A life insurance agent, briefcase in hand, steps onto a bus with only a single passenger aboard, points at the empty seat next to him, and asks ‘Is this seat taken?’
In an uncertain world, we can still be sure of taxes and death. Let’s leave taxes aside, for the most part, and focus on ‘the other one’. What are the various ways that life insurance can help us address this certainty?
Mortgage insurance is a common type of life insurance, providing your family with the promise of a debt-free home at a critical time of loss.
Income insurance is another primary use for life insurance. In this role, life insurance is used to protect your dependents by partially replacing a breadwinner’s income. Most of us have never considered the total economic value of our earning potential. For example, a 30-year-old earning $50,000 a year, estimating a 2 per cent annual raise, will earn two and a half million dollars by the age of 65. If you have dependents, income insurance may be as important to your family as your income itself.
You may choose to use a life insurance policy to support your favourite charity. Ownership of the policy can be assigned to the organization and, at death, your estate will receive a tax credit. Alternately, to receive immediate tax relief, your annual premiums may be “written off”. Once again, the policy must be “assigned” or owned by the charity and an appropriate beneficiary arranged.
Although there is no inheritance tax in Canada, there are situations where your estate may be required to pay taxes to the government. For example, if you had no spouse at the time of your death, your entire RRSP or RRIF value would be deregistered automatically and added to what is called your “terminal tax return”. This could result in tens of thousands of dollars of taxes to your estate. Anticipating this, you could effectively offset this loss to your legacy with an appropriate amount of life insurance.
If you are in business, you may have other needs for life insurance. For instance, companies often opt to insure the life of a “key person” or someone whose talents are expected to contribute to large profits over the life of your company. If permanent insurance is used in this type of situation, you may commit to turn the policy over to the key employee at retirement age. At that point, your employee may decide to redeem the policy for its cash value or he or she may opt to leave the plan in force to build an estate. Either way, the insurance can double as protection for your company and as an incentive for long-term loyalty on the part of your valued employee.
Another common business use of life insurance is “partnership insurance”. This type of plan enables the family of a deceased business partner to receive their full share of the value of the company immediately and in cash. At the same time, the ongoing potential of the business is not crippled with what might be a massive unexpected financial liability.
There are other “wildcard factors” that could spell a need for life insurance. Extra costs before death, for instance. People rarely drop down dead. We all know of people who died having first experienced long periods of illness that brought with them many direct and indirect expenses. In order to help provide care, family members may have left their employment thereby suffering a loss of income. In such cases, these economic challenges may be partially offset by life insurance.
Other financial considerations you may face include funeral costs, probate and estate disbursement fees, death certificates, and transportation help for family members who may have to travel from afar. Death will pose its own set of emotional challenges, but it can be easy to make sure that money stress isn’t added on top of everything else. Arrange for adequate volumes of life insurance and do it while you are young and most likely insurable.
Your starting point is to consult a life-licensed financial consultant who can provide you with appropriate insurance options after fully considering your present financial situation and your future goals. Once your insurance is in place, review your plan from time to time in order to take into account any relevant changes.
Finally, affairs in order, fear not that empty seat next to you on your next bus ride.
Rock Hutsul is the Hope Standard’s finance columnist, giving you rock-solid advice for a sound financial present and future. Reach him at rhutsul@telus.net.