How does life insurance fit within my estate planning?

5 minute read Published on Feb 14, 2022 by BrokerLink Communications

How does life insurance fit within my estate planning?

Has estate planning been on your to-do list but is often pushed aside for another day? You’re not alone. There are many factors to consider and it can be a confusing process. This article can help you learn more about estate planning, including the benefits, steps to take and how the right life Insurance policy can help protect the ones you love financially.

What is estate planning?

Let’s start with the basics: what makes up your estate? Your estate is everything you own. For example, land and real estate, possessions, such as cars, art collections, furniture, cash, stock, bonds and other assets. When you start to review your assets, you’ll realize that planning for your estate should be done sooner rather than later!

Estate planning includes the action of documenting all your assets and deciding how they will be distributed to loved ones or charities after death. This can be an ongoing process, as you may acquire more possessions or make further investments, but starting your estate planning early can relieve future stress and you may enjoy your time knowing your assets will go where you intend.

Benefits of estate planning

Estate planning can be driven by your emotions and by logic. You may want to ensure everyone important in your life is taken care of to the best of your abilities, like your family members, friends and charities close to your heart. You may also want to organize your assets, so your family isn’t left with the burden of taking care of final expenses, debt, or simply who should get what you have left behind.

Estate planning can help by:

  • Creating a sense of relief that your estate will be distributed according to your wishes.
  • Reducing stress of your loved ones by organizing your own estate.
  • Providing financial support to those close to you or to charities that are meaningful to you.

Steps to estate planning

From start to finish, the following steps can help ensure you have the right plan in place:

  • Contact a trusted advisor – Is there a consultant that you already trust, such as a lawyer or financial advisor? If so, they can help you start the process of estate planning.
  • Take the time to set your estate planning objectives – Are you single, have kids, a spouse or are in a common-law relationship? Do you own a business? These are important factors to consider when estate planning.
  • Develop your plan – Your advisor(s) will help you with this process, however, you will need to be prepared to give your time and careful thought to ensure your plan is accurate.
  • Share your plan – You may share your plan with those close to you, whose input you value. This can help you think about the assets you have allocated.

Here’s a tip from one of our expert insurance advisors

When dealing with potential advisors, ensure they are credible and have a proven track record, especially when it comes to something as important as estate planning.

Life insurance and estate planning

Life insurance is an important element in the estate planning process. When an individual passes away, the assets in an estate, whether it’s a family farm, a cottage or shares in a business, are considered for tax purposes as if they are to be sold at fair market value. A life insurance policy can be structured in such a way to ensure there is sufficient funds to take care of any final taxes and not erode the value of your estate.

It’s also important to know that any payment made to beneficiaries listed on a life insurance policy is confidential. No one will need to know how your affairs have been settled. Any death benefit paid to the estate is subject to probate and subsequent probate fees. The details of the estate and the terms will become a matter of public record.

Joint Last-to-Die life insurance

One half of the capital gains, which are referred to as “taxable capital gains” is included in income, along with other income in the year of death. It’s possible to defer the capital gains by passing the property to a surviving spouse, however, the tax will then apply to future death of the survivor.

A very good way of reducing the tax consequences on death of the surviving spouse is through the use of a Joint Last-to-Die insurance policy. This policy insures both spouses with the death benefit being paid out upon the death of the surviving spouse – precisely when it is needed to pay the tax bill. If there isn’t enough cash to pay the Canada Customs and Revenue Agency (CCRA), then assets will need to be sold. Sometimes this may prove difficult or undesirable due to market conditions.

In general, people preserve their estate with Joint Last-to-Die insurance, so that the estate passes to their children or other beneficiaries intact. Since life insurance is paid out upon the death of the insured, the money can be used to pay the income tax and all other expenses incurred as a result of the death rather that selling the assets to pay the liability.

How much life insurance is enough?

There are many factors to consider when purchasing life insurance. Considerations like the ones listed below can help your insurance advisor understand the policy that’s right for you:

  • Do you have dependants?
  • Do you own your business?
  • Are you concerned about the financial burden of your funeral costs?

You may also have different needs from your insurance policy, depending on the stage of life you’re in, and that’s okay! Your life insurance policy can be customized to meet your needs.

BrokerLink offers several life insurance options, including the following:

  • Term life insurance: Offering short-term protection, term life insurance is meant for a defined period, typically 20 or 30 years. Once your term is up, you may have the option to renew or select a different policy.
  • Whole life insurance: This policy is intended to provide you with financial security for your entire lifetime. This type of policy does not have a defined time period and includes savings that are invested by your provider.
  • Universal life insurance: This is a variation of whole life insurance. With universal life insurance, an investment component is included, so you can grow tax-free cash value.

Get in touch with an experienced insurance advisor

Life insurance with BrokerLink can help give you and your family peace of mind. Contact a BrokerLink Insurance Advisor today to discuss the life insurance options that are available to you! It’s easy to get in touch with us!

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Estate Planning and Insurance FAQs

Is life insurance considered inheritance?

Life insurance is an element of your estate planning. It’s very important as it can help pay any taxes owed on property and final income taxes the estate. Life insurance helps to ensure the beneficiary receives what was intended by the insured.

How can you avoid probate?

One of the first things to do when estate planning is to speak to a trusted advisor, including a lawyer or financial planner. They will be able to advise you about how to manage your estate, including taxes and fees that may occur once the insured has passed.

Who can be the beneficiary on a life insurance policy?

Your beneficiary can be your spouse, family member, friend or charity. You can also choose to name more than one beneficiary, and if this is the case, your insurance company will distribute the benefit between them.