Your policy will pay a sum of money, called a death benefit, to your beneficiary or your estate. There are three main options for this money:
- Provide a tax-free, lump-sum payment: If you name a beneficiary – whether a loved one or a favourite charity -- the insurance money will pass to them quickly, without any taxes or probate fees.
- Provide a steady stream of income: Your beneficiary can use the death benefit to buy an annuity for monthly income. They won’t have to pay taxes on that income.
- Cover your final estate costs: If you name your estate as the beneficiary for your life insurance policy, your executor can use the money to cover any final costs, including your funeral and probate fees. The drawback is that the money will be added to your estate, increasing the probate fees.
Example: Let’s say you leave your children a cottage that has been in the family for many years. This could leave behind a huge tax bill and if the children can’t afford to pay it, they may have to sell in a hurry. If this happens, they likely won’t get the best price in a rush sale. Also, they could lose something that has a special meaning to the family. If you have enough life insurance, it will cover the cost of the tax.
Remember, unless you plan properly, the government will be one of the major beneficiaries of your estate. As life changes, your estate plan will also need to change. For example, if you marry or start a family, you’ll want a plan that will protect your loved ones if something happens to you. If you build up wealth, you will have to think about taxes, as well as who will inherit money or property from you.
A lawyer can help you with the important issues and create a complete and legally valid plan. This will give you extra peace of mind that you have cared for your loved ones in the best way possible.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.