The role of life insurance in estate planning
The word “estate” most likely drums up pictures of affluent individuals like the Bill Gates or Warren Buffets of the world, but whether you think it or not, you have an estate. Your estate is comprised of everything you own, from your car, home, bank account and investments, to your grandmothers wedding rings you inherited and your personal collection of classic movies.
No matter how large or how modest, everyone who owns property has an estate and something in common - you can’t take it with you when you die.
Estate planning simply refers to making a plan in advance so when you pass away your property will be distributed among the people or organizations you choose and in the way you think is best. It also may include strategies for minimizing taxes and legal fees.
Estate planning is important for everyone but it can mean the most to families with modest assets since they can afford to lose the least.
What’s the role of life insurance in estate planning?
Life insurance plays a very important role in your estate planning for a number of different needs. First off, though, it is important to define “estate planning”. Traditionally life insurance needs have fallen into two categories:
- needs around income replacement (sometimes referred to as estate creation); and
- needs around estate transfer (sometimes referred to as estate preservation).
Income replacement needs generally occur when you are younger and have family members depending on your income for ongoing support. If you were to die prematurely, life insurance can provide a source of tax-free financial resources to replace your lost income and help your family meet their ongoing needs.
Estate transfer needs generally come later in life, once financial resources have already been accumulated. To preserve and transfer these resources, life insurance can be both economical and tax-efficient. Estate transfer needs can be somewhat broader than income replacement needs and could include:
- Covering taxes and probate fees on death
- Providing for last expenses including funeral, legal and executor costs
- Allowing children to be treated equally when a parent wants to leave a large, asset like a business, cottage or farm to one chid and an equal amount of cash to another child
- Facilitating charitable donations
- Growing financial resources in a tax-sheltered environment
Source: Investors Group 2012
Having identified a role for life insurance in your estate plan, you will need to consider other questions like “How much life insurance do I need?” and “What type of life insurance best meets my needs?” Talk to an insurance advisor to help you work through these questions.
Some final thoughts on estate planning
Remember that estate planning does not have to be expensive or time consuming and the best time to make an estate plan is now because if you wait, it may be too late.
If you don’t think you can afford a complex estate plan now, start with what you can afford. For a young family or single adult, that may mean a simple will, power of attorney and a life insurance policy. Your estate plan can develop and expand as your needs change and your financial situation improves. This may mean updating your will and changing you life insurance coverage in the future. It’s important to understand the options and flexibility a life insurance policy can offer before you purchase it.
Knowing you have a properly prepared estate plan in place - one that contains your instructions and protects your family - can give you and your family peace of mind. Isn’t that one of the most thoughtful and considerate things you can do for yourself and for those you love?
Did You Know?
73% of Canadians say they can't afford life insurance? 1
$84/month for coffee2 vs. $27.90/month for life insurance3Buy Now
1 LIMRA: Canadian Life Insurance Ownership study, 2013.
2 Based on a Starbucks cup of coffee at $2.45, purchased 31 days per month.
3Initial monthly cost for a healthy, 40 year old female, non-smoker purchasing $250,000 of Empire Life Simplified 20 life insurance as of December 7, 2016. Price increase every 20 years.