The coronavirus pandemic has permanently reshaped the world in many different ways, leading many Canadians to confront things in their lives that they might have ignored before. Be it their finances or their relationships, perspectives on life have been altered – for better or worse.
With more time on our hands in the absence of many of our normal social and recreational pursuits over the lockdown period, many people have engaged in some introspection, thinking about their mortality and how they could safeguard the financial security of their loved ones in the event of their passing.
Today, according to a new study, nearly half of Canadians (44 percent) say they are planning to purchase or have acquired life insurance because of the coronavirus. They say that life insurance has become more important to them now than prior to COVID-19, and that it is one of the most crucial coverages to have during the pandemic, and into the future.
Despite this increasing awareness of the importance of life insurance, there is still plenty of misinformation out there. Many of these misconceptions surround the taxation of life insurance policies and benefits.
So, with the tax deadline for Canadians looming around the corner, what better time to share the real story about what is and isn’t taxable when it comes to life insurance.
Is Life Insurance Taxable in Canada?
For the most basic type of life insurance policy and death benefit, the short answer is no.
There are two primary types of life insurance policies: permanent and term. The former is coverage guaranteed for your entire lifetime, while the latter is coverage over a set period (usually 10, 20, or 25 years) with fixed-rate payments over the policy term.
Benefits from a life insurance policy will not be subjected to income tax, no matter how large or small the policy is. Whether your spouse or your child is the beneficiary, life insurance proceeds are considered non-taxable income. This makes it an attractive investment option for spouses, parents, and grandparents.
When Does Life Insurance Get Taxed?
There are several instances when life insurance could face taxation, whether you are alive or have passed.
Every life insurance policy needs a designated beneficiary. If not, the payout would be transferred to your estate. Should this be the case for your coverage, your estate could be subjected to a tax.
Permanent life insurance policies often see the cash value reinvested to generate interest. Over time, the cash value could grow and become as large as the payout. As a result, your provider would send the beneficiary a T5 slip for interest earnings that are then reported on line 121 of an income tax return. Further, should the beneficiary surrender the life insurance payout and opt for its cash value in return, that individual would be required to pay taxes on the surrendered amount.
That said, if you are simply purchasing life insurance for the sake of leaving behind financial security for your loved ones, you do not need to worry about these possibilities of taxation.
Is Buying Life Insurance Still a Challenge?
For years, seeking life insurance was an ardent endeavour. Life Insurance Providers required applicants to perform multiple interviews, medical examinations, and lengthy health assessments, provide a list of references and jump through other hoops to accurately measure their risk prior to granting you coverage. But times have changed.
As part of efforts to appeal to the tech-savvy millennial generation, financial institutions are making it easier than ever before to attain life insurance, with more products sold completely online with a quick, streamlined application process. Yet, as more consumers purchase life insurance, there is an even greater need for public education on the correct taxation of these products.
Still have questions regarding whether any part of your life insurance policy may be taxable? Check out the Canada Revenue Agency (CRA) website, or speak to your trusted Keller & Associates Insurance Broker.