Building Generational Wealth with Life Insurance¹

Life insurance policies are consistent and predictable because the coverage amount typically does not decrease during the life of the policy. In addition, for many policies, the premiums do not change throughout the life of the policy.

Provided you pay your life insurance premiums diligently, you can always track the value of the benefits ultimately payable to your beneficiary or estate.

Unlike many investments, like stocks, and real estate, which are subject to capital gains, death benefit payouts are generally non-taxable, with some exceptions. Non-taxable means that you and the life insurance policy beneficiary do not have to pay interest and tax income on the life insurance policy or payout.

Many life insurance policies are immune to market volatility, which means that fluctuations in the stock market or other economic factors cannot impact the policy’s cash value. This helps ensure that your loved ones receive an ascertainable amount of money to cover final costs and get ongoing support.

You can tailor your life insurance policy to specific family needs and financial goals, by choosing the coverage amount, premium costs, policy duration, and investment options that align with your financial objectives.

You can also revise the policy to reflect a change in your current circumstances. For example, if you have children or get divorced, you can often adjust the coverage accordingly and change the beneficiary if necessary.

Inherited debt can be overwhelming to a family, especially while they’re grieving. Luckily, creditors generally cannot claim death benefits unless the insurance policy beneficiary is the deceased’s estate. To that effect, your family may receive the death benefit directly without it being absorbed by the estate.

A life insurance payout can also help ensure that the surviving family can afford to remain in their home by continuing to pay the mortgage, even without the deceased’s income.

Before your assets are distributed between your heirs, an estate administration or probate tax must be paid in all Canadian provinces except Quebec. This tax is charged as a percentage of the total dollar value of the estate.

If the estate value is high, the amount paid can be steep, especially if you live in certain provinces/territories. For example, British Columbia currently charges 1.4% and Ontario 1.5% for assets above $50,000.

So, if your life insurance beneficiaries are able use the death benefit to pay this tax, this can preserve your other assets, rather than potentially being forced to use these assets to pay the probate tax.

Whole life insurance is a type of permanent life insurance policy that provides lifetime coverage to the policyholder. This type of policy generally offers a guaranteed death benefit to your family after you’ve passed on and, in some cases, a cash value for your own benefit.

Universal life insurance is a type of flexible permanent life insurance policy that allows you to adjust your premiums and death benefits depending on the changes in your life.

If you have large expenses or need to pay a mortgage, you can generally reduce the death benefit and later increase it when you’re done paying these loans. This type of policy can also offer a cash value accumulation, which you may be able to access through loans or withdrawals.

Variable life insurance is a type of permanent life insurance policy that offers a death benefit and the opportunity to invest in various investment options, such as mutual funds, stocks, and bonds.

For this reason, it’s a riskier option for building generational wealth, as your policy’s cash value can fluctuate based on how the underlying investments perform — however, at the same time, it has the potential to provide higher returns in market overturns.

Ideally, the coverage amount should be sufficient to meet the financial needs of loved ones upon your passing. Essential factors to consider when estimating your life insurance coverage include:

1. The amount of money required by your loved ones to help cover any final expenses;
2. The funds needed to help maintain their standard of living;
3. Your current savings, assets, and any existing insurance coverage; and
4. Future expenses like tuition and childcare.

You should regularly review and adjust the coverage to ensure it meets your financial goals and the current circumstances in your life.

You should choose a policy with premiums you will be able to pay consistently, over a long period. If you default on paying these insurance costs, you risk having these costs taken off your death benefits, reducing its value, losing any life insurance cash savings, or having the policy lapse or be cancelled entirely.

You may wish to ensure that the life insurance policy you select allows you to review and change the beneficiary designations to align with your wishes. It’s important to consider how the death benefit will be distributed, and how this will impact your loved ones.