Developing an estate plan isn’t the most fun thing in the world… Camping, sports, eating food, listening to music – there’s a bunch more that you would probably rather be doing than deciding how to protect your estate and your dependents futures.
We get that.
It might be easiest to get in touch with us directly to begin estate planning, but not everyone is the same. If you are the type to dig into the facts and get a solid understanding of a subject before starting on it, then you’re in the right place.
Follow along as we walk you through the intricacies of estate planning with life insurance. It might not be as spicy as a hot tamale, but it’ll ensure that there are plenty of tamales (and other foods) in your family’s future.
Protecting Your Income
While making money is great, most of us have debt. What form your debt takes may not matter quite as much in estate planning – while a mortgage is certainly a better form of debt than a credit card, you cannot eat a house.
Liquidity is essential for estate planning – if all of your money is tied up in assets and investments, they will need to be sold in order to cover costs. Even if you have the cash to cover expenses, cash can make evenly distributing assets much simpler.
Generally speaking, this is the primary reason why people should have some form of life insurance. It is a low-hassle alternative to cash that does the dirty and lets your other assets stay invested.
You don’t need to purchase an exorbitant plan to ensure your family members have a secure future. Simple term-life plans offer the assurance that your family will be able to pay off a mortgage or protect a family business should a death occur. Permanent plans (Whole Life & Universal Life) have a higher initial cost but provide a benefit at no matter what age death occurs. It comes down to making a plan that makes financial sense for you.
Protecting Your Estate
Life insurance helps to smooth the passing down of your estate’s assets to your heirs.
The Canada Revenue Agency (CRA) will expect that the transfer of these possessions comes along with the applicable taxes being paid. Capital gains taxes will, most importantly, apply to property. Whether that is a business or a vacation home, capital gains tax will force your executor and heirs to consider whether it is worth it to liquated and selling off the asset.
If there isn’t sufficient cash in your estate to pay these taxes, the property may need to be sold. If market conditions are unfavourable, that might mean losing a significant investment with a promising future.
This is one example of why liquidity is essential in estate planning. In order for your estate to function, it needs cash. It’s the grease that keeps the gears in motion.
Reducing the Burden of Fees and Taxes
Naturally, you are inclined to retain as much of your estate as possible by reducing the fees and taxes that come with estate planning and disbursement.
You can’t pass down the assets of your estate without triggering fees and taxes, BUT, by including life insurance in your plan, the burden of those fees and taxes will feel like much less to your executor and heirs. Why? It’s because a life insurance death benefit is cash, and dividing up cash is much simpler than dividing up or selling off a vacation home or stock investment.
Finding the Right Type of Life Insurance for Estate Planning
We can boil this down easily into two categories: term (or temporary) and permanent (or “whole life”, “universal”).
- Term insurance is the most cost-effective form of life insurance – but is only applicable for a set period of time. The initial cost is significantly lower but the price will rise substantially as an individual ages.
- Permanent insurance stays in force until death, offering level or growing death benefits, and the option of a cash surrender value while living. Premiums are usually level with either “life-pay” or “limited-pay” options.
If your goal is to protect young dependents in case your income disappears, then term life may be the right direction. However, if your goal is to include life insurance as part of a solid, lifelong estate for your, then permanent life insurance is likely ideal.
The good news though is that the two types of life insurance are two sides of the same coin and both can be started at the same time or as your particular situation allows.
These examples are mere generalizations of a complicated planning process. Working with an insurance advisor ensures that you are choosing the best plan for your particular set of assets, income, dependents, and so on. These are all major factors that tie into one another – we plot that all out so that nothing is left to chance.
There is more to planning your life insurance plan than shopping around between the top-tier providers. Each provider has their own set of advantages and disadvantages that can only be compared by a neutral third-party. That’s where we come in – taking the guesswork out of estate planning through life insurance.