The laws regarding the taxation of life insurance in Canada are anything but straight forward. This article will discuss the basic components, but as this can be a complex issue, the best advice can only come from a certified professional who can assess your own individual circumstances. The subject of taxes and life insurance are basically broken down into two main areas; the payments that are made at death, and the payments that are made during life.
When an insured person dies, the life insurance policy is settled in the form of a death benefit. When the death benefit is paid out as a lump sum of cash then it is not subject to income taxes, federally or provincially. Because these proceeds are protected from income tax, life insurance is an ideal way to transfer assets to your beneficiaries tax free. If an arrangement is made where a policy is held by the insurer and paid out in installments, then a portion of the policy is taxable. This is because the insurance company continues to build interest with the money it holds, and this interest is considered additional taxable income.
The second area is a little more complicated in that a life insurance policy can be used as an investment tool. As a whole life insurance policy has a cash value that can potentially pay dividends, it has the potential to outgrown the amount paid in premiums. In those cases, the difference is considered a taxable gain. If the policyholder elects to surrender their coverage, then any money that is paid that is in excess of the policies’ cash value is taxable.
It is always advisable to speak with a financial professional advisor as they can help you evaluate the different options available to you. LifeCover.ca helps Canadians get in touch with certified financial advisors who can help you get the coverage you need, at the best price.