Tax Uses Of Personally-owned Life Insurance

There are three main uses of personally-owned life insurance

  1. defer taxes
  2. prefund taxes
  3. 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
  • 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

  1. 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
  2. gift an existing policy
    • donor gets charitable donation receipt for cash surrender value and any ongoing premium payments
  3. 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

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