GUEST COLUMN: Insurance can help

Insurance can also help you enhance and protect your family’s wealth.

When people think of insurance, they usually think about home, auto and life insurance. But insurance can also help you enhance and protect your family’s wealth.

Here are three ways insurance can help provide financial peace of mind for you and your family.

Wealth creation – It’s important to know that your family would be financially secure if you became unable to earn an income due to illness or disability, or if you passed away prematurely. Critical illness insurance can provide a lump-sum payment to help with your family’s day-to-day financial needs, and cover any extra health care costs not covered by the government, while you focus on getting better.

Life insurance can help create wealth that you would have otherwise created if you hadn’t passed away. The funds can be used in any way your family needs: to help with mortgage and other debt payments, to fund your children’s education costs, or to cover daily living expenses.

Estate preservation – You are probably familiar with Benjamin Franklin’s quote: “In this world nothing can be said to be certain, except death and taxes.” Unfortunately, death and taxes often go hand in hand.

While you can pass along your assets tax-free to your surviving spouse, you can’t pass them along to anyone else without triggering taxes. Unless you have a surviving spouse, there is a deemed disposition of your assets at death. In other words, the government considers your assets – whether they have really been sold or not – to have been disposed of at fair market value, triggering the associated income taxes.

Everything from stocks and bonds held outside your registered retirement plans to the family cottage is taxable in the hands of your beneficiaries. Any remaining funds in your registered plans are also taxable on your final tax return – nearly half could go to the taxman.

To help preserve the value of your estate for your beneficiaries, consider the cost/benefit of a life insurance policy to help fund your estate’s tax liability. A life insurance policy can either provide a fixed death benefit, or one that grows with the tax liability.

Tax-exempt investing – If you hold a large percentage of interest-bearing bonds and GICs in your non-registered investment portfolio, you will be very familiar with the one-two punch of high taxes and inflation. Between your interest income being fully taxable at your marginal rate, and inflation slowly eroding away your purchasing power, you’re almost better off putting these funds under your mattress.

A potentially interesting solution is tax-exempt insurance, where any income generated by your assets can accumulate on a tax-deferred basis, as they do in a registered plan. And you can access the funds by taking out tax-free loans using the insurance policy as collateral.

Because of these advantages, many high-net-worth Canadian families have come to regard tax-exempt insurance not so much as insurance, but rather as a third investment pool, complementing their registered retirement plans and non-registered investment portfolios.

However, there is also an insurance benefit to tax-exempt insurance – a completely tax-free death benefit that your beneficiaries can use to cover estate taxes, or for any other purpose, such as creating a family trust or a charitable legacy.

Kirbey Lockhart is an investment advisor with RBC Dominion Securities. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.