As the baby boom generation has aged, it has been presented with a whole new set of challenges. Not the least of which is boomers’ failure to plan for their own passing, a period that, from a financial point of view, can be devastating.
But smart estate planning using life insurance presents older Canadians with one last opportunity to shape the future – even after they’ve gone.
A later-in-life life insurance policy can be used in a variety of money-saving ways, including:
Replacing essential income:
Income replacement is often the main focus when young families are considering buying life insurance. But the need for many older people is the same.
The loss of a major revenue source can be devastating, especially if the surviving spouse’s advancing years are also accompanied with increasing medical challenges.
On occasion, retirees will purchase a life annuity with no guarantees in order to receive the highest monthly payout. However, this offers little support for other surviving family members.
Supporting that annuity purchase with life insurance – the least expensive being a term-to-100 life insurance policy – can make more sense. This will still produce a steady income stream and, at the same time, guarantee the value of your estate.
Accommodating special needs:
You can provide life-long financial support to children or grandchildren with special needs using the proceeds of a permanent life insurance policy and a discretionary trust – known as a Henson Trust in Ontario.
Universal life policies, for instance, provide lifelong coverage combined with tax advantaged investment opportunities, which the policy owner controls. At the same time, the trust set up is worded so that the disabled child is considered not to have personally received the inheritance.
If the child is considered not to personally own the assets, then he or she can continue to receive full government benefits. Meanwhile, the designated trustee can pay out the trust assets for the benefit of the child at its discretion.
Equalizing an estate:
Parents or grandparents who want to ensure that their savings are distributed equitably to all their children or grandchildren often turn to life insurance.
For instance, if you’ve been helping out a deserving child financially then, upon your death, the proceeds from a permanent insurance policy can be distributed to your other children in such a way as to recognize the financial support already provided.
This simple solution avoids any unnecessary squabbles or siblings feeling that a brother or sister has somehow been unfairly favoured.
Establishing a bequest:
Many older Canadians are interested in leaving a legacy. And making an insurance-related gift to your church or favourite charity can offer substantial tax benefits.
You can donate the proceeds of a permanent life insurance policy you’ll receive down the road or make an outright gift of an existing paid-up policy, in which case you’ll receive a tax receipt for any cash value.
Such gifts don’t have to be elaborate, nor do they necessarily have to move beyond family members. Although you wouldn’t receive a tax deduction, a tax-free life insurance payout could be used to pay for your grandchild’s post secondary education, for instance.
Settling a tax bill:
If you were fortunate to buy even a modest cottage 30 years ago, it’s now likely worth several times what you paid for it. This huge appreciation is taxable when the property changes hands.
To protect the estate's value, you could purchase an insurance policy that would pay a tax-free benefit that might cover most, if not all, the potential taxes.
You can arrange for coverage on the single owner of the cottage or, as is often the case, a ‘joint last to die’ permanent policy on the two co-owners. Since two people are insured, the cost should be less than either could buy individually.
In some instances, your children might purchase the policy, dividing the cost of the premiums among those who’ll be sharing the cottage after you pass on.
