The hardest part about buying life insurance is trying to find good -- and objective -- advice on whether it makes sense in your planning, how to best use it, how much is enough, and what type to buy.
You may have had the experience of the insurance adviser who says: "I understand that you want to think about this insurance purchase. So, sleep on it. And if you happen to wake up in the morning, give me a call."
There are many very good insurance advisers who have the best interests of their clients in mind.
Insurance is a great tool for five key reasons.
First, life insurance is the only investment that is guaranteed to pay the most when it's needed the most.
Second, the death benefit is tax-free. Tax-free is always good.
Third, certain policies allow you to accumulate investments on a tax-sheltered basis. The policy can act similar to, but not identical to, a registered retirement savings plan (RRSP) -- and the investments are paid out tax-free along with the death benefit when the insured dies. As a result, life insurance is an amazing tax and estate planning tool.
Fourth, life insurance can offer protection from creditors. Accumulation inside the policy may be beyond the reach of creditors when certain beneficiaries are named.
Finally, the full amount of the insurance proceeds paid on death (net of the adjusted cost basis of the policy) will be added to the "capital dividend account" (CDA) of a corporation, if the corporation is the named beneficiary. The CDA is very valuable because a positive CDA balance can be paid out by the corporation as tax-free dividends to shareholders.
If you own a corporation, you'll often have the choice to own the policy personally, or in your corporation. In many cases it makes sense to have your company own and pay for the policy. Why pay the premiums from your higher-taxed personal dollars? But if you don't do this right, you could end up paying tax unnecessarily. You see, if your corporation is going to own the policy and pay the premiums, then it must be the named beneficiary and receive the death benefit to retain the tax-free status of the payout. If Mr. Too-Smart-For-His-Own-Good has named his wife as beneficiary, but has his corporation paying premiums, guess what? That's right -- the insurance proceeds will be fully taxable in Mrs. Too-Smart-For-His-Own-Good's hands.
Furthermore, life insurance premiums are typically not tax deductible. Those who deduct the cost of premiums for tax purposes do so at their own peril. The Canada Revenue Agency (CRA) disallows deductions unless the subject policy is pledged as collateral on a loan and a few other tests are met, including that the loan for which the policy is pledged must be a loan from a Scheduled Chartered Bank. This prevents one from making premiums deductible for collateralized policies given as security for payment of their kids weekly allowance.
If premium costs are deducted without proper justification, all proceeds paid out will be fully taxable in the hands of the beneficiary.
Generally, the corporation should be named the owner and beneficiary of the policy. The company will not be able to deduct the premiums (unless the above tests are met), but there would be no taxable benefit when the proceeds are paid out. Upon death of the life insured, the corporation will receive the insurance proceeds tax free and can then use its Capital Dividend Account to pay some or all of the proceeds out to one's spouse or other heirs,
tax free.
n Joel Attis is a Financial Advisor with AttisCorp Financial Group, Inc. in Moncton. Comments or questions may be submitted to joel@attiscorp.com, or he may be reached at 855-1155.
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