When it comes to financial planning, many people focus on building wealth through investments, real estate, and businesses.
However, an often overlooked aspect of protecting this wealth is ensuring that it isn’t depleted by unforeseen expenses or taxes after the death of a loved one. Whole life or permanent insurance plays a crucial role in preserving family assets, such as homes, cottages, and businesses, by providing the liquidity needed to cover capital gains taxes and other financial obligations without forcing a sale of these valuable properties.
Understanding the Impact of Capital Gains and Taxes
When an individual passes away, the Canada Revenue Agency (CRA) considers that person to have disposed of all their assets at fair market value, when the assets are passed on to your children or anyone other than your spouse. This "deemed disposition" can result in significant capital gains taxes, particularly for properties and investments that have appreciated in value over time.
For example, if you own a cottage that has increased in value by $500,000 since you purchased it, your estate could be responsible for paying capital gains taxes on that appreciation. Without sufficient funds set aside, your family may have no choice but to sell the cottage or other assets to cover the tax bill.
In Canada, 50% of the capital gain is taxable, and this taxable portion is added to the deceased income for the year and taxed at their marginal tax rate.
Canadian Revenue Agency
How Whole Life or Permanent Insurance Helps
Whole life or permanent insurance provides a death benefit that can be used by your beneficiaries to cover these taxes and other expenses. Unlike term insurance, which only lasts for a specified period, whole life insurance covers you for your entire lifetime, ensuring that your family will receive a payout whenever you pass away. This makes it an ideal tool for long-term financial planning.
Key Benefits of Whole Life or Permanent Insurance:
- Liquidity for Estate Taxes: The death benefit from a whole life policy provides immediate liquidity to your estate, ensuring that your heirs have the funds to pay capital gains taxes without selling off cherished assets like a family home, cottage, or business.
- Preservation of Family Wealth: By covering the tax liabilities, whole life insurance helps preserve the full value of your investments, properties, and other assets for future generations. Your family can continue to enjoy these assets without the financial pressure to liquidate them.
- Guaranteed Payout: Whole life insurance guarantees a payout as long as the premiums are paid, providing peace of mind that your family will have the financial support they need when the time comes.
- Cash Value Accumulation: In addition to the death benefit, whole life policies also accumulate cash value over time, which can be borrowed against or withdrawn during your lifetime, offering flexibility for other financial needs.
Protecting Businesses and Other Assets
For business owners, whole life insurance can be particularly valuable in ensuring that the company remains intact after the owner's death. The death benefit can be used to pay off any outstanding debts, cover the cost of a buy-sell agreement, or provide the necessary funds to continue operations without financial disruption.
Similarly, if you own multiple properties or have significant investments, whole life insurance can help your heirs avoid the need to sell off these assets quickly, often at a lower price, just to cover taxes and other expenses.
Conclusion
Whole life or permanent insurance is a powerful tool for protecting your family’s financial future. It ensures that the assets you’ve worked hard to build—whether it’s a family home, a cherished cottage, or a thriving business—can be passed down to your heirs without the burden of unexpected taxes or financial hardship. By incorporating whole life insurance into your estate planning, you can provide your loved ones with the security and flexibility they need to maintain and enjoy the wealth you’ve created.
