Financial Planning Q 'n A

Attitudes on life insurance are polarized. The question as to need for life insurance is answered with comments ranging from “I won’t be around to use it” to “how will my family continue without me”. The very core use of life insurance is to provide for your family in the case of your untimely death. If you are the breadwinner in the household, the loss of your income can lead your spouse and children from a comfortable lifestyle to one of poverty quickly. If this is a concern, life insurance should most definitely be considered. A secondary but related reason is estate preservation. If you have assets which have increased in value over the years, the income taxes on death may be significant enough on death to force the sale of those assets. If your goal is to keep them in the family, life insurance is a valuable tool to accomplish that goal. If you are in business with partners, and spouses are not involved in the management of your business, life insurance is often used to assist the surviving partner(s) to purchase the deceased ownership from their beneficiaries. Often, as part of a partnership or shareholder’s agreement, life insurance plays a key role. Finally, the income tax rules in Canada treat life insurance quite favourably. As a result of these rules, life insurance can be used not only as an estate tool, but also a retirement tool. Essentially, you are allowed to over fund life insurance policies and have income earned within them tax free for a number of years. The result, similar to an RRSP, is to accrue assets quickly as compared to non-registered assets which are subject to tax. There rules are complex in extracting these funds and must be followed closely to avoid adverse tax consequences.