Life insurance to save you estate taxes

Q: What is the best life insurance option to help offset taxes payable upon death?

—Scott

A: Good question, Scott. The best insurance option in this case really depends on whether you are single or married.

If you are single an Individual Permanent Life Insurance policy is likely best. These policies cover you for your whole life—and some types can build cash value over time. The growth of cash value is generally on a tax-deferred basis, meaning that you pay no taxes on any earnings in the policy so long as the policy remains active.

A Term policy will generally not be a good fit for this type of need because a Term policy is designed to cover a need for a specific period of time (term) such as for the duration of a mortgage or line of credit. This compares to permanent life insurance policies that generally have level rates and lifetime protection. So permanent policies are better suited to offset taxes on death.

If you are married a Permanent Joint Last-to-Die (JLTD) life insurance policy would likely be the best fit. Joint Last-to-Die life policies pay out a tax-free benefit to the policy owner’s beneficiary on the passing of the second spouse on the policy. These policies are significantly less expensive when compared to individual single-life policies because the insurance company does not plan to pay out the money until much further in the future. Plus, the insurance company only has to pay out once for two people.

These types of policies are generally designed to offset future tax liabilities. These liabilities could be in any form. For instance, they could be from capital gains as the result of investment properties to business investments. Or, they could be in the form of other taxes related to the collapse of an RRSP, or RRIF, or from capital gains resulting from the sale of mutual funds and stocks. Half of this income is taxable and will be added to your income in your final taxation year. A JLTD policy can help offset those taxes and make cash available to pay the tax man.

You can get more info on Last-To-Die Life Insurance here.

Leave your question for Lorne Marr »

Lorne Marr, is the founder of LSM Insurance, an independent Canadian Life Insurance Brokerage company in Markham, Ont.

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