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Is life insurance taxable in Canada?
Most life insurance money is not subject to income tax. The death benefit paid from a life insurance policy is a tax-free lump sum for the beneficiary that can be used to finance a number of things. This involves paying off debts, including a mortgage, so your family can stay in the same house and in the same community. It can also be used to replace income so that your family can maintain their standard of living without you. It can pay funeral expenses and preserve other assets so they don’t need to be sold or liquidated. Additionally, it can take care of your children and loved ones, or you can choose to donate to a charity owned by your or your beneficiary. Your spouse, child, or anyone else you designate as a beneficiary would not be required to report life insurance revenue as taxable income on their Canadian tax return. It doesn’t matter whether the life insurance was term insurance or full insurance, or how big the policy was.
Now we have said that “most” of the money is non-taxable for the beneficiaries. So what is it? How complicated is it?
If the estate is named as the beneficiary or if the beneficiary dies before the death of the insured person and no other (conditional) beneficiary has been named, the proceeds from the death of the insured person will be paid to the estate of the deceased. This is where it gets tricky: “There may be inheritance fees, estate administration taxes, and estate settlement costs such as enforcement, legal and accounting fees that would have to be paid in addition to the debts or taxes the estate owes before money or money assets can be paid at the will of the deceased be distributed to the beneficiaries, ”says Peter Wouters. Director of Tax, Retirement and Estate Planning at Empire Life Insurance Company in Kingston, Ontario. He adds that when no will has been created, Each province indicates who will receive the propertyhow much each person gets and in what order. When there is no will for someone who has died, it means “dying bowel. ”
How to make your life insurance more efficient for beneficiaries
Life insurance, funeral plans, and investments are important parts of a proper estate plan that can provide emotional and financial relief for your loved ones. How do things like life insurance, funeral planning, and investments play a role for these beneficiaries? How can you influence taxes less?
Most importantly, introduce the names of your beneficiaries with the insurance company. “This can avoid inheritance and related costs, as well as most of the outstanding debts of the deceased life insurer,” says Wouters. “There are exceptions, such as relieving relatives, where the deceased was obliged to take care of relatives, especially in the context of a separation or divorce agreement.” Designating beneficiaries in a life insurance policy can also speed up the settlement process and get the funds into the beneficiaries’ hands more quickly and confidentially, as these payouts, unlike a will, are not part of the public record. The more you prepare, the better it is for your loved ones.
“Life insurance proceeds from death can also be used to pay income taxes owed by the deceased and their rebates on earned income. Investment income, including capital gains; registered retirement plans [RRSPs] if a spouse has not been named as the sole beneficiary; and registered pension funds [RRIFs] when a spouse has not been named the sole beneficiary or successor, ”says Wouters. “Life insurance can also provide lump sums of cash and income to replace income lost through the death of the life insured. Using investments for these purposes can mean selling them when markets are down and losing opportunities for market rallies and appreciation. The sale of investments can result in unrealized capital gains that must be reported to the beneficiaries and paid to the government prior to distributions. “
Lending institutions such as banks, trusts, and credit unions may need insurance as additional security for loans in the event the borrower dies before it’s fully repaid. “If an amount is outstanding, the lender will subtract the loan amount from the total proceeds from the death of the insured,” says Wouters. “The borrower’s estate or the named beneficiaries receive the balance. Life insurance as security can be up to a certain percentage of their cash value and / or their insured amount [the amount paid on the death of the life insured]. ”