Is Life Insurance Taxed in Canada?
In Canada, sometimes it can feel like almost everything is taxed — our income, our purchases, and even our savings. With so many things falling under the tax umbrella, it’s natural to wonder about life insurance. You might be asking yourself, 'Does the government take a cut from that too?'
In Canada, sometimes it can feel like almost everything is taxed — our income, our purchases, and even our savings. With so many things falling under the tax umbrella, it’s natural to wonder about life insurance. You might be asking yourself, ‘Does the government take a cut from that too?’
So, is life insurance taxed in Canada?
The short answer is no. That’s right, one of the most valuable benefits of life insurance is that your beneficiaries (i.e., the person(s) you choose to receive your life insurance payment in the event of your death) will receive their inheritance, tax-free. The money is theirs to spend however they choose – whether they’re paying off the mortgage, taking time off work to grieve, or paying for funeral expenses.
If you think that’s good news, it gets even better!
Life insurance can help pay for taxes, too
If you plan to leave a second property to the kids, they could be left owing a hefty sum to the CRA, thanks to capital gains tax. Fortunately, the right life insurance policy can cover some or all of the taxes owing when they inherit the property. This type of financial help can mean the family cottage stays in the family – rather than being sold because your heirs couldn’t afford to pay hundreds of thousands of dollars in tax. Give this article a read to learn more: How to Offset Capital Gains Tax on Real Estate in Canada
Tax advantages of charitable giving
Most Canadians are aware that registered charities issue tax receipts donations, allowing us to deduct that amount from our annual income. But did you know that you can also use life insurance to provide a charitable gift? This can help reduce taxes in one of two ways:
1. Deduct life insurance premiums annually
When you purchase a life insurance policy in the name of a charity, the annual premiums can be tax deductible. This is a way to reduce your tax bill year over year.
2. Reduce estate tax down the road
Making a charity the beneficiary of a life insurance policy allows your estate to file for a tax return on the entire amount. The tax savings results in more money going to your loved ones. Give this article a read to learn more: Donating Life Insurance Benefits
Deductions for small business owners
There are also tax incentives for business owners who purchase life insurance. The two most common are:
1. Providing group benefits to employees
As part of a group benefits plan, business owners may choose to pay the premiums for their employees’ life insurance. This can be deducted as a business expense when the policyholders are either corporate officers or employees, and the company is not named as the beneficiary on the policy. In other words, there are a few limitations. But generally, this is a common business deduction.
2. Using life insurance as collateral for a loan
Sometimes a lender will ask you to take out a life insurance policy that can be used to repay your loan if you die. If the insurance policy is mandatory, the payments may qualify as tax deductions. For that to happen, you need to meet the following criteria:
- The policy must be required as collateral for the loan
- The lender must be the beneficiary of the policy
- You must be taking out a loan at a restricted financial institution (meaning a bank or credit union)
These are just two examples of tax-saving strategies for business owners. Always seek advice from your accountant or tax specialist to know all the tax benefits you may be eligible for.
Different types of life insurance
If you want to take advantage of the many benefits of life insurance, it’s important to know that there are a few different types, and – no – none of them are taxed. Let’s review the options to see what might be best for you and your family at this stage of life. And if you still have questions, a Serenia Life advisor can help answer them.
1. Have a mortgage, short- or long-term debt, or loved ones who depend on your income?
Consider term life insurance. Term insurance is a good way to ensure temporary debts, like a school loan, credit card debt, or your mortgage, are paid for. Plus, it’s a great way to protect your children financially until they reach an age when they no longer depend on you to cover their living expenses. One of the best parts of a term product is its flexibility and affordability. Not only can you choose 10-, 20-, or 30-year term based on your needs, but the cost is low when you are young and in good health.
2. Want to cover funeral expenses, final taxes, or your retirement living?
Consider Term to 100 life insurance. This option is an affordable way to cover final expenses, and is more comprehensive than funeral insurance. It might also be a good option if retirement is on the horizon and you want to give your children the opportunity to pay down debt or put money aside after you’re gone. As long as you continue to make the affordable monthly payments (up until your 100th birthday), you’ll remain covered for life.
3. Looking for lifetime coverage with an investment component?
Consider whole life insurance. This is a great option if you’re looking for financial protection with an accessible cash portion that can grow over time. That’s because whole life insurance comes with a cash value1 that you can access later in life to pay for things like a child’s post-secondary education or to fund your retirement living. Plus, if you live a long and healthy life, the cash portion of your policy could increase substantially, letting you leave a large inheritance to your children. If you don’t like the idea of making payments for the rest of life, there’s also a 20-pay option, where payments stop after 20 years – and coverage lasts your entire life.
Note that whole life insurance is most affordable – and has the most opportunity for growth – when purchased for a baby or child. If life insurance for a child seems strange to you, remember that it has nothing to do with a child’s death and everything to do with planning for a child’s nice, long life. Not to mention, they’ll remain insured no matter what, despite any health conditions or risky activities later in life. Learn more about life insurance for kids.
4. Looking to save on joint life insurance rather than buying two single policies?
Consider joint life insurance for couples or business partners. The former is a great way to ensure your debts are paid and your children are taken care of, while the latter means the business you worked so hard to build will be protected well into the future. Keep in mind that the way this type of life insurance works is that the payout is received after both partners have passed. So if you’re looking to protect your partner as well as your children or business, this may not be the best option for you.
The real advantage of joint life insurance is that it’s more affordable than buying two single policies, especially if one partner has an illness that makes individual insurance too expensive. And for socially conscious businesses, it can be an ideal way to leave behind a donation to a cause your business supports.
Is life insurance ever taxed?
When it comes to the death benefit (i.e., a payment made to designated family members or other loved ones after you die), the answer is always no. But if you are the owner of a participating whole life policy, and you decide to access the living benefit (i.e., a cash value you can dip into when you need it), that’s where the Tax Man comes in. The following are three different ways you can access your cash and the tax implications of doing so:
1. Policy loan2
If you decide to take out a loan on the guaranteed cash value of your life insurance policy, you will need to pay this back – with interest – and the amount may be taxable. Note that unlike a loan from the bank, you can pay it back at your own pace.
2. Policy withdrawal3
If you withdraw money from the dividends portion of the total cash value of your life insurance policy, this will reduce your death benefit by that amount, and may be taxable. However, if the amount you withdraw is less than what you’ve paid into the policy, you may not have to pay income tax.
3. Policy surrender4
If you decide to cancel your policy, the value is taxable only if it is more than what you’ve paid for your policy so far. In this case, the money you receive as the policyowner will be treated as taxable income, and includes any interest the cash value has earned or any dividends paid into it.
Get ahead of the tax with these tips
1. Purchase life insurance
If you don’t have life insurance – whether to cover your mortgage, help pay for capital gains tax on a second property, or make annual donations to a charity – now is as good a time as any to get some. The younger and healthier you are, the more affordable a policy – so don’t delay when it comes to making this important investment. Find out how much life insurance you need.
2. Consider joint ownership
When you share a bank account with a family member, or you have joint ownership of a home or other asset, it can simply be passed along to the other person when you die – without the need for probate (i.e., a legal process that determines whether or not a person’s will is legally valid). This should only be done after getting qualified tax and legal advice.
3. Start investing
Savings and investment accounts such as registered retirement savings accounts (RRSPs) and tax-free savings accounts (TFSAs) let you designate beneficiaries and/or successor holders. You can also choose the life insurance version of a GIC (a.k.a., a guaranteed interest annuity), which is passed along to your beneficiaries immediately with no tax and no red tape.
Why choose Serenia Life for your life insurance needs?
As a member-based organization with roots that go back nearly 100 years, we encourage kindness by sharing a portion of our profits through community outreach, fundraising, and unique member benefits that help Canadians support their family, their community, and the causes they care about. The more we grow, the more we can give.
We provide members with access to a growing collection of member benefits that make a positive impact on their lives and the lives of others, such as:
- $1,000 post-secondary scholarships
- $250 seed funding towards fundraising events
- Free digital wills (value: $189), or $150 reimbursed when drafting/updating a will through a lawyer
- And much more
View a full list of our member benefits.
Get a free quote
Life insurance is an important part of your financial plan — one that can protect your family’s finances and help you save on taxes. Want to learn more?
Disclaimers
This blog post contains general information only. Because each person’s situation is unique, it is best to speak with a qualified professional before making any final decisions. Serenia Life Financial does not advise clients on tax, accounting, or legal matters.
1Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.
2Policy loan is an easy way to access the accumulated cash value of the policy. A variable interest is charged on the amount borrowed. This may result in taxable consequences. Loan can be repaid at any time. Upon death and the loan is unpaid, the outstanding balance including any accumulated interest will be deducted from the total death benefit, with the remainder paid tax free to the beneficiary(ies).
3Policy withdrawal is an option to withdraw money from the accumulated cash value of the policy if Paid-up Additions or Accumulated Dividends is the selected dividend option. Withdrawals reduce the total cash value, affects future growth, and reduces the death benefit. If the withdrawal is only up to the amount that is paid in premiums (known as the adjusted cost basis), there won’t be taxes. Otherwise, there would be taxes on the portion that is more than the adjusted cost basis.
4Policy surrender can either be partial or full surrender of the cash value of the policy. A partial surrender will reduce the value of the policy. A full surrender means cancelling the policy and receiving the cash value less any surrender fees. Beneficiaries won’t receive any death benefit upon full surrender. There may be tax on the amount received that is above the adjusted cost basis.
