No financial plan can be considered complete without an insurance review. Life and disability insurance are important in planning for contingencies, providing for dependants and ensuring your financial goals will be achieved.
Life insurance can fulfill many needs. One of the primary needs is to protect the financial well-being of your survivors by maintaining their current lifestyle in the event of your death. Life insurance provides a tax-free lump-sum death benefit, which can be invested to provide income for a spouse or dependent children. Portions of a death benefit can be used to pay off debts and eliminate the need for survivors to continue to meet repayment schedules.
Death may create income tax liabilities for a deceased's estate. For example, capital property is treated as if it were sold for fair market value at the time, unless transferred to a spouse. This will trigger taxation on any capital gains if the assets have appreciated in value. In addition, the values of certain registered assets, such as RRSPs and RRIFs, are included in the deceased's income in the year of death unless a spouse or dependent child is named as beneficiary. This taxation burden can lead to a liquidity problem for the estate, especially if the children want to hold onto an asset, such as a cottage.
A life insurance policy can offer unique advantages. If a family-class beneficiary - such as a spouse or child - is designated as the beneficiary of the life insurance proceeds, the policy may be exempt from seizure by the creditors of the policy owner or life-insured.
The death benefit payable to a named beneficiary under a life insurance policy does not form part of the estate of the life insured. Therefore, the life insurance proceeds are not subject to estate shrinkage costs, such as probate, legal and executor's fees, and creditor claims. In addition, life insurance proceeds payable to a named beneficiary will flow directly to that beneficiary without the usual delay involved in the settling of an estate.
In order to determine the amount of insurance you require, a full needs analysis should be completed by an insurance professional. A complete review will examine your current sources of income and living expenses to determine which will continue after your death. With the assistance of the insurance adviser, you will determine how much of your income should be replaced and the length of time to provide this replacement income to survivors. Your assets and liabilities should then be reviewed to determine which assets can be liquidated at death and which liabilities should be funded at death.
Final expenses should also be considered, including funeral costs, probate and legal fees. In addition, you should consider any goals you would like to fund, such as university education for any children or grandchildren.
To complete the needs analysis, several assumptions must be made. These include the rate of growth of assets, the inflation rate and long-term interest rates. If there is a shortfall between income required for dependants and the income available (from capital invested and the liquidation of investments and assets), insurance can be used to provide the capital required to close this gap. Insurance can also provide funds to close the gap between liabilities and life goals to be funded at death, and the assets available for this purpose.