Life Insurance - What's the Use?

Dec 2014

inkwellNo one NEEDS Life insurance. Without life insurance you will continue to breathe, and otherwise carry on with your day to day existence. Besides, life insurance will only come into play once you are gone and buried. On the other hand, if prefer that your affairs are left neat and tidy and your survivors that you care about get what you think is just and right then life insurance may be the most cost effective and generous legacy you can leave. That said, your decision to fore go life insurance may be based on incomplete information.

Life insurance is, at its foundation a financial commodity, much like a stock, bond or futures contract. It matures into instant tax free cash, just when you stop producing or managing your cash (due to death).  In the absence of instructions to the contrary, the beneficiary may use this cash in anyway he/she desires. A Life insured may have purchased a life insurance contract for a beneficiary to utilize the proceeds in any one or more of the following eventualities.

  • Provide tax free funds for loss of income of the deceased insured for the surviving beneficiary;
  • Provide tax free funds for completion of child education fund.
  • Provide tax free funds for the beneficiary’s RRSP retirement funding.
  • Provide tax free funds to retire a mortgage.
  • Provide tax free funds to retire other indebtedness, like line of credit, student loan, credit cards, car loans, investment loans, etc;
  • Provide tax free funds to pay income taxes triggered by the death of the insured like, RRSP/RRIF tax, Capital Gains on appreciable property like a cottage, stocks, bonds, real property, foreign or domestic; See RRIF-RAFT and PrePaid Capital Gains Tax Account
  • Fund a buy sell agreement of partner’s share of a business.
  • Key Person Life insurance

If you did a little advance planning and purchased the correct type of life insurance, benefits can accrue  to the contract owner while the life insured is still alive. It can be used to:

  • increase the retirement income of the owner of the life policy through a GLIC or a Pension Maximization strategy;
  • Increase the retirement income of a surviving spouse’s RRSP income through a RRIF RAFT strategy.
  • structure a tax favored reverse mortgage strategy in retirement using the life policy’s cash value as collateral.
  • Charitable Giving to your favorite charity, (college, university, church, etc) on a tax advantage basis.
  • Use life policy to transfer funds out of your holding company tax free.

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