Life insurance is an important financial instrument in the estate planning of a business owner.
Many issues can be effectively covered by life insurance, including payment of taxes due to capital gains, liquidity concerns, estate equalization issues as well as debt elimination and cash for family security.
There are, however, many types of life insurance. Some are suited for short-term planning while others are more appropriate for long-term and estate-planning purposes. It’s essential to know what’s available to best meet your family’s needs and plan your wealth.
Term Insurance (Renewable and Convertible)
- Term insurance is temporary coverage under which premiums are guaranteed and remain level for the term of the policy (e.g., 10 years, 20 years) and increase with each new term.
- These policies are renewable for additional terms with no medical evidence required, but usually not past age 70 or 75. If renewed, premiums increase with age and at some point higher premium costs may make it difficult or impossible to continue coverage.
- Coverage typically expires at age 80 or 85.
- Term policies are initially less expensive than permanent insurance and are suitable for short term insurance needs or specific liabilities like a mortgage or debt elimination.
- They can be converted to permanent insurance without medical evidence, often up to ages 65 or 70.
- A disadvantage of term insurance is that if a premium is not paid, the policy terminates after 30 days and may not be reinstated if health is poor.
Permanent insurance has a number of policy types, including Universal Life, Whole Life and Term to 100.
- Universal Life is permanent coverage that unites a term insurance product with a premium/investment account. Because the two are combined in one contract, the investment portion receives the favourable tax treatment afforded to life insurance policies – investment earnings within the policy are exempt from annual taxation.
- Charges for the term insurance portion are usually level and guaranteed not to increase for the life of the policy, regardless of age or health problems.
- Premium deposits to the policy may range from the minimum amount needed to cover the monthly cost of insurance and expense charges, to the maximum limits specified in the Income Tax Act.
- Amounts in excess of the minimum can be invested in guaranteed fixed options or directed to a number of separate accounts that operate like mutual funds and are linked to various stock or bond indices with greater risk and potential reward.
- The accumulating fund value is added to the death benefit and can be borrowed, used to pre-pay future insurance costs or continue protection if a premium is missed, or withdrawn if the policy is no longer required.
- Because the initial cost for universal life is higher than term 10 or term 20, it may be most suitable as a means of covering longer term or permanent insurance needs including estate liquidity requirements and capital gains tax payments at death.
- Coverage is for life.