What are the ins and outs of using a whole life policy to cover tax liability?

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By Julie Cazzin with Allan Norman

Q: I’ve a whole-life coverage I purchased 34 years in the past. It has paid-up dividends/money worth, a principal quantity of $100,000 and I pay a premium of $1,000 yearly. The life insurance coverage quantity has grown to $300,000 via paid-up dividends and there’s a money worth as effectively. I’m now within the means of property planning and questioning if it makes monetary sense so as to add to the principal of this life insurance coverage coverage. Is that attainable? Or is a greater possibility to easily purchase a brand new time period life (or different) insurance coverage coverage? I’m 62 and would love so as to add to this coverage to cowl taxes at demise, however I’m wondering what the most effective and least expensive means of doing that is at my age. — Thanks, Julia

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FP Solutions: Hello Julia. You received’t be capable of add further life insurance to your current coverage. It’s attainable to scale back the demise profit on an insurance coverage coverage, however not improve it.

Your query has me questioning: What’s your rationale for desirous to cowl taxes at demise? It feels like one thing you must do, and life insurance coverage is commonly introduced as the answer to do it, however do you actually need to cowl your taxes at demise?

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In case your taxes are the results of a registered retirement revenue fund (RRIF) account or capital gains on an funding portfolio, you may pay the taxes with the proceeds of the investments. Buying an insurance coverage coverage means having much less cash for your self whereas attempting to create a bigger property to your beneficiaries.

Alternatively, when you have rental properties, a cottage or different belongings you don’t wish to be bought, you’ll have to cowl the tax and an insurance coverage coverage could also be the most effective answer. Earlier than leaping to insurance coverage, estimate the projected worth and related taxes of your belongings at demise. Is there something in your property you don’t need liquidated or divided evenly between beneficiaries?

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Will there be sufficient cash to cowl the tax when all the pieces is liquidated and transformed to money so you may maintain the belongings you don’t need bought and equalize the property? For instance, that is the case in case you are leaving the cottage to, say, Mary and compensating Invoice.

In case your anticipated future liquid belongings are sufficient to cowl the taxes, possibly you received’t need the insurance coverage. My colleague, Jeff Cait, an insurance coverage specialist, could ask, “However do you wish to die neatly?”

Counting on promoting belongings at an anticipated future worth may be messy. You’ll have some tax-free belongings (home, tax-free savings accounts), taxable belongings (RRIF) or belongings paid outdoors the property with the property liable for the taxes (RRIF). Asset values could also be completely different than anticipated and it might take longer than anticipated to promote these belongings and for the property to settle. There can also be attainable conflicts with beneficiaries.

Utilizing insurance coverage provides certainty to estate planning. What choices do you may have together with your current coverage? The unique demise profit in your coverage was $100,000 and it has grown to $300,000, and it’ll continue to grow so long as you might be alive and paying premiums. Learn the way a lot it would develop by requesting three coverage illustrations from the insurance coverage firm.

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• Proceed to pay premiums;
• Offset the coverage on the anniversary date, which implies there’s sufficient cash within the coverage to pay for the premiums by itself, though it’s not assured will probably be capable of pay for itself eternally;
• Offset the coverage on the second anniversary date.

In the event you maintain paying the premiums, what’s going to the coverage demise profit be at your anticipated demise, and can that quantity cowl future anticipated taxes?

In the event you offset the coverage and cease paying premiums, it might nonetheless develop somewhat, and you’ll redirect your present premiums to a brand new coverage. Having the second offset illustration permits you to measure the worth of another premium fee on the projected demise profit. It will assist you resolve in the event you ought to proceed making premium funds.

A brand new $300,000 complete life coverage has a premium of about $12,000 per 12 months, or in the event you went with a 10- or 20-year time period, the premium could be about $1,600 per 12 months and $3,000 per 12 months, respectively.

With complete life, you already know the cash can be out there to cowl taxes, whereas with time period, as soon as the time period is up, it’s executed, except you renew to a brand new time period or convert to a complete life or everlasting coverage. However these choices are solely permitted as much as a sure age, and the time period ultimately expires.

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Julia, what’s your estimated tax concern? Is it as massive as you suppose? Do you must cowl all of it? In the event you should cowl all of the taxes, what are your choices? Whether it is by utilizing insurance coverage, how are you going to finest use your current coverage? In the event you select a brand new coverage, do you wish to absolutely commit with a complete life coverage or as an alternative hedge your bets by utilizing your current coverage and a few time period insurance coverage you may convert if wished?

Allan Norman, M.Sc., CFP, CIM, gives fee-only licensed monetary planning companies and insurance coverage merchandise via Atlantis Monetary Inc. and gives funding advisory companies via Aligned Capital Companions Inc., which is regulated by the Canadian Investment Regulatory Organization. Allan may be reached at alnorman@atlantisfinancial.ca.

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