Published at 8 July 2024

Do you need life insurance if you’re wealthy?

Do you need life insurance if you’re wealthy? Here are 8 ways you can use life insurance to help grow and protect your wealth.

Life insurance is something everyone can benefit from. However, it’s especially important for those with a high net worth. It can help provide protection for your family, grow your wealth, assist with estate planning and more.

How to use life insurance to grow and protect wealth

1. Protect your wealth

If you have a life insurance policy and designate a beneficiary other than your estate, the full life insurance payout goes to your beneficiary. Creditors of your estate can’t go after that payout.

2. Divide your estate

Estate equalization means balancing your estate among your heirs. However, dividing an estate equally may be a challenge. For example, let’s say you want to leave a cottage worth $900,000 to one child. And you also want to leave $600,000 worth of investments to another.

A $300,000 life insurance policy could solve this imbalance. It allows you to top up the lesser inheritance so both children inherit equal value.

3. Tax-free payout

For the most part, life insurance payouts are not taxable in Canada. This means your beneficiaries receive the full amount you want to leave them.

4. Protect your estate

Life insurance can help protect the value of your estate. Here are three ways it can help with estate planning if you name your estate as the beneficiary of your policy:

    • The life insurance payout can be used to pay probate expenses. These are fees charged by the government based on the deceased’s estate value. The payout can also be used to pay for executor’s fees and other legal expenses.
    • Beneficiaries can use the funds to pay off estate debt. This avoids the need to sell part of your estate to raise cash.
    • The payout could help cover funeral costs.

5. Diversify your portfolio

Life insurance isn’t often thought of as an investment. But it has gained recognition as an alternative asset class. This is because permanent life insurance often offers better rates of after-tax return than more traditional investments. This includes GICs and government bonds.

6. Provide extra tax-free retirement income

Permanent life insurance can be used as an additional tax-efficient source of retirement income.

One way is to use the cash surrender value* of the policy as collateral for a loan from a financial institution. The financial institution gives you a series of loans, for which the insurance policy is collateral. Under the current laws, the loan proceeds are received-tax free.

The loan arrangement can be set up so that no interest is payable on the loan until death. Upon death, part of the payout goes to cover the loan and the rest goes tax-free to your beneficiaries.

7. Fund a buy-sell agreement

A buy-sell agreement, often funded by life insurance, helps protect your business, family, and business partners. When a co-owner dies, the insurance proceeds are used for buying out the deceased’s shares from their family.

8. Support a cause

Permanent life insurance can be a great way to support your favourite cause.

Here’s a couple of ways how. One is to set up a charitable giving rider. It can pay a percentage of the policy’s value to your charity of choice.

The other is a policy donation. This is where you apply for permanent insurance. Once the policy is approved, you can transfer ownership of the policy to a charity. You then pay the annual premium and receive a tax receipt each year for that amount.

Source: SunLife

This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.