Learn about the taxation of insurance.

Life Insurance

• premiums for individual life insurance are not tax deductible → death benefit is tax-free
  • regardless of whether ownership is personal or corporate

Exceptions

Life insurance premiums are only tax deductible when the policy is

1. assigned as collateral for a loan
2. donated to a registered charity
3. part of an RRSP

Collateral Life Insurance

• the lender requires insurance as a condition of granting a loan (collateral assignment)
• can deduct min{NCPI, actual premium} related to the current loan balance
  • deduction decreases as loan principal decreases
• if the life insured dies
  1. the tax-free death benefit goes to the lender to payoff the outstanding loan
  2. any remainder goes to the beneficiary specified by the policyowner

Charitable Life Insurance

• insurance policy is absolutely assigned to a registered charity (which then becomes the policyowner and beneficiary)
• different methods
  • donating the premiums
    • premiums paid qualify for a nonrefundable charitable tax credit
    • death benefit → charity tax-free
  • donating the death benefit
    • at death, nonrefundable charitable tax credit for the death benefit
    • death benefit → charity tax-free

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Registered Life Insurance

• policyowner registers the cash surrender value as an RRSP
• gets tax deduction for the portion of the premium which goes to the cash surrender value
  • no deduction for the portion of the premium used for the life insurance charges
• cash surrender value taken while alive is fully taxed as interest income
• at death of the insured, the insurance portion goes to the beneficiary tax-free and the cash surrender value portion is taxed as any other RRSP
• usual RRSP rules apply to the registered cash surrender value (e.g., over contributions, maturity options, etc.)