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The role of life insurance in estate planning.

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The role of life insurance in estate planning.
OMA Insurance
Life insurance plays a vital role in estate planning, including preserving the value of your estate, providing financially for dependants or a surviving spouse, and ensuring money is available to pay for any taxes, fees, or other outstanding debts upon death.

Any estate — large or small — will require money to pay taxes, administration expenses, and outstanding debts. Estate liquidity is also very important for providing living expenses to a surviving partner, spouse or dependent children.

Last month's column discussed the importance of a will in effective estate planning. This month, we look at the vital role of life insurance in the estate plan.

"One of the greatest benefits of life insurance is that it provides tax-free money to your beneficiary," said Alban Moran, senior consultant, OMA Insurance Services.

"Life insurance can not only be used to protect surviving dependents, but also to create, increase or preserve funds to ensure the fair and equitable distribution of your estate," said Moran.

Providing for Your Dependents

Life insurance proceeds can replace earnings, pay debts, or provide for the education and daily living expenses of your family and dependents. Also, there may be particular circumstances that warrant careful consideration.

"If you have a special-needs child who requires care for a lifetime, life insurance can provide the necessary funds. In the case of a divorce or separation, the court may order that life insurance be in place to continue support obligations," said Moran.

 Normally, life insurance proceeds are paid in one tax-free lump sum to your beneficiary. "However, insurance contracts can also provide a number of settlement options, such as purchasing an annuity with the proceeds. This would allow for payment of the death benefit in installments over time," Moran advised.

This may be something to consider if there are concerns with the money management skills of your beneficiary.

Preserving Your Estate

Life insurance proceeds can be used to pay debts, taxes and other estate costs so that estate assets, such as registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs) are not eroded to pay these expenses. Capital gains tax, tax associated with registered plans, estate taxes and probate fees can all be covered by life insurance.

"Canada Revenue Agency considers a deceased taxpayer to have disposed of all depreciable and non-depreciable capital property for fair market value immediately before death," said Moran.

Examples of depreciable capital property include equipment, buildings and business vehicles. Non-depreciable property includes shares of a corporation, partnership interests, mutual or segregated fund units, recreational property and land.

Life insurance can provide the necessary funds to pay capital gains taxes, and is particularly important if beneficiaries wish to retain property, or if market conditions will not provide the estate with an amount equal to fair market value.

"The best advice I can give is to consult a qualified insurance professional, because there can be many tax scenarios with capital property. There is no 'one size fits all' solution," added Moran.

Life insurance is also often used to replenish an estate. Debts may erode what would otherwise be available to beneficiaries. "By having life insurance to pay the debt, your estate may remain intact for your heirs," said Moran.

Registered Plan Tax Liabilities

Similar to property, Canada Revenue Agency considers that upon death, a taxpayer disposes of RRSPs and RRIFs for proceeds equal to their fair market value. This means the funds from these plans are fully taxable in the year of death.

"As with capital gains liability, life insurance can fund the tax liability resulting from bringing registered funds into the income of a surviving partner or spouse," explained Moran.

Probate Fees and Other Estate Costs

Probate is a legal process that validates your will and confirms the appointment of your executor(s). Probate fees are based on the value of your estate and vary from province to province.

"Life insurance can provide the necessary funding for probate costs, burial and funeral expenses, estate administration costs (i.e., executor fees, valuation and appraisal fees) and any legal or accounting fees that may be incurred," said Moran.

Life insurance policy proceeds are paid directly to your beneficiary and do not form part of the assets of your estate for tax purposes.

The liquidity and prompt availability of insurance proceeds are beneficial in covering the varied costs, fees and expenses associated with estate processing.

Creating Your Estate

Life insurance can be an efficient way to create an estate or pass on wealth to next generations as more funds can be provided to heirs tax-free.

 "Another common use for life insurance is to facilitate equal distribution to beneficiaries," said Moran.

An example would be an estate that includes shares of a business to be distributed among family members who are active in the business.

"Often, the business represents the major asset of the estate; the value of the remainder to be divided among non-active family members is significantly less. Life insurance can provide additional funds to ensure fairness," noted Moran.

Leaving Money to Charity

You can use a life insurance policy to make charitable donations. The proceeds go to the organization you name as beneficiary.

"If the charity is registered with Canada Revenue Agency, the premiums can be tax-deductible," said Moran. This is another method of reducing the tax burden of your estate.

Protection from Creditors

"Your beneficiary designation affects whether or not life insurance proceeds are protected from your creditors," cautioned Moran.

Provincial insurance laws provide that where a spouse, child, grandchild or parent is a beneficiary, insurance proceeds are exempt from seizure by creditors. Laws vary from province to province, so be sure to ask your advisor about your specific situation.

Is Life Insurance Right for You?

"Life insurance can serve many purposes and meet various needs throughout a physician's lifetime, even as those needs change through the years," concluded Moran.

Even if you already have life insurance protection in place, depending on when you last reviewed your estate and insurance needs, it may require updating.

As an OMA member, you have access to a broad range of easy and affordable life insurance solutions that meet your unique needs. Contact your OMA Insurance Advisor today to discuss protecting what's important in your life.

For assistance in finding the right insurance solutions to suit your needs, please contact OMA Insurance Services at 1.800.758.1641, or email to schedule an appointment with one of our non-commissioned OMA Insurance Advisors.

Additional information is available on the Insurance Services website at: