The little-known tax benefits of life insurance

Most people think of life insurance as a necessary expense. It’s something that you almost begrudgingly pay for, in the hope that you’ll never need it, but with the expectation that it will protect your family’s finances, should the worst happen

What most people don’t realize, however, is that life insurance can be used as an extremely useful estateplanning tool that can go far beyond keeping your family financially secure It can help maximize your estate’s value and ensure that your will is distributed fairly, all while funding your estate’s tax liabilities.

Let’s examine the ways that life insurance can provide tax benefits, particularly for those investors with larger estates.

Using life insurance to preserve your estate’s value

There are numerous assets that could be extremely valuable, and which could trigger a significant tax bill when you leave them in your will. These could include, for example, RRSPs, vacation or rental properties and a business.

Without an estate preservation strategy, the beneficiaries of your estate might have to sell off a considerable amount of your investment assets or even the family vacation home to cover your final tax bill

An estate preservation strategy involves taking out a life insurance policy that will provide a large tax-free lump sum that will cover the costs of the estate’s tax bill. This means that your entire estate is left to your beneficiaries, rather than having to use a large chunk of it to cover taxes.

Also, because the insurance payout goes directly to your beneficiary, it bypasses your estate and avoids any possible probate fees.

Keeping your will fair, in a taxefficient

Way

Most people want to leave their wealth to their loved ones fairly, leaving the same value in assets or cash to each family member or loved one. However, this can become difficult when you have assets of widely varying values, several beneficiaries and/or a blended family.

Let’s say you have a large home and a family vacation property that you want to leave to two of your children, but you don’t want to leave out your third child

Unfortunately, after tax, the rest of your estate wouldn’t provide enough in assets and cash to ensure that your third child receives an inheritance that’s equal to those of their siblings.

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