Tuesday, 25 July 2017

Do you need life insurance for estate planning?

Being an insurance professional, I always try to approach the topic carefully, especially with friends and relatives because they are afraid that I am trying to sell them insurance policy. I feel the same way too,  sometimes, that I am no different from an ordinary salesman or another annoying telemarketer.  The cold calls that I made to prospects that the insurance agency had purchased from a reliable source ultimately proved once and for all that people genuinely dislike dealing with life insurance phone calls.

I hate to use the word “I told you so”, but for the people that realize later the importance of having purchased either a life insurance policy, critical insurance , disability or health insurance has renewed my faith in the profession.

Since I am also a CFP, I recently advised a close friend ,who is single, in her fifties, financially well-off, and planning early retirement.  The topic of estate planning came up. Since she has no dependents, she wondered what would happen to her assets once she pass away. Even though she has a will naming her niece and her sister as beneficiaries, she did not realize that certain assets such as her RRSP would trigger tax implications upon her death.  Since she is unable to roll-over her RRSP proceeds to her spouse  (she is single), taxes at the marginal rate (almost 45%) would be applied before the net proceeds are given to her sister and her niece. In summary, a $100,000 RRSP balance will be reduced to $55,000 once the tax authorities gets their hands on it.

If, for example, she had purchased a $50,000 10-year whole life insurance policy in her twenties and had named her sister and niece as beneficiaries, she would have only paid a total of $5,000 for the premium and have insurance for her whole life that could be used to offset the taxes on the liquidation of the RRSP upon her death (Annual premium $500 per year X 10 = $5,000).  You see, proceeds from life insurance policies are tax-free and can be a valuable tool in estate planning to help minimize taxes paid.

In addition, life insurance plays an important role when your children are young and you require the assurance that their needs can be taken care of in the event that you die suddenly. In addition, life insurance is also useful when you have a mortgage that can be paid off in the event that you passed away prematurely.

So, before you brush off someone who tries to sell you life insurance the next time, think carefully. 
Yes, the sales person is being compensated when he or she sells you the policy. But he or she is also doing you a favor that you may not realize immediately.

And finally, remember, it is best to purchase life insurance when you are younger and healthier as the premiums escalates exponentially once you gets older and sicker!

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