free to the surviving or successor shareholders.  This allows any surplus or future earnings to be received by the heirs as tax-free capital dividends up to the amount of the balance of the CDA subsequent to the death of the insured.

To Facilitate Business or Investment Financing

Often when a company borrows to invest or for business operations, the bank will require that the principal(s) of the corporation be insured.  In this case, if the life insurance is purchased as a condition of the bank loan being granted, part of the life insurance premiums become tax deductible to the corporation.  The reasons for providing life insurance to cover the bank loans are consistent with the reasons stated in repaying debt, but with the bank’s written requirement for life insurance, there is now a tax deduction available as well.

There also may be a situation where an investor would look favourably on the business owner being insured before he or she invests in the company.  While there would be no collateral insurance deduction in this case, it may create a comfort level for an investor.

To Assist Family Business Succession

With a family business there is often a desire to transition the ownership of the company to the next generation.  One of the common objectives of this transition is to ensure that the company is left financially sound when it is received by the next generation.  This can be accomplished by having life insurance on the first generation owner to guarantee that the company is left financially viable and debt-free should the succession occur as a result of the death of the business founder.

The above items are all situations where life insurance is used by a business for risk management purposes.  When life insurance is held in a corporation it also can result in attractive planning opportunities.  These opportunities include the following:

Estate Planning for the Business Owner

Owners of private corporations in Canada that are qualifying small businesses have the first $500,000 of annual corporate income taxed at a very favourable rate.  For example, in B.C. and Alberta it is 12%.  The low small business tax rate combined with the Capital Dividend explained above presents the business owner with an opportunity to place life insurance designated for estate planning purposes (e.g. paying taxes arising at death from capital gains), in the corporation.

Sheltering of Corporate Investment Income

While the income tax rate on active business income is quite low, the tax levied against corporate investment income is extremely high.  In some provinces, this tax is over 50%.  Using tax exempt life insurance policies to shelter this investment income can provide substantial opportunities to defer taxes which would otherwise be payable.  All the insurance opportunities for risk management itemized above can also be satisfied by using cash value tax-exempt life insurance.  As a result, there are significant planning opportunities available with corporate owned life insurance.

Protecting the Small Business Income Tax Rate

In addition to the above, once a corporation earns more than $50,000 of passive investment income it starts to erode its small business tax limit of $500,000.  Once the passive investment income reaches $150,000 it loses all of the small business limit for that tax year.  This can be avoided by investing in tax-exempt life insurance policies.  Combined with the previous comments not only does the investment grow tax sheltered, it will not impact the small business income limit.

These are the primary reasons why business life insurance is so important.  Not only does it help manage risk, it can also provide significant planning opportunities for the business owner.  I am available at any time, should you wish to discuss how these ideas could benefit you and your company.

If anything should happen to me…

Don and Kate were nervously anticipating Don’s upcoming life saving surgery.  Don was also concerned that, should he not survive, Kate might not know everything that needed to be done upon his death.  The night before his surgery he made this list for Kate of the things she should do if he didn’t make it through the operation: 

My Dearest Kate

Although I expect to make it through this surgery it has got me thinking that anything could happen to any of us at anytime and we are rarely prepared. 

So, if anything should happen……………. 

  1. Before you tell anyone that I didn’t make it– Clean out our safety deposit box and joint bank accounts. Everything is going to you anyhow and when the bank finds out I’m dead, they’re liable to close off all access to them until my will is probated.

  2. Call the funeral director– But go there with somebody who won’t be suckered into buying the fanciest coffin.  Just remember, the money you spend on my funeral won’t be available for the big wake I want you to throw for me!

  3. Gather up all my important papers– My will, life insurance, disability insurance, and general insurance policies, business agreements, banking information, notes receivable or payable, stock or bond certificates, real estate deeds, recent tax returns, marriage, birth and death certificates, military records, automobile registration forms and all recent contracts. Don’t throw away anything that looks official, even if it appears to be terminated.

  4. My passwords are in the bottom left hand drawer of my desk in a note book which should be a big help to you in managing those accounts.

  5. Call our life insurance agent– He’ll not only help you in collecting the money from my life insurance, but also in collecting the death benefits of my group insurance, company pension, social security, as well as the death benefits from my variable annuities.

  6. Call our accountant– He’ll be needed for the various tax returns that must be filed.

  7. Call our attorney– She’ll tell you what other stuff is needed and what must be done to settle my estate.  She’ll also tell you whether my will has to be probated (a process to prove my will is valid).  Our attorney will also advise you on whether there are any federal or state estate taxes. As far as state probate costs, I’ve tried to minimize them through joint ownership of most of our assets and naming beneficiaries where I could.

  8. Call the other executors– You know you are my primary executrix, and you know who the other two are, so call them.  Even though our lawyer will probably call them, it would be nice if they heard from you first.

  9. Call my business associates– My partner will want to know that our buy-sell agreement has just been triggered so he can collect the insurance money to buy my share of the business from you.  And call my assistant Marie in Admin to spread the word.  Ask her if there’s anything else coming to you such as unpaid expense accounts, ongoing group benefits, etc.

  10. DON’T PANIC! I picked my executors and the above-mentioned professionals to assist and advise you in this situation.  So let them do their jobs and help you.  And don’t rush into anything, like selling the house, or anything major, for at least a year.  With my life insurance and all the other benefits coming to you, you can take your time and make better decisions when the time is right.

Fortunately, Don survived his surgery and is on the road to recovery. Don decided that he would attach this list to his will for Kate to refer to in the future, because, well, you never know….

SIX IMPORTANT REASONS TO HAVE A WILL

It has been said that a Will is the last message you will leave your family. Having a Will can provide clear direction as to what your wishes are and who will get what. Die without a Will (known as dying intestate) and chaos will likely be the result.  Having a Will allows you to provide for certainty instead of chaos.

Most of the reasons to have a Will have to do with what happens if you don’t have one and that often will depend on what province you reside in. Each provincial government has its own Wills and Estate legislation which also provides for the rules regarding intestacy. The following are some of the reasons to have a Will and what could result without one.

1.  Informs your family how and when your property is to be distributed

Your Will affords you the opportunity to give clear instructions as to whom will receive your wealth. It also allows you to make bequests of certain items such as family heirlooms which you may wish to leave to a specific individual. For those who wish to leave funds to a charity, the Will allows you to do this. Without a Will, this opportunity may be lost. The bottom line is that you make the call. Dying without a Will means that the provincial government will make the determination on how your estate is to be distributed depending on the intestacy laws.

For example, if there is a spouse and children, the spouse will usually receive a specified amount. That amount can vary between $200,000 and $300,000 depending on the province. Any amounts over that are, for most provinces, split between the children and the spouse. The amounts due to the children, however, are not received by them until they reach the age of majority. Up until then, those funds are administered by the provincial government. If you reside in Alberta or Manitoba the children receive nothing, and all goes to the spouse.

If you die without a spouse and without children, then the assets will be left to parents, siblings, nieces and nephews, in that order. The government will receive all if there are no relatives. And remember those family heirlooms that you could dictate to whom they went in your Will? Without a will those and other similar assets will most likely have to be sold so the estate can properly be distributed.

2.  Allows the testator to name an Executor

The task of the Executor is to administer the estate and ensure that the testator’s wishes are carried out. Without a Will, there is no Executor, and an administrator must be appointed by the government. Usually, this will be the spouse, but if the spouse is not willing or capable then someone else will have to be found to carry out this function. Regardless, the result usually will be unnecessary delays and increased expenses.

In administering estate assets, the role of an Executor also helps to ensure that there is no loss of estate assets due to lack of oversight prior to the assets being distributed.

3.  Protects a common law spouse

British Columbia, Saskatchewan, Manitoba, North West Territories and Nunavut recognize common law marriages where the parties have lived together for more than two years. In these jurisdictions common law spouses have the same rights as a married spouse. In all other provinces, however, they are not recognized and as a result are entitled to nothing. There may be exceptions where a dependency claim can be made to the courts, but that could prove to be expensive and result in significant delays. It also could result in other family members making objections to the court. With a properly drafted Will, the rights of a common law spouse are protected.

4.  Naming a guardian for your children

Having the choice as to who will look after your children should you die is an extremely important reason to have a Will. This is especially true in the case of a common disaster involving both parents. Consider the unimaginable scenario in which the decision as to who should be the guardian of your children was left to the courts.

5.  Leaving instructions for your funeral, burial or cremation

A Will affords you the opportunity to leave concise instructions regarding your funeral arrangements. Dying without a Will or with no clear directive could cause stress and family discord. 

6.  Proper estate planning can result in income tax savings

Estate planning, including a properly drafted Last Will and Testament, may result in tax savings. On the other hand, dying intestate will see this opportunity lost and administrative costs increased. 

It is unfortunate that many Canadians do not have a Will. While there may be some circumstances where a Will is not necessary, for those Canadians who are married and have children, a Will is vital and should not be overlooked. Ideally, a Will should be drafted by a lawyer who is acquainted with all the technical requirements and contingencies that come into play. 

If you are without a Will, talk to a professional who can assist you as soon as you can.

Ontario Budget 2018

The 2018 Ontario budget features a number of new measures and billions of dollars of enhanced spending across the spectrum, as announced by the province’s Finance Minister, Charles Sousa. Read on for some of the key proposals.

Personal

Eliminate Surtax

A new sliding scale for personal income tax will be introduced, with seven personal income tax rates which will be applied directly to taxable income, in an attempt to eliminate Ontario’s surtax. The province estimates that approximately 680,000 will pay less tax as a result.

Free Tuition

Access to further education will be income linked, with those families with an income of less than $90,000 per year receiving free tuition and families with an income of between $90,000 and $175,00 per year receiving financial aid for tuition costs.

Free Pre-School Child Care

Effective in the Fall of 2020, children aged two-and-a-half until they are eligible for kindergarten can receive free licensed child care. 

New Ontario Drug and Dental Program

For those without workplace benefits or not covered by OHIP+, this program offers up to 4.1 million Ontarians a benefit that pays up to 80% of expense up to a cap of $400 for a single person, up to $600 for a couple and $50 per child in a family with two children, regardless of their income.

Free Prescription Drugs

The budget announces the introduction of free prescription drugs for those aged 65 or older, resulting in an average of $240 per year in savings per senior.

Charitable Donation Tax Credit

The non-refundable Ontario Charitable Donation Tax Credit will be tweaked to increase the top rate, remaining at 5.05% for the first $200 but increasing to 17.5% for anything above $200.

Seniors’ Healthy Home Program

$750 is offered to eligible households with seniors of 75 years of age or older to help them to care for and maintain their residence.

Corporate

R&D Tax Credit

The budget introduces a non-refundable tax credit of 3.5% on eligible costs relating to R&D, or an enhanced rate of 5.5% for eligible expenditures of $1 million plus. Note that this enhanced rate would not be payable to corporations where eligible R&D expenditures in the current tax year are less than 90% of eligible R&D expenditures in the tax year before.

Innovation Tax Credit

The existing Ontario Innovation Tax Credit will see changes to its credit rate in the following way:

·      If a company has a ratio of R&D expenditures to gross revenues of 10% or less, they will continue to receive the 8% credit.

·      If their ratio is between 10% and 20%, they will receive an enhanced credit rate of between 8-12%, calculated on a straight line basis.

·      If their ratio is 20% or more, they will receive an enhanced credit rate of 12%.

Ontario Interactive Digital Media Tax Credit

Eligibility to receive this tax credit will be broadened to include film and television websites.

Maclean’s on the Hill: Federal Budget 2015