How life insurance can shave your capital gains tax

Q: My husband and I bought life insurance in 2008. At that time, I was 44 and a non-smoker, and he was 46 but a former smoker. Each of us is insured for $250,000. The monthly premiums have been a total of $142.50 since we took out the policy—$58.90 for me, and $83.60 for him. In 2018, when my husband turns 56, his premiums will increase to $307.33 per month. This seems unreasonably high.  My premiums don’t increase until I turn 64, at which point they increase to $387.60. I am the primary insured on the policy, and he is included as a spouse. We both have life insurance policies with our employers—mine is about equal to what this policy would pay and my husband’s is less, although he plans to either fully retire or semi-retire in 2018. Our home and cottage are both paid off and we have no debt. Our three children are in their 20s, out of the house and mostly self-sufficient, and we have saved about $450,000 for retirement so far. I have a DB pension plan and he has a DC plan. Our plan in 2018 is to cancel his part of the policy but keep mine until I turn 64 when my premiums increase. Does that seem reasonable?  I can’t see a reason to keep his policy when the premiums will be so expensive but maybe I am missing something.  Should we look into converting his work policy when he retires?  Do we always need to have life insurance?

—Mary B.

A: Mary, if you, your husband or your children are no longer dependent on your current income than life insurance in terms of income replacement is not really necessary.

Income replacement on death is the primary reason for life insurance. Having said that, life insurance can offer a variety of benefits in terms of estate planning. Two great features of life insurance is you are paying future tax free dollars at a discount.

Depending on you overall financial goals, it would be worthwhile to at least investigating converting all or part of the coverage on your term life insurance policies. One advantage of doing this is there are no medical tests and no health questions and your new policy would be issued based on your health criteria at the time of the initial application.

As mentioned above, you may also want to consider having life insurance as part of your overall estate planning program especially if there is a sizable potential capital gain on your cottage.

Joint last-to-die life insurance can be an effective way to offset potential capital gains, as these policies do not pay out until the passing of the second spouse which is when capital gains tax is generally due. They are less expensive than individual life insurance because they’re paying out the death benefit farther in the future i.e. on the death of the second spouse.

As for converting your husband’s work coverage, most group life insurance plans build a buffer into the pricing of the conversion option. The insurance company factors into their pricing that the insured’s health may not be optional at retirement. Generally speaking, converting your individual term life insurance policy is going to be more cost-effective than converting a group life policy and you will be able to convert into a wider variety of plans.

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

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