Tax Uses Of Personally-owned Life Insurance
There are three main uses of personally-owned life insurance
- defer taxes
- prefund taxes
- earn tax credits
Defer Taxes
- investment earnings grow tax-free in exempt life-insurance policy
- tax regulations limit how much money can
- go into the policy (analogous to RRSP contribution limits)
- stay in the policy
- on death of life insured, the surrender value portion of the death benefit goes to the beneficiaries tax-free
- the investment growth is never taxed
Prefund Taxes
- “prefund” the projected tax liability at the death of the taxpayer on
- registered savings
- capital gains triggered by deemed disposition
- recapture of Capital Cost Allowances (depreciation) triggered by deemed disposition of depreciable capital property
- Note: on first death, can rollover RRSP proceeds or dispositions of capital property to surviving spouse tax-free —> Joint Last To Die policy
Earn Tax Credits
- gift a new policy
- donor buys a new life policy and transfers full ownership to charity and continues to pay premium; premium treated as charitable donations
- gift an existing policy
- donor gets charitable donation receipt for cash surrender value and any ongoing premium payments
- gift a death benefit
- donor retains ownership of policy and names charity as the beneficiary
- estate gets charitable donation receipt for use on terminal tax return
- if amount greater than 100% at year’s income, can carry back one-year
page revision: 6, last edited: 17 May 2007 16:39