Life Insurance and wealth protection

Life Insurance and wealth protection

A life insurance policy serves the purpose of replacing the income in case of an untimely death of the family breadwinner. In case of a family with two or three small kids, a mortgage and some additional debt, a life insurance policy on the parents would be extremely important. If one of the parents were to die, the surviving spouse would find it difficult to take care of the responsibilities and maintain a standard of living.

However, let us talk about families with minimal debt and grown up kids…would they need life insurance?  Could life insurance help in maximizing wealth?

Yes. Life insurance has several benefits for maximizing wealth. Let us look at them:

1.  Life insurance is tax efficient: the proceeds from a life insurance policy are paid out tax free. Moreover the death benefit of certain Permanent policies – more specifically Participating Whole Life and Universal Life policies – grow on a tax sheltered basis. They are paid out TAX FREE. The accumulation fund within a Universal Life policy or dividends within a Participating Whole Life policy can also be used to offset future premiums, allowing these premiums to be offset with pre-tax dollars rather than after tax dollars.

2. Life insurance is a risk free asset. Although the returns on life policies are often compared to returns of a portfolio of stocks or equity based mutual funds or exchanged traded funds, this is not a fair comparison. Returns on an equity based account have significant downside risk while the face amount on a life insurance policy are guaranteed. Even the accumulation funds one can add to a Universal Life policy’s death benefit are often guaranteed. Companies like RBC Insurance, Transamerica and Empire Life all have minimum guarantees of 4% or higher on their Universal Life accounts.

3.  Life insurance is liquid. Another key advantage to life insurance is that proceeds are paid immediately to policyholders beneficiaries and are not subject to probate fees. Probate fees are highest in Ontario: on a $1,000,000 estate the probate fees would be $14,500. The liquidity of life insurance is superb. When there is a significant tax liability from a family cottage or business, life insurance is exactly what you need to offset those liabilities and pass on an estate whole.

Therefore, life insurance remains an extremely valuable tool for estate planning, even when your full mortgage is paid up and your kids have grown older.

We at YourInsuranceGuy.ca are experts in explaining the the various types of life and health insurance. Please feel free to contact us at aman@yourinsuranceguy.ca or at 1 416 509 2540. Please visit us for a no obligation quote or advice.

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Prepared by: Aman Kapur

 

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