Originally Published by: ReFined Kingston Volume 1, Issue 1

Welcome to your mid-50s, a time when you notice your world has begun to shift. Children are often grown and your mortgage and other debts have shrunk or are all together gone.

By age 55, many business owners have a strong, successful business that affords them a lifestyle they worked hard to achieve. With few of the traditional needs for life insurance, why do so many people in this situation continue their coverage?

The answer is simple. They own life insurance because it helps them protect against the concerns that exist at this stage of life including tax, estate and succession planning. Let’s look at an example of how life insurance can play an important role in achieving succession and estate planning objectives.

Stella is a healthy and vibrant 65-year-old widow. Since her husband died, she has owned 100 per cent of the shares of her family’s successful small business corporation. Her other assets include her home, the family cottage and a significant sum of registered and non-registered investments.

Stella is now retired and her son Jack works in the business. Since his father’s passing, Jack is leading the business. He is talented and hard-working and Stella wants to ensure he assumes full ownership of the business upon her death. Stella’s daughter Jillian has moved to Toronto to pursue a different path. Stella plans to leave Jillian the remaining value of her investments, her primary residence and the family cottage Jillian loves dearly. Stella has recently begun estate planning with a goal of reducing taxes due at death, helping ensure her estate is distributed fairly between her two adult children, and safeguarding cash to cover her final tax bill. Stella has worked with her trusted accountant and lawyers to achieve these goals. She also wants to work with a financial security advisor to investigate what role life insurance can play in her planning. As part of her tax-reduction planning, Stella will complete an estate freeze and move forward with strategies to purify her corporation.

Let’s assume that after implementing these measures Stella’s final tax bill (at death) on the deemed disposition of her shares, her cottage and her remaining registered retirement savings plans (RRSPs) is approximately $570,000 today and $500,000 at age 89.

Stella considers the options her children will have to pay her final tax bill. The options include:

  • Setting aside some of her investments today to provide funds to cover her final tax bill
  • Hope her house sells quickly after her death (although the investments and the proceeds of the sale of the house are intended for Jillian not Canada Revenue Agency)
  • Take the required funds out of the company (although this is not a tax-friendly option and this option could negatively impact business operations)
  • Borrow the money (but her children will need to pay it back plus interest)
  • Purchase a level cost permanent life insurance policy that pays out a tax free death benefit

After considering these options Stella decides to purchase a permanent life insurance policy. Ultimately, Stella moved ahead with the life insurance option because it made sense for her situation and her budget. She also appreciates knowing that upon her passing, the final pieces of her estate plan will move into action — including her children receiving a tax-free life insurance death benefit to pay her final tax bill.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of the writer’s knowledge as of the date submitted for publication.

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