Life is uncertain. The future is largely unknowable. Insurance helps people remove the risk associated with going about their lives by compensating them when misfortune occurs.

MP900185176-204x300Insurance is all about managing risk—the financial risk that death, illness or disability would have on a policyholder as well as his or her dependents. Use it to help provide extra financial security to your spouse, to contribute towards your grandchildren’s education, or to help relieve the financial burden of final expenses.Life insurance in its basic form promises to pay a benefit upon the death of the person who is insured. Life insurance is purchased by people for many reasons, including a desire to cover the costs of a funeral, to create an estate so that a family can be supported, to pay off existing debts including a home mortgage, and to settle the expenses of an estate, including the payment of taxes.

An individual transfers risk by shifting the financial burden of the risk away from themselves to an insurance company, in exchange for a fee. Life insurance allows people to address the financial risks of dying too soon, living too long, or becoming disabled. These risks mean that individuals cannot provide the necessities of life for their surviving family members or repay mortgages, loans, taxes or other financial obligations.

Dying Too Soon

Most individuals earn the financial resources they need to live comfortably and acquire assets from a salary, commissions, or business income. These sources of income end when the individual dies. If the individual dies too soon, he or she may not have met all of his or her obligations, whether it is a loan or mortgage to be repaid, or building up sufficient financial resources to allow family members to continue to live as they are accustomed to do. Life insurance in its many different forms can help address the risk of dying too soon.

Living Too Long

Individuals who outlive their financial resources may face a life of poverty or may have to rely on the goodwill of others to survive. Life insurance products, such as deferred and immediate annuities, can address that risk by allowing individuals to put money aside so that one day, they will have an income that is guaranteed for life with an annuity.

Becoming Disabled

Life insurance products have been developed to address the needs of individuals who suffer a critical illness, or who for health reasons cannot care for themselves. Life insurance companies also offer disability income plans that provide a regular income to a policyholder who has suffered a disability.

Other Use

In addition to addressing the risks that everyone faces, life insurance can help people achieve certain financial goals.

For example, Eva wants to make a significant contribution to her favourite charity. She does not have the means to make a large gift, and her salary level does not allow her to accumulate the kind of gift she has in mind. She can apply for a life insurance policy and appoint the charity as the beneficiary. For a relatively small regular premium payment she can ensure that when she dies, the charity she chose will benefit from her gift.

Using Life Insurance Proceeds to Defray Capital Gains Taxes

When an individual dies, the executor of the estate must complete a final tax return. In the final tax return, all of an individual’s income from all sources, earned up to the date of death and not previously taxed, becomes subject to income tax.

At the same time, any capital property that an individual owns is considered disposed of (that is, treated as if it had been sold) for income tax purposes. The difference between its fair market value and its original cost is the capital gain or loss. For any property that has a capital gain (that is, the fair market value exceeds the original cost), the excess amount must be reported as capital gain income; 50% of that amount is taxable.

Although life insurance represents a valuable asset to an estate, the amount of the life insurance benefit paid out either to the deceased’s estate or to a named beneficiary is not considered a taxable amount for income tax purposes.

Life insurance is therefore a valuable tool for defraying the potentially large tax liability for the capital gains realized upon a property owner’s death. Rather than the heirs of a deceased property owner having to sell a property in order to obtain the funds necessary to pay the taxes, they can use life insurance proceeds to pay the taxes.

Why Businesses Purchase Life Insurance

Insurance can help address the needs of the individuals who engage in any of these three forms of business. Disability insurance can provide much needed income if the sole proprietor becomes ill or disabled. Life insurance can also be used to fulfill any remaining obligations, such as business loans and employee salaries, if the business is wound up on the death of the sole proprietor.

Business Continuation Insurance

Small businesses, whether sole proprietorship, partnerships, or private corporations, depend on one or a few principal owners to ensure the continued operation of the business. If one of the principal owners dies, the business will not only lose the revenues that that person generated, but creditors may also require the repayment of any loans or liens that were guaranteed by the deceased owner. The family of the deceased may insist on the disposal of business assets to provide a legacy to the deceased’s heirs or payment from the surviving owners in exchange for their ownership interest in the business.

Business continuation insurance is intended to ensure the survival and continuation of a business by providing insurance proceeds to compensate in part for financial losses resulting from an owner’s death.

Contact Claudio

Claudio Piron CPA, CA, CFP®, CSWP, TEP
Senior Investment funds Advisor
Insurance Advisor

HollisWealth Insurance Agency Ltd.
4 Director Court, Suite 110
Vaughn, Ontario, L4l 3Z5
Phone: 905 712 9302
Fax: 905 712 9330

Mutual Fund Dealers Association of Canada