Last week, when we mentioned that life insurance can serve a certain need in retirement, we specifically noted the use of permanent insurance. Since all term policies expire at age 80 or 85, they cannot be relied upon to pay out a death benefit. Therefore, a permanent policy must be used to ensure that the funds will be available when needed. Many of the estate planning goals do not require a benefit to be paid on each death. Instead, the goals can be achieved by having a single death benefit paid on the last survivor's death. An effective and relatively inexpensive life insurance policy that covers two people but only pays on the last survivor's death is called joint last-to-die life insurance.
As we travel through the journey of life, our financial needs and obligations undergo constant change. For example, your financial obligations increase once you are married, and continue to do so as your family grows in size. It should come as no surprise that insurance varies in importance at different stages of life. Proper planning at each stage of life is necessary to ensure that you and your dependents are protected. Without knowing the risks and a plan to minimize the risk, you are potentially exposing your family to a financial disaster. Here are which types of insurance you should be aware of at each stage of life.
In Canada, income is taxed using a marginal tax rate system, where high income earners are taxed more heavily on each dollar they earn than a lower income earner. Tax planning strategies usually involve some kind of tax splitting with lower income earners of the family, such as a spouse or child under 18. The government restricts the benefits of income splitting with attribution rules, which are designed to attribute income back to the high income earner of the family.
Many people assume their life insurance needs decrease as they become more successful financially. They believe that their dependents can survive on their accumulated wealth, so life insurance is no longer necessary. While this is true to a certain extent, other life insurance needs will arise as their net worth increases. Some people have built up a significant amount of wealth over their lifetime. They've worked hard and have put their blood, sweat and tears into accumulating their assets. What is most important to them, after they have achieved their retirement goals, is to keep their estate intact for the next generation. In Canada, the biggest impediment to this is taxes. There are several options available to Canadians for funding this tax liability. Which method is the best?
What if there was a way to give a birthday present to your child or grandchild every year, even after your death? A method that doesn't involve costly trusts or confusing clauses in a will? With a lifetime gift annuity, you can ensure that your child or grandchild will have you in his mind as his birthday comes along. A lifetime gift annuity pays out a tax-efficient annual income for the rest of his life. Like the insured annuity, the lifetime gift annuity is another strategy used as a solution for some of the common problems facing Canadians today.
Understanding the taxation of financial instruments is imperative to financial planning. Imagine planning for your retirement without consideration for taxation of investments during the accumulation or drawdown phase. Your assumptions will be off target and you are unlikely to reach your goal. The same principle can be used to explain why taxation of life insurance is so important as well. There are many different interactions within a policy that can trigger tax, but the first step to understanding taxation of life insurance is knowing the difference between exempt and non-exempt policies.
Charitable giving is an important part of many people's lives. Charities depend on benevolent individuals and corporations for funding so that they can improve our communities and help those in need. As a donor, you are contributing to an organization you feel strongly about and ensuring that it can continue to enrich people's lives. In Canada, you are also rewarded for your gesture with the charitable donations tax credit. The tax credit provides tax relief for donors and incentive for them to give.
Last week we looked at when you should perform a life insurance review. One of the suggestions that was brought up during a review was to replace your current policy if a new one would better serve your needs. How do you determine if a new policy is more suitable for you? In which way is it better? Worse? Is there a cash surrender value in the old policy that would trigger tax if you cancelled it? Would you qualify for a new policy for the same or better rate? These are all questions that you need to ask before replacing a life insurance policy.
An insured annuity is a retirement strategy that can increase your after-tax income while leaving a large estate to your beneficiaries. It makes use of a life insurance policy to provide the legacy and a prescribed annuity to provide the income. As the case study shows, using the concept of an insured annuity increases the income that you can receive over a GIC strategy.
If you are nearing retirement and live in Canada, you may know that one of the options when your RRSP matures at the end of the year you turn 71 is to use the funds to purchase a life annuity. Of course, an annuity can also be bought before you reach 71 and there's no requirement that it must be bought with registered money. There are many options for the types of annuities you can choose. In this post, we'll sort through all the different types of annuities that are available to fund your retirement.