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Taxation of Life Insurance

Photo of Life Insurance information

How is Life Insurance Taxed

How is Life Insurance Taxed?

Life insurance can be divided into two types: term and permanent. Term insurance has no investment component and pays out a tax-free death benefit. Generally universal life or whole-life is designed to last throughout your life time. It often has an investment component allowing you to build up cash values inside the policy in a tax-sheltered manner.

The laws regarding the taxation of life insurance in Canada are anything but straight forward and can be a complex topic; the best possible advice will come from a tax professional that 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.

At time of Claim

The life insurance policy is settled in the form of a death benefit when an insured person dies. This death benefit 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.

The second area is a little more complicated. A life insurance policy can be used as an investment tool. A universal life or whole-life insurance can have a cash value that can potentially pay dividends or income, it has the potential to outgrow the amount paid in premiums. In those cases, the difference is considered a taxable gain. If the policyholder surrenders their coverage the money that is paid that is in excess of the policies’ ACB is taxable. The ACB is calculated as the premiums paid less the cost of the actual insurance.

It is always advisable to speak with a tax professional as they can help you evaluate the different options available to you. SolutionsFinancial.ca helps Canadians get in touch with financial advisors who can help you get the coverage you need, at the best possible price.

Return of Premium Life Insurance

Return of Premium Life Insurance

So you’ve decided that you want the protection that only life insurance can provide for you, now what? What most Canadians will do will conduct online research. Next, deciding which particular type of insurance will best cover their needs. The choices that you have boil down to three basic types: term life insurance, whole life insurance and return of premium (ROP) life insurance. If you’ve made it this far, chances are you’re more than familiar with both term and whole life insurance but a little unsure as to what exactly ROP insurance is and the advantages it offers.

Return of premium life insurance is essentially a hybrid of term and whole life. Like all policies, it guarantees a death benefit should you pass away. It is similar to term life insurance in that it provides coverage over a specific period of years, and like whole life insurance you do get money back.  But unlike whole life insurance buying return of premium life insurance is a lot more straight forward, in that you only select the amount of coverage you desire and for how long. If you outlive your policy’s term, you get all the money you paid in premiums returned to you.

The cost of Return of Premium Life Insurance 

As a rough guide, ROP insurance is approximately 50% more than a comparable term plan. It is important that a ROP plan is not mistaken for an investment tool as it offers no returns. It is for this reason many financial advisors suggest a term life insurance, while investing the difference.

We can help

At SolutionsFinancial.ca we know that life insurance shopping can leave most people’s heads spinning, SolutionsFinancial.ca is here to help guide through all the different plans available. If you’re interested in getting the best coverage available at a price you deserve then we can help. All we need is a little information, and we’ll take care of the rest. SolutionsFinancial.ca is simply the quickest and easiest way to life insurance in Canada.

My Best Financial Tip

My Best Financial Tip

Credit Cards

Credit cards generally have very high interest rates compared to conventional loanMy Best Financial Tip

Some people use their credit cards and never pay interest, how you say – by paying the entire balance of the statement on or before the due date. Many Canadians today only pay the minimum required amount that is stated on their credit card bills, even though this practice usually ends in misery for the cardholder and puts unnecessary strain on their family. Credit cards generally have very high interest rates compared to conventional loans, for example – bank loans, lines of credit and car loans. Credit card interest can accumulate quickly at 28.8%, however when considering compound interest this increases the outstanding balance even quicker making the cardholder feel more anxiety and despair.

Here is a list of 10 things that you could do to not fall into the credit card trap. 

  1. Never pay credit card interest always pay the balance of each statement.
  2. Ask yourself this question before using your credit card; is this what I need or what I want.
  3. Never put automatic payments on your credit card.
  4. Leave your credit card at home when going out to shop.
  5. Never pay the balance late.
  6. Never exceed the credit card limit.
  7. Only have 2 credit cards maximum.
  8. Make sure keep the available credit low.
  9. Never let anyone use your credit card
  10. And if all else fails freeze the card in a block of ice and hope like hell the urge passes before the block melts.

In conclusion people have to look at a credit card as a tool and not a way of borrowing money. To minimize the dangers of hurting your financial health be aware of the 10 points above, also choose your credit card wisely some have annual fees and extra charges for the way you use the card.  My best financial tip is never pay credit card interest and always pay the balance on your statement every month on or before the due date.

Visit the Solutions Financial website for help in securing your Financial Security needs and obtaining your Financial Freedom in the future years to come.