Using Life Insurance in Your Will

Most people buy life insurance to protect their loved ones’ financial security. In your Will, you can make it work even better.


Used properly in a Will, life insurance can do more than help you care for your loved ones. It can also reduce taxes and protect assets from creditors.


The Basics of Life Insurance


Life insurance is a contract between the life insurance company and the insured person. In simple terms, under a life insurance contract, the insured person agrees to pay a premium to the insurance company.


When the insured person dies, the insurance company agrees to pay a lump sum to another person. This other person is called the “beneficiary”.



Advantages of Using Life Insurance in Your Will



  • Insurance is paid as a cash benefit and is not subject to income tax.
  • You can use the proceeds from a life insurance policy to cover taxes your estate needs to pay, such as capital gains tax.
  • You can make a donation to charity and reduce your taxes both while you’re living and after you die.
  • Insurance proceeds can be protected from your creditors.
  • Insurance proceeds can be excluded from probate. This is a way of getting money into the hands of your loved ones without government fees and taxes reducing the amount.
  • Insurance proceeds can be made part of a trust for the benefit of spouses, children, beneficiaries with a disability and any other individual. The money can be held in trust with certain conditions, including designating the funds for a child’s education or releasing them when the child reaches a certain age.
  • You can buy “key man” insurance by providing capital to buy shares in a small company. If you die, your partners could buy all your shares from your family. If the insurance is purchased by your company the premiums may be considered a business expense.
Insurance Trusts


Some people name their “estate” as the beneficiary of their life insurance policy. This can be useful because you can have the insurance proceeds divided and paid for different purposes.


There are drawbacks to this, however:


-       The insurance proceeds will become an asset of your estate. Depending on the province you live in, your probate fees may increase. For example, if have $100,000 in your estate from an insurance policy, your probate fees would amount to $1,000. If you had $200,000, the probate fees would double.


-       If there are claims, your creditors can take your insurance proceeds, just like any other asset in your estate.



Here’s where a lawyer can help. A lawyer can create an insurance trust in your Will in a way that the proceeds won’t be subject to probate fees nor available to creditors.


The insurance trust can make use of a graduated tax rate and a chosen tax year, and still pay out money to your family members according to the terms of the trust. Speak to your lawyer about this.
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