Life Insurance
Life insurance can play a significant role in your estate plan as
it provides a solution to a wide range of potential objectives. In
general, life insurance serves one of two purposes: either to create
an estate for your heirs or to preserve your existing estate. Generally,
life insurance premiums are not tax deductible but the benefit paid to
the estate (probate may apply) or a beneficiary (probate would not apply)
is also not subject to income tax.
(For explanations of the insurance solutions discussed on this page,
please see our section on
Understanding Insurance.)
Using Life Insurance for Estate Planning Purposes
Some common reasons you may wish to use life insurance include:
- To provide liquidity in an estate to pay off liabilities such as
taxes or mortgages. This will ensure that non-liquid assets, such as
a cottage or business, do not have to be sold, but can be left to your
beneficiaries.
- To establish a fund to provide income for an individual you wish
to support.
- To make a donation to charity.
While term life insurance can be used to fund a short-term estate
need such as paying off an outstanding mortgage or protecting the
estate against an immediate shortfall, universal or whole life
insurance is the preferred option when the insurance is for estate
purposes.
Examples include having a life insurance policy that would cover
estate taxes on death (capital gains generated due to the deemed
disposition rules) or the ability to leave bequests without the advent
of taxes payable.
As with all insurance products that are used for estate planning
purposes, a thorough cost-benefit analysis should be performed in order
to assess the appropriateness of the strategy.
How much life insurance is enough?
The amount of coverage you require will depend on your estate
objectives and current financial status. As you age, you may find
that the level of coverage you require declines or perhaps changes
from short-term to permanent coverage. Determining exactly how much
and what type of insurance is most suitable for your situation can
be best assessed through the preparation of a financial plan
and the aid of a life-licensed advisor.
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