Life Insurance and Estate Planning: Things You Need to Know
According to several
studies, many Canadians have not made estate planning a priority, and
as a result, there is a good chance that many people will not have
their estates distributed as they wish — and that the beneficiaries
of their estates will not only receive less than they could, but be
saddled with more taxes than they expect.
Most people put off
estate planning because it can be complex, and because it can be
challenging to make some of the major decisions that are inherent in
the process. However, if you take the process systematically and
focus on a single aspect at a time, you can complete the process and
feel confident that not only will your estate be divvied up according
to your wishes, but also your loved ones will be taken care of after
your death. With that in mind, one of the first things to consider is
life insurance.
Life Insurance
101
Life insurance, also known as
final expense insurance, is a type of coverage in which the insurer
pays a designated sum of money to a beneficiary upon the death of the
named insured. There are two major types of life insurance: Term
insurance and permanent insurance. Each type of insurance has its own
benefits and drawbacks, as well as costs (get
free life insurance quotes here),
so it is important to explore all of the options.
A term
insurance policy is one in which the policyholder pays a premium for
a specific amount of insurance for a specified amount of time. The
benefit is paid in a lump sum upon a specific event, usually death,
although some policies will cover incapacitation or certain
illnesses. In a term policy, when the term is up, the insured has the
option of allowing the coverage to lapse, or continue coverage at
potentially higher rates.
Many people use permanent coverage
as an investment, as these policies build value over time. With a
whole life policy, the insured pays the premium (which is usually
higher than a term premium) which the insurance company then invests
to build cash value in your account. The policy remains in effect as
long as you pay the premiums, up to your death.
A universal
life insurance policy shares some similarities, except that it is a
more flexible policy in the sense that you can change your premiums
and death benefit as you go. The major advantage of permanent life
insurance is that you can borrow money from the value of the policy
to help with major expenses; if you do not pay it all back before
death, your death benefit is reduced by the amount you owe.
Both
types of policies
have benefits to your estate planning.
However, in order for your loved ones to actually receive those
benefits, you need to take some important steps.
Adding Life
Insurance to Your Estate Plan
When you purchase a
life insurance policy, the most important step to take is designating
a beneficiary. Even if you draw up a last will and testament to
distribute your property, the law states that the official
beneficiary designation on the policy supersedes any designations in
the will. This also underscores the importance of keeping beneficiary
designations up-to-date. If you forget to change your beneficiary
after remarrying, for example, your former spouse will receive the
proceeds of the policy regardless of what your will says.
Who
you designate as a beneficiary is also important. Life insurance
payouts are not subject to income tax, but only if you name an
individual beneficiary. If you name your estate or a trust as the
beneficiary of your policy, the payout will be subject to taxes and
probate fees. Naming a beneficiary can also protect the payout from
creditors, provided that the beneficiary is a spouse, child,
grandchild, or parent.
Charitable Giving
A life
insurance policy can also help you give to charity. Not only is the
value of the policy tax-free, but when you designate a charity as the
beneficiary of your policy, you may be eligible to deduct the
premiums on your annual tax return.
Because the process
of purchasing life insurance and including it in an estate plan is
complex, and laws vary by province, it is best to work with a
qualified agent and financial advisor to ensure that you do not make
mistakes that could cost your loved ones after your passing — or
lead to your wishes not being carried out. Take the time to make
estate planning a priority today and have the security of knowing
that your family will have everything they need when you are gone.
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