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How to Use Insurance as an Estate Planning Tool

How to Use Insurance as an Estate Planning Tool

For individuals, the idea of designating a Beneficiary for our assets is common and helps us plan the distribution of our assets at death. We can do this through Wills, group benefits, and personal insurance, among other products.  How to use Insurance as an Estate Planning Tool? What isn’t common knowledge is that our assets, designated through an insurance product, do not form part of our Estate, and are deemed to be in the interest of our Beneficiaries.  This can be extremely advantageous to the insured and the Beneficiary, depending on their various goals and interests.

When discussing insurance, I often highlight a couple of basic ideas.

  1. While the insured is alive, any invested portion is typically safe from the claims of creditors in the absence of fraud or bankruptcy.
  2. The proceeds of an insurance contract, at the death of the insured:
  • flow directly to a designated beneficiary on a tax-free basis.
  • are available as soon as the claim is paid.
  • allow them the flexibility to direct funds to their priorities.
  • are typically protected from creditors of the insured.
  • are typically not of public record.
  • are not included in the value of the insured’s estate for the purpose of calculating Probate fees.
  • can be paid as a lump sum, or as a series of payments (annuity / structured settlement), providing the insured with a sense of control from ‘beyond the grave’.
  • can also be designated to extended family members.
  • can be designated to a charity, trust, corporation, etc., for tax planning purposes.

I then contrast how financial assets held personally, like property, savings, shares in a corporation, etc., will be subject to Estate fees and potential taxes and creditor claims before the Estate Trust can be wound up. This typically takes between six months and three years to complete.

Next, I note that government-sponsored programs like RRSPs, RRIFs, TFSAs, etc., are subject to the same tax treatment regardless of where they are administered (bank, insurer, credit union), but funds may be available to a beneficiary more quickly through an insurer, provided taxes have been paid.

Finally, I explain how Beneficiaries must be designated upon the purchase of a life insurance policy or an insured investment.  The insured can select one or more primary beneficiaries and one or more contingent Beneficiaries. In the case of minor Beneficiaries, a trustee for the proceeds must be named. If your Beneficiary(ies) die before you can address the issue, then the insurance proceeds will become part of your Estate and will be subject to claims of creditors and Probate fees like any other asset.

One prominent insurance company lists the following issues concerning Beneficiaries:

  • Failing to name a Beneficiary (assets go to Estate and you will have to pay Probate fees – now called Estate Administration Tax)
  • Naming minor children (judge decides who administers assets)
  • Naming a child with special needs, or a dependent adult (government benefits may be disqualified)
  • Ignoring spousal rights (courts may intervene)
  • Ignoring tax consequences (CRA could become involved)
  • Failing to update Beneficiary forms (the wrong person may get assets)
  • Naming only one Beneficiary (may predecease you)
  • Using non-specific Beneficiary designations (ex. My children)
  • Losing Beneficiary designation forms (changes may not have been received by the insurer)
  • Tax planning (charitable giving, trusts, and family interests)
  • Group benefits (often overlooked)

With respect to Estate and Financial Planning, please remember to consult your qualified and designated lawyer, tax advisor, and insurance advisor to achieve the best possible results for all your financial goals.

It is SMART to review all your options in Estate Planning.

Jamie Lepper transitioned from education to the financial sector in 2003. He specializes in brokering life and health insurance to build wealth and protect individuals, families, and small to medium-sized businesses. He can be reached at 289-213-6449, or by email at jamie@lepperfinancial.com


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This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.