What Is A Life Insurance Policy?
Let’s start with the basics. A life insurance policy is a form of protection that you buy for your family. If you pass away, your loved ones will be paid a death benefit from the life insurance company. This helps them meet financial obligations if something happens to you. Life insurance offers peace of mind for your family.
There are two types of life insurance that you can buy from a life insurance company:
Term Life Insurance
Term life insurance policies are one type of life insurance that is in place for a specific term. For example, you can buy life insurance for 10 or 20 years. Sometimes a life insurance company will even allow you to buy coverage until a certain age, such as 65.
Permanent Life Insurance Policy
Permanent life insurance is also known as whole life insurance. This insurance policy will be valid for your entire life. What type of insurance you select is completely up to you. However, you may need to undergo a medical exam for some life insurance policies.
With this background, let’s consider whether your life insurance policy is taxable in Canada.
Is Life Insurance Taxable In Canada?
Purpose of Life Insurance
Life insurance proceeds or the death benefit replaces the lost income that beneficiaries experience when you pass away. The goal is to help your loved ones continue to make ends meet during a tough time. That means your family will be able to use the money to pay down debt, make mortgage payments, or even cover the funeral costs.
There is no limit to how beneficiaries can use the death benefit. And they won’t need to report the money they receive from your life insurance policy when they file income tax. The Canada Revenue Agency does not require anyone to pay taxes on inheritances or most financial gifts.
Are Life Insurance Premiums Tax-Deductible?
Do You Pay Taxes On The Cash Value of A Life Insurance Policy?
Permanent life insurance or whole life insurance offers the added benefit of accumulating cash value. Cash value is money that is part of the life insurance premium you pay and is usually invested so it can grow. It’s important to note that cash value is only accumulated with permanent life insurance policies, not term life insurance.
Some permanent life insurance policyholders decide to cancel their life insurance, and if there has been cash value accrued on the policy, they’ll get that money. In this scenario, the funds would be considered income, and you’d have to include it on your income tax return and pay taxes on it. You’ll need a T5 slip from the insurance company for your income tax, and you’ll report the cash value on line 12100 of your tax return.
When Is A Death Benefit Taxable In Canada?
No Appointed Beneficiary
Selling Your Policy
Why Work With Shelter Bay Financial?
At Shelter Bay, we know insurance. And we also know you may have questions about life insurance and your coverage. With Shelter Bay Insurance, you can rest assured we’ll give you the straight answers to your questions. That’s because, unlike other insurance companies, we don’t work for just one insurance provider. Our brokers have access to several different life insurance policies. We’ll be able to find the right amount of coverage for you.
Whether you’re ready to buy life insurance or just have some questions about life insurance, contact Shelter Bay today.