Protecting your loved ones with life insurance

5 minutes

A quick glance at your latest grocery bill is enough to make you realize that the cost of living just keeps going up. So, the question is: would monthly expenses, inflation and growing debt be a financial burden on your loved ones should you no longer be there to support them?

This where a financial tool like life insurance comes in. Let’s see what this product can do for you.

Life Insurance Crib Notes

Life insurance can be used is to leave enough money to your loved ones to cover your taxes, debt and final expenses. Think of it as a financial umbrella for your beneficiaries.

On the market, there are several types of life insurance :

  • Term – a temporary insurance policy that can be renewed.
  • Permanent – an insurance policy that never expires unless you cancel it.

Did you know?

The death benefit is non-taxable and is paid in a lump sum to your beneficiaries. This means it can be used as the beneficiary sees fit.

Different Strokes, Different Folks

Before shopping around, set a budget.

Each situation is different, so be sure to consider :

  • Protecting your loved ones
  • Paying your income tax
  • Covering your personal debt and final expenses
  • Leaving money to loved ones or donating it

1. Protecting Your Home

Do you have a family and a mortgage? Consider the impacts that your death would have on those around you.

Ballooning Mortgages

Canada’s real-estate market is volatile! The rising prices are hard on buyers. From 2015 to 2022, the average mortgage loan increased $103,000  (This hyperlink will open in a new tab). across the country.

In a context of inflation, growing debt is undermining household budgets, which is why a good prevention strategy is so important.

Ask yourself if your loved ones could afford their monthly expenses without your income (e.g. taking care of a sick parent or young children, doing the household accounting). Will your loved ones have to hire people to do your household chores? Keep that in mind.

Case Studies

Anthony and William recently purchased a home. Anthony is working full-time, while William is finishing up school. To cover the mortgage and ensure William’s financial security in the event of his death, Anthony takes out term life Insurance.

Their neighbour, Yasmeen, who is expecting, is planning to take out insurance to cover the financial needs of her child. She talks to a financial security advisor to determine which option is best for her.

2. Income Tax After Death

The short end of it is that when you have enough money in your estate, your executor will use it to pay your income taxes after death. In Canada, even though inheritance is not taxable, taxes and capital gains are payable on the property and assets of the deceased. In fact, the Income Tax Act assumes that all assets are sold at death at their fair market value—even when that is not the case.

If you own a business, cottage, apartment building or financial products, your estate will have to declare capital gains and pay taxes where applicable. Life insurance can provide the amounts required to avoid forcing your estate to sell off your assets to pay off your debt.

3. Covering Your Personal Debt and Final Expenses

In Canada, life expectancy  (Cet hyperlien s'ouvrira dans un nouvel onglet). is 82 years of age.

That doesn’t mean you won’t live to be 100, travel, spend every last dime...

If you do, you might want to take out life insurance to cover your final expenses.

Important : the death benefit of a life insurance policy is not an inheritance. It is paid to the beneficiary you name, which can be a person or a charitable organization. If you don’t name a beneficiary, then your estate will receive the amount.

Here’s an example

Claire inherits her sister Audrey’s estate. Audrey had accumulated quite a lot of debt before her death: credit cards, unpaid bills, loans. Since Claire is sole beneficiary of Audrey’s life insurance policy, she is paid the death benefit. However, Claire decides to refuse the estate due to her sister’s insolvency. It’s her decision.

She can use part of the death benefit to pay her sister’s funeral expenses, which amount to $9,900.

4. Leaving money to loved ones or donating it

Life insurance can help you leave behind the biggest possible nest egg.

How much can you leave behind? Who will be your life insurance beneficiary?

Getting the help of a pro

Life insurance should be a part of all household budgets. Working with a financial security advisor, you can analyze your family situation, your income and your financial health.

Do you have life insurance coverage at work? Make sure to take that into consideration. If you have some coverage, then identify what may be lacking.

If the advisor recommends changing insurance, be sure to ask about the advantages and disadvantages of the new coverage, and if there are any costs related to this change.

It’s only with a clear assessment of your situation that an advisor can recommend appropriate life insurance.

Not one size fits all

After establishing your needs and discussing them with a specialist, you can choose the products that are best suited to your needs. When in doubt, shop around and get more than one opinion.

Good life insurance decisions will make good financial sense!

This article is intended for information purposes only and should not be construed as professional advice.