Experienced Insurance Planner In Canada
THE INSURANCE ADVISOR CALGARY CAN TRUST
Providing Peace Of Mind On All Insurance Needs
Insurance is the most effective way to provide your family and business with financial protection while also giving you peace of mind. These are three of the most common types of insurance you need:
Disability Insurance
Your greatest asset is you and your ability to earn a living. If you’re disabled and can’t work, disability insurance can mean the difference between having enough to pay your bills and financial ruin. Disability insurance is vital for business owners, but anyone responsible for supporting themselves or their family should strongly consider it.
Unfortunately, nearly 50% of all individuals 35 or younger will be disabled for 90 days or longer before age 65.
Approximately 30% of people aged 35 – 65 will suffer a disability for at least 90 days, and about 1 in 7 can expect to become disabled for five years or more.
Disability Insurance Solution in Calgary
Regarding protecting your financial future, disability insurance is a must. Consider the odds…During your working years, you will likely face a disability than die.
Protect your family and business today.
We can explain the different features of disability insurance policies and the type of coverage that makes sense for you.
Critical Illness Insurance
With critical illness insurance, you’ll get a tax-free lump sum of money if you have a heart attack, stroke or cancer. This can be especially important if you’re self-employed and don’t have employer benefits to help tide you over if you can’t work while recovering or receiving treatment.
You can use the lump sum any way you see fit, such as paying off bills so you can take time off to focus on your recovery. You may also want to use the lump sum to pay for treatment that the public health system doesn’t cover.
Looking for Critical Illness Insurance in Calgary?
Many critical illness insurance policies come with a return of premium policy that returns your premiums if you make no claims. We can explain this feature to you, as well as what amount of coverage we recommend.
Life Insurance
Life insurance is a must if you have anyone financially dependent on you. Life insurance is generally inexpensive to obtain and provides your family with a tax-free lump sum payment in the event of your death. There are two main types of life insurance – term and permanent life insurance.
With term life insurance, you’re covered for a set period – five, ten, twenty or thirty years. Premiums are lower than they are for permanent life insurance and will rise as you age or if your health deteriorates. Term life insurance is an excellent choice to cover temporary needs such as a mortgage or debt or when your children depend financially on you.
Permanent insurance provides you with lifetime coverage. The premiums will be more expensive than term insurance at the beginning but cost less overall than if you had term insurance for your whole life. In addition, permanent life insurance can be used to cover final expenses and final taxes.
There are also permanent life insurance policies that act as an investment vehicle allowing you to contribute additional funds to the policy, where it grows tax-free. Those funds can be used to supplement your retirement.
We can help you determine what type of life insurance is best for you and how much coverage you need.
FAQs
1. What is life insurance?
Life insurance is essentially an insurance policy that, in the unfortunate event of your death, pays out to your family. There may be different payouts for various causes of death and different conditions for collecting on these benefits, but for now, that’s not the primary concern. What’s crucial is understanding that life insurance serves as a financial safety net for your family, ensuring their financial security when you’re not there to provide for them. To obtain life insurance, you make premium payments to an insurance company, which takes on your risk. If you have individuals financially reliant on you or specific financial obligations to address, it is advisable to acquire life insurance. And even if your family doesn’t rely on your financial support after your passing, they can still benefit from the legacy you leave behind. At the very least, you wouldn’t want to leave your family in debt. While individual circumstances vary, and Canadian families have unique needs, life insurance always offers a form of financial security.
2. How many types of life insurance is available in Canada?
In Canada, there exist two primary categories of life insurance policies: term insurance and permanent insurance. There are two types of permanent Insurance products: Whole life & Universal life.
3. What is term life insurance?
Term life insurance, the most common type in Canada, features structured premiums covering mortality costs and policy expenses. It lacks an investment component and typically expires around age 75 or 80, making it cost-effective. Term policies are often issued as 10- or 20-year renewable term policies, with some non-renewable options available for shorter-term needs.
Term policies offer three death benefit structures. The most common is a level death benefit, where the benefit remains constant as long as premiums are paid. An increasing death benefit option, which adjusts for inflation, is rare but available. The third option is a decreasing death benefit, often linked to financial obligations like mortgages. Premiums may be level or decreasing.
Term policies suit short-term needs, such as mortgage protection, and are cost-effective. They are also suitable for families with limited finances and a recognized insurance need. Convertible term policies are a common offering, allowing conversion to permanent insurance without underwriting, though premiums increase significantly. However, term insurance lacks cash value and non-forfeiture provisions, offering little flexibility. Coverage expires when the term ends.
4. What is a permanent life insurance?
In contrast, permanent insurance is intended for enduring needs such as addressing tax liabilities, funeral expenses, providing ongoing support for a disabled child, charitable contributions, accumulating interest, or leaving a legacy.
5. What is whole life insurance?
Whole life insurance is a long-established type of permanent coverage. It involves a contract with level premiums that can span different timeframes, such as 1, 5, 10, or 20 years. A whole life policy has three key components: an investment part, a protection part, and the insurer’s expenses. The investment part builds a policy reserve over time, reducing the need for the protection part. When this reserve can cover the death benefit by itself, the policy is considered paid up.
6. What to expect with whole life insurance?
With a whole life policy, clients have a relatively hands-off experience. They pay premiums, and the insurance company manages the policy. The investment portion typically grows at rates similar to long-term GICs, and this growth is guaranteed, with most gains not subject to taxation. In some cases, extra deposits are allowed, creating additional cash value. However, there are early surrender charges. Accessing the cash value can be done through a policy loan, non-forfeiture provisions, or policy surrender.
- Comparing whole life to term insurance:
Whole life insurance is more expensive than term insurance. However, when you compare the total cost of a term policy over its lifetime to the premiums paid for whole life insurance, they can often be quite similar.
- Types of whole life insurance:
There are two main types of whole life insurance: non-participating and participating. In non-participating policies, the insurance company doesn’t share profits with policyholders, resulting in a higher guaranteed cash value and death benefit. Participating policies, on the other hand, offer more features and flexibility. Policyholders can share in the profits through policy dividends, which enhance the cash value and death benefit. However, these dividends are non-guaranteed and vary based on dividend payments.
- Understanding dividends:
Dividends in an insurance policy aren’t fixed; they’re determined annually by the insurance company and depend on factors affecting the participating account, especially changes in investment returns. Premiums paid go into a participating account used for operating expenses, death benefits, and dividends. The company can adjust these dividends based on performance and other factors. Dividends can be used to reduce premiums as well. Basically, the insurance company keeps the dividend and the client is freed from a month or two (approximately, depending on the dividend scale) of premium payments. Premium Offset. In the early 1980s, bond yields were in the mid-teens. These bond yields allowed insurers to offer policies with very generous dividend scales. These policies often featured schemes in which the dividends would grow by such an extent that within 9 or 10 years the dividends would be able to pay the premiums. These were called premium-offset or vanishing premium policies
7. What is a universal life insurance?
Universal life insurance is a more flexible and complex insurance product compared to whole life. It provides clients with various options, but these choices come with some responsibilities. Universal life insurance has two main components:
Life insurance: Just like other life insurance products, universal life insurance provides a death benefit, underwriting, and a policy document. Premiums are calculated based on mortality, investments, and expenses. It protects against the risk of premature death and can be used for estate planning.
Investments: Although life insurance isn’t primarily an investment, universal life policies include an investment component. This part allows you to invest in different options like pooled funds, GICs, Term Deposits, and Savings Accounts. These investments grow on a tax-deferred basis, which means you don’t pay taxes on the gains every year.
Here are five key features of universal life insurance:
- Premiums: Unlike some other policies where premiums are fixed when you purchase the policy, universal life insurance offers more flexibility. You’ll have a minimum premium based on mortality and expenses. You can choose between T-100 or Yearly Renewable Term (YRT) pricing based on your situation. The amount you pay above the minimum premium goes into the investment component, offering you control over your investment.
- Choice of investments: You can choose from various investments like segregated funds, GICs, term deposits, indexed accounts, and daily interest accounts. You can also change your investment allocation over time. What makes universal life appealing to many is that your investments grow tax-deferred or even tax-free, depending on your situation.
- Choice of coverage: You can select between two death benefit structures. A level death benefit stays constant, while an increasing death benefit provides regular growth. The increasing death benefit can be structured in three ways: Level Plus Account Value, Level Plus Cumulative Gross Premiums, or Indexed. The choice depends on your preferences and needs.
- You are the decision maker: Universal life insurance offers great flexibility, but it also requires you to make decisions about the policy’s working. You decide on the asset allocation within the investment component, and you can adjust your premiums within limits. It’s essential to understand the consequences of your decisions, so be informed when managing your policy.
- Transparency: Universal life insurance is more transparent compared to other policies. You receive an annual policy statement that shows how your investments have performed, your account value, surrender charges, and other necessary information. This transparency is crucial because you’ll base your decisions on these statements.
Universal life insurance is a versatile but complex product. It’s suitable for clients with disposable income, an interest in the investment component, and the need for flexibility. It can also provide creditor protection for cash values, making it valuable for business owners, contractors, and the self-employed.
8. What is the different types of coverage available in Universal life insurance?
There are two types of coverage available in Universal life insurance.
Level death benefit – The death benefit remains the same throughout the entire duration of the policy. If you bought a policy for $500,000 face value, then it means death benefit would always be $500,000. The death benefit will increase only if you invest very heavily in the policy or if the investments perform well. This option comes with the lowest cost of insurance in a universal life insurance product. At the death of the insured if the investment component is higher than the face value, then death benefit will be higher than the face value.
Increasing death benefit: This structure comes with 3 different types of death benefit options.
- Level plus account value: This option offers the highest death benefit, equal to the policy’s face value plus the investment’s growth. For example, a policy with a $500,000 face value and a $100,000 account value would provide a $600,000 death benefit. The cost of insurance in this structure is very high. At the same time the death benefit is also very high. The death benefit is tied to the performance of investments in the policy. If you have growing needs in business, estate, taxes or legacy then it could be right product.
- Level plus Gross premiums – This option is not and easily available option. The death benefit in this option would increase along with the premiums paid into the policy. In a policy with a face value of $500,000 in which you pay annual premiums of $10000 would have a death benefit of $510,000 in the first year; $520,000 in the second year; $530,000 in the third year, and so forth.
- Indexed death benefit – The death benefit in this kind of structure increases as per the inflation or up to a maximum limit. The cost of insurance in this case is a little higher than level cost.
9. What is Term to 100 Insurance?
Term to 100 (T-100) is a permanent insurance type that bridges the gap between term and permanent life insurance. Instead of traditional term policies with set durations, T-100 extends coverage until age 100 by averaging the cost of term insurance over that time. There’s no investment component in T-100, although some policies may start building cash value after 20 years or more.
With T-100, you’re essentially purchasing straightforward life insurance with level death benefits. It’s a basic product with no policy loans, non-forfeiture options, or cash surrender values, which can be appealing for its simplicity.
T-100 policies differ from older endowment policies, as they don’t pay out at age 100 but are considered paid-up at that point, meaning no more premiums are required. These policies are often used for late-stage estate planning, where individuals want to cover potential taxes on assets like property. T-100’s premiums are typically 10-15% lower than comparable whole life policies.
T-100 suits those who need permanent coverage without the added features of whole life or universal life insurance. However, younger clients should be cautious, as missed premiums in T-100 policies can lead to lapses, unlike whole life policies that often activate an automatic premium loan provision.
11. What is a corporately owned or business-owned life insurance?
Generally, when a corporation owns insurance, the rules are the same as personally owned life insurance. However, there are some special rules for corporations that allow insurance benefits to be given to shareholders without them having to pay taxes. This special mechanism is called the Capital Dividend Account. When shareholders receive dividends from this account, they don’t have to pay taxes on it. This can be a useful estate planning tool to reduce or eliminate the taxes when the shareholder passes away.
To make sure this process is tax-free and not a shareholder benefit, the corporation (or a subsidiary corporation) should be the one named as the beneficiary in the life insurance policy. This means that the money from the policy goes to the corporation, which can then distribute it to the shareholders.
12. What is the Cash Surrender Value (CSV) of a life insurance policy?
The Cash Surrender Value (CSV) is the money you receive if you decide to surrender or cancel your life insurance policy.
Both universal life & whole life products have cash surrender value. It represents the value of your policy’s savings or investment component, which has grown over time through premiums and potential earnings.
However, it’s important to note that insurance companies might deduct certain fees, known as surrender charges, from the CSV if you surrender the policy early. The remaining amount after deducting these charges is what you’ll receive if you choose to cash in your policy. The CSV can be a valuable asset that provides a financial safety net, but it’s essential to understand the terms associated with accessing this value. For term insurance policies, the CSV is zero.
13. Can you deduct life insurance premiums?
Usually, life insurance premiums aren’t tax-deductible because they’re seen as a capital expense. However, there are some situations where you can deduct the lesser of the Net Cost of Pure Insurance (NCPI) and the premium. To be eligible for this deduction, the policy owner and the borrower must be the same person, and certain conditions must be met as follows:
- The life insurance policy must be assigned to a restricted financial institution (major banks, insurance companies, trust companies, and credit unions) in the process of borrowing from that institution.
- The interest on the loan must be tax-deductible.
- The assignment of the life insurance policy is required as collateral for the loan, and there must be a legal obligation to assign the policy.
- The Canada Revenue Agency (CRA) doesn’t consider premiums payable for contracts without specified premiums, like universal life policies if they’re paid from internal policy values. In these cases, to benefit from the deduction, the borrower should pay a premium at least equal to the NCPI each year.
- If the life insurance amount assigned as collateral for the loan exceeds the loan amount, the deduction must be prorated. For example, if the death benefit is $1,000,000 and the loan is $500,000, the deductible amount is 50%.
14. What is NCPI of Life insurance policy?
The Net Cost of Pure Insurance (NCPI) is a concept related to life insurance policies. It’s calculated by multiplying the Net Amount at Risk by the Mortality Factor.
It increases each year because the risk of mortality naturally increases with age. The calculation of NCPI is governed by the Income Tax Regulations, and it varies depending on when the policy was issued. For policies issued after 2016, the NCPI is generally lower, reflecting improved mortality statistics over recent years.
15. Who should be the beneficiary of a corporate-owned life insurance policy?
When a corporation owns and pays for life insurance, it’s crucial that the corporation or one of its subsidiaries is named as the beneficiary. This means the death benefit from the insurance company goes to the corporation, not to the shareholder’s estate or the shareholder’s family members. Why is this so important? If corporate funds are used to provide personal benefits to shareholders or their families, it can lead to a taxable shareholder benefit.
A recent Tax Court case, Harding v The Queen, serves as an example. In this case, the company owned life insurance policies on Mr. Harding, who was the sole shareholder. However, the policies listed Mr. Harding’s spouse and children as beneficiaries. This arrangement led to the assessment of a shareholder benefit, which was not a favorable outcome. Mr. Harding argued that he didn’t know who the beneficiaries were and didn’t intend to confer a benefit. Unfortunately, both the Canada Revenue Agency and the court didn’t accept these arguments as valid, and they assessed a shareholder benefit for the life insurance premiums paid.
16. What is a Capital Dividend Account (CDA) and how does it work?
A Capital Dividend Account isn’t an actual bank account; it’s a notional account used for tax purposes. Companies don’t put it on their financial balance sheets, but they might mention it in the notes to their financial statements.
How it works:
- Identifying Non-Taxable Money: Companies use the Capital Dividend Account to keep track of money they receive that doesn’t get taxed, like life insurance payouts. They add these non-taxable sums to this notional account.
- Tax-Free Distribution: After notifying the Canada Revenue Agency, companies can give these non-taxed amounts to shareholders without imposing taxes.
Important points:
- Only privately owned companies can make this tax election.
- Non-resident shareholders face a 25% withholding tax on these Capital Dividend Account payments, making them less tax-friendly for non-residents.
- The Capital Dividend Account is part of Canada’s integrated tax system, which aims to tax income consistently, whether it’s earned directly by an individual or funneled through a corporation.
- Life insurance proceeds net of ACB are added to the CDA of a private corporation, from which dividends can be paid tax-free to shareholders.CDA:
- CDA Credit = Life insurance proceeds – ACB (adjusted cost basis of the policy)
17. What is ACB of life insurance policy?
The ACB also known as the adjusted cost basis is essential for used to determine the gain when there has been a disposition/surrender of a policy and in calculating the CDA.
Actions that increase ACB:
- Premiums paid by the policyholder or on their behalf.
- Interest paid on policy loan (unless interest deducted for business or investment purpose)
- Most policy loan repayments.
- Policy gains become part of the policyholder’s income.
Actions that decrease ACB:
- Net Cost of Pure Insurance.
- Policy Loans & proceeds of disposition
18. Can the Canada Revenue Agency (CRA) seize life insurance payouts to cover the deceased’s taxes?
Under the law, the CRA has the authority to seize money or assets transferred by a person owing taxes to someone they have a close relationship with (non-arm’s length party). The person receiving these assets becomes jointly and separately responsible for the tax debt, but their liability is limited to the Fair Market Value (FMV) of the transferred assets, minus any amount they paid for it.
To trigger these rules, there must be a transfer of property from the deceased. When a life insurance death benefit is paid directly to a named beneficiary, it’s generally considered not to be a transfer of property from the deceased. Therefore, the CRA usually cannot seize the insurance payout to cover the deceased’s tax debt. However, this protection doesn’t apply if the estate is the beneficiary of the insurance policy.
19. What is a policy loan in a life insurance policy?
A policy loan is an amount lent by an insurance company to a policyholder in accordance with the terms of a life insurance policy. Taking a policy loan counts as a disposition, and the money borrowed as well as repayments affect the Adjusted Cost Base (ACB) of the policy. If the policy loan amount exceeds the ACB, it results in an income gain.
20. How to access the cash value in your life insurance policy for investments or other uses?
As a life insurance policy owner, you have three main options to access the Cash Surrender Value (CSV) of your policy:
- Withdraw the CSV through a partial or full surrender of the policy.
- Get a policy loan.
- Use the CSV as collateral for a loan from a third party (Financial institution).
The first two choices can trigger a ‘disposition,’ and you may face an income gain if the proceeds from these actions exceed your policy’s Adjusted Cost Base (ACB). In cases of partial surrender, the ACB is adjusted proportionally.
However, it’s important to note that a collateral assignment of your life insurance policy does not result in a disposition.
Here’s a general outline of such an arrangement:
- Identify the need for life insurance to fulfill estate, succession, or business planning goals.
- Deposit funds into a permanent life insurance policy to cover the required mortality premiums and, for certain policy types, additional deposits are invested in an accumulation fund.
- Use the life insurance policy as collateral to secure a loan.
- If specific criteria are met, the interest expense on the loan might be tax-deductible.
- If the policy owner and borrower are the same, a deduction may be allowed for the lesser of the premium and the Net Cost of Pure Insurance (NCPI) under certain conditions.
- The borrower(shareholder/employee) must pay the guarantee fee to the corporation. This would prevent the loan from being a shareholder benefit which may cause tax consequences.
- Upon the death of the insured, the loan must be repaid. In most cases, a portion of the death benefit under the policy must be used to repay the loan. Typically, the death benefit is greater than the loan amount owed. This can boost the Capital Dividend Account, allowing for more tax-free money.
21. Is the interest in a life insurance policy deductible for tax benefits?
When it comes to deducting interest for tax purposes, there are specific requirements to meet. Here’s what you need to consider:
- Interest must be paid or payable in the same year it’s claimed as a deduction.
- Interest should be paid as per a legal obligation.
- Borrowed money must be used to generate Investment income from a business or property.
- The amount of interest deducted should be reasonable.
Many leveraging strategies involving insurance rely on the deductibility of interest. To navigate the tax and legal aspects of leveraging for such strategies, it’s advisable to consult independent tax, legal, and accounting professionals.
22. What are policy dividends?
Policy dividends come into play with participating whole life insurance policies. It’s important to note that these are different from taxable dividends received from shares. Policy dividends represent a return of extra premiums paid on participating insurance plans and are tied to the performance of the policy’s par fund, not the profits of the insurance company itself.
Depending on the terms of your insurance contract, you can use policy dividends in several ways:
- Receive them as cash.
- Keep them in an interest-bearing account.
- Use them to cover your next premium payment.
- Invest in paid-up additions (PUA) to increase your death benefit.
- Buy term insurance to add to your basic coverage or pay off policy loans.
23. When does a life insurance policy trigger taxable income?
A taxable event occurs when there’s a disposition of a life insurance policy. This means that you may have to pay taxes on the gain you receive, which is considered regular income (not a capital gain), if the proceeds from this event exceed the policy’s ACB. If the life insurance policy is owned by a corporation, any profit generated would be factored into the calculation of aggregate investment income for passive investment income rules.
Events that include the triggering of taxable income:
- Surrendering a policy, whether it’s the entire policy or just a part of it.
- Taking out a policy loan, including automatic premium loans.
- A disposition that happens automatically due to certain legal situations, like transferring the policy to a trustee in bankruptcy.
- Changing the ownership of the policy.
- Earnings from policy dividends in a participating whole life policies.
Events that exclude:
- The death benefit paid out under a life insurance policy that qualifies for an exemption.
- Using the policy as collateral for a loan (collateral assignment).
24. Does U.S estate tax apply on life insurance in Canada?
In the United States, there’s an estate tax that’s quite different from the system in Canada. Instead of only taxing the appreciation in the value of assets upon death, the U.S. levies an estate tax based on the gross value of the deceased person’s estate. This tax system takes into account citizenship (rather than just residency, as is common in many other countries). As a result, it’s crucial to determine if policy holder or their family members are U.S. citizens or residents.
Life insurance proceeds are considered part of the estate’s gross value if the proceeds are payable to the estate or if the deceased had ‘incidents of ownership’ in the policy. U.S. estate tax applies to U.S. citizens and residents, but it can also affect Canadian residents who don’t hold U.S. citizenship if they own certain types of U.S. property, such as U.S. real estate, equities, or tangible assets within the U.S. However, it usually doesn’t apply to most debt or cash in U.S. deposit accounts.
The U.S. estate tax exclusion for 2022 is US$12,060,000, meaning no estate tax is owed if the estate’s total value doesn’t exceed this amount. However, after 2025, this exclusion is expected to revert to US$5,000,000. The highest federal estate tax rate is 40%.
For Canadian residents without U.S. citizenship, if the value of U.S. property is less than US$60,000, it typically isn’t subject to the estate tax. But if U.S. property value surpasses US$60,000, and the worldwide estate value exceeds US$12,060,000, those assets may become subject to estate tax. Fortunately, Canada has a tax treaty with the U.S., allowing for a prorated credit of up to US$4,769,800 in 2022 to offset the estate tax liability. The exact credit amount depends on a formula that considers various factors.
While life insurance isn’t usually considered U.S. property, the fair market value (FMV) of the policy is included in the deceased person’s worldwide estate when calculating the prorated credit.
It’s important to review the terms of life insurance policies to check if the deceased had ‘incidents of ownership, regardless of whether the person was a U.S. citizen or a Canadian resident without U.S. citizenship but holding U.S. assets.
Incidents of ownership’ may encompass things like legal ownership of the policy, beneficiary status, the right to surrender or cancel the policy, the right to borrow against the policy, and more. If these incidents are removed within three years before death, the life insurance can still be included in the estate for tax purposes.
A life insurance trust, known as an Irrevocable Life Insurance Trust (ILIT), can be used to eliminate ‘incidents of ownership’ so that life insurance proceeds are not subject to U.S. estate tax. The ILIT owns the policy and is the beneficiary. The settlor can utilize the annual gift tax exemption to fund premiums, and if a non-U.S. citizen spouse is a beneficiary, additional gift tax exemptions may apply. If premiums exceed these exemptions, the lifetime estate and gift tax exemption of $12,060,000 can be used, but this reduces the amount available for gifts while alive. U.S. tax rules are complex, so it’s essential to seek U.S. tax and legal advice before planning.
25. What is the Fair Market Value (FMV) of a life insurance policy?
To figure out the Fair Market Value (FMV) of an insurance policy, it’s a process that involves actuarial experts and takes various factors into account:
Policy details:
- The amount the policy is worth and the cash value it holds.
- What it would cost to replace the policy.
Health and life expectancy:
- The overall health and expected lifespan of the person insured.
Future payments:
- The future premiums that need to be paid.
Type of policy:
- Whether it’s a permanent or term insurance policy.
Term policy features:
- If it’s a term policy, any options for converting it into a different type.