Rich also buy life insurance

Popular wisdom suggests that as people accumulate wealth their need for life insurance decreases.

However, permanent life insurance is a financial tool with unique tax benefits.

Many affluent families find significant value by using life insurance to protect and even enhance their wealth.

People buy life insurance either for temporary income protection or for long term wealth preservation. When you are young, life insurance is used to protect your family by providing money to replace your income.

However, as we approach retirement our need for income replacement lessens and the focus switches to wealth protection.

Wealth protection is a long-term concern, so it requires permanent solutions. Permanent life insurance is a tax efficient tool that many Canadians use for one of the three following concerns:

Estate preservation

Some Canadians have built up significant wealth in certain assets (such as RRSPs, second properties, businesses, etc.) that may trigger significant tax liabilities when those assets transfer to the next generation.

Where does the money come from to pay that tax bill?

Your beneficiaries could liquidate some of your assets or borrow the money. Or, prior to your death, you could try to save the additional funds required.

What if you funded that tax bill with insurance?

Insurance is typically the most efficient and effective solution as the money arrives tax free when needed most.

If you are concerned about a large tax bill when you pass away or that your beneficiaries may have to sell off estate assets to fund it, then you should consider an estate preservation strategy to preserve the value of your estate.

Estate equalization

Many Canadians have a strong desire to leave the value of their assets equally to their beneficiaries. But some have certain assets that are unique and destined for only one beneficiary (or a group of beneficiaries) such as a business or vacation property.

Blended families also often require estate equalization strategies to ensure each family line is protected and treated fairly. Even if estate preservation has been addressed, the nature of some assets can make it difficult to divide equally among your heirs.

Leaving certain assets to specific heirs is also likely to create inequality and friction.

To address these complexities, most affluent families find that life insurance is a cost-effective way to provide the liquidity needed to make estate values more equitable.

This solution is even more effective where a private corporation is involved. With an estate equalization strategy, the tax-free life insurance death benefit proceeds provide liquidity which helps balance out estate values while still achieving your asset distribution goals in a cost-effective way.

Estate maximization

Some Canadians have more income and/or assets than they will need for retirement and have a strong desire to leave a legacy.

Most people assume that investments are always the best way to increase the value of their estate. Others believe real estate or business ownership are the solution.

While all of these are useful, they do come with tax implications.

What if you were to move some of that excess money that may be attracting annual taxation into a life insurance contract?

An exempt permanent life insurance policy provides tax-deferred policy growth while you are alive and pays out tax-free on death to your named beneficiaries (or estate).

If maximizing the size of your estate is important, then you should consider an estate equalization strategy”.

With this strategy, you increase the size of your total final estate by moving surplus funds, which may be currently exposed to tax, into an exempt permanent life insurance policy.

You can potentially reduce the amount of taxes payable during your lifetime, avoid associated probate fees on the death benefit amount and create a larger pool of tax-free money at death, thereby maximizing your estate values.

As you can see, life insurance is an important financial tool, with unique tax benefits, used by many affluent Canadians, particularly when looking to optimize their overall estate plan.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.