Financial planning is important for you, and permanent life insurance policies are an important part of it.
Now why is that so?
It’s because life insurance gives you a huge amount of money that helps you meet daily expenses.
Now think about it.
If your parents pass away, how much does it impact your life, especially financially?
When your family’s breadwinner suddenly passes away, you face many issues.
Such as inheriting a business, paying for the funeral, or paying daily expenses. So, you’ve got your hands full.
But when you have a permanent life insurance policy, there’s no need to worry.
However, it’s not as easy as you think.
It’s because there are many tax considerations when you’re buying a life insurance policy.
So in our today’s blog, we tell you about these tax considerations.
Thus, without further ado, let’s move ahead.
In our first part, we tell you about the tax treatments for different parts of your insurance policy
Taxing Life Insurance Policies In Canada-Tax Treatments For Different Parts Of Insurance
Your insurance policy has many parts, each with a different tax treatment.
This section tells you about the tax treatments for different parts.
1. For your paid premiums
The tax premiums you pay for permanent life insurance in Canada are not tax deductible.
2. For your death benefits
The death benefits your beneficiaries get are mostly tax-free.
So, you can rest easy knowing that your loved ones get the most from your insurance policy.
3. For your policy’s cash values
Your policy’s cash value is tax-free.
However, your gains are taxable if you let go of the policy.
Also, any cash you withdraw from the cash policy is taxed.
So, before you make a decision, think about it.
4. For your policy loans and withdrawals
Your policy loans and cash withdrawals are also taxed.
The amount of tax you pay depends on your policy’s ACB( adjusted cost basis)
Now, you’re probably thinking, What ACB means? Right?
Let us explain.
ACB is the sum of premiums minus the withdrawals and the policy loans.
So, for example, if you have paid $10000 in premiums and $2000 in policy loans, your ACB is $8000.
Then, when you withdraw $5000 from your policy, the $3000 is taxable.
Now you know about the tax treatment for different parts of your policy. The next part shows the tax considerations when buying an insurance policy.
Tax Considerations For Life Insurance
Here are the tax considerations you should know when buying life insurance.
1. The tax advantages you get.
A permanent life insurance policy gives you many tax advantages.
For example, your policy’s cash component grows tax-free. Therefore, you save money for the future.
Moreover, you can also borrow against your cash value, which is tax-free.
Hence, your insurance policy gives you many tax benefits.
2. Taxes on borrowing against cash values
When you borrow against your insurance policy’s cash value, it’s tax-free.
But remember that any existing loans you take reduce your policy’s death benefit.
Also, if you surrender your policy, any outstanding loans are taxable.
So, always read your policy carefully and then make decisions.
3. Taxes on transferring policy ownership
The gains are taxable when you transfer your policy’s ownership to someone else.
So, consult with a tax professional before transferring your insurance policy.
Your tax professional gives you the right advice on making the most out of transferring your insurance policy.
4. Taxes For Beneficiaries.
When you’re naming your policy beneficiaries, choose wisely.
It’s because the status of your beneficiaries decides whether they pay taxes or not.
Here’s how it goes.
If your spouse is the beneficiary, the benefit is tax-free.
However, if it’s someone else, you’re in hot water. It’s because non-spouse beneficiaries are taxable.
So again, be careful when choosing your policy’s beneficiaries.
In the next part, we’ll discuss estate planning and taxation. So keep reading.
Estate Planning And Taxation
Your choice of the permanent life insurance quote helps you plan your estate.
Here are some ways it helps.
1. Using permanent life insurance policies for estate planning.
Getting the best permanent life insurance in Canada means securing your future.
Why is that so?
Here’s the deal.
Life insurance helps distribute your property according to the beneficiaries you select.
Also, if you have a large estate, the sum from your policy pays for the taxes.
Thus, you don’t have to worry about your family’s finances and estate management.
2. Helps you give to charity
Do you think of society and want your good deeds to continue after you pass away?
If yes, then your permanent life insurance policy is good for it.
All you need is to nominate a charity as a beneficiary, and that’s it.
Now, your chosen charity receives the benefits of your insurance.
So, with a life insurance policy, your philanthropy continues even after you pass away.
To sum up, life insurance is great for planning your estate.
The takeaways
Life insurance is a good policy for you and your loved ones.
However, there are many tax issues in Life insurance.
But, if you have good knowledge about the tax on permanent life insurance, you can turn the tide.
FAQs
Here are some common questions people ask about life insurance.
1. What is permanent life insurance?
Permanent life insurance is a long-term insurance policy.
The policy benefits your loved ones after you pass away.
Also, you can select your beneficiaries who benefit from the policy.
2. Difference between term and permanent life insurance
Term life insurance covers a part of your life.
On the contrary, life insurance provides you benefits for your entire life.