Is the term life insurance payout taxable?

• Are term life insurance payouts taxable in Canada?
• When can term life insurance payouts be taxed in Canada?
• Are term life insurance premiums tax deductible?
• Tips to ensure your term life policy remains tax efficient
• Explore coverage options

While most term life insurance death benefits are non-taxable when paid directly to a beneficiary, there are circumstances where taxes may come into play:

• Probate fees (also known in some provinces as probate tax): Can occur when a policy owner lists their estate as the beneficiary or the estate is the beneficiary by default. In such cases, the life insurance death benefit paid to the estate may be subject to these fees.
• It's important to note that probate fees take into account the total value of an estate. So, the insured individual's life insurance death benefit payment amount would more than likely be part of the amount that's subject to tax. And probate fees, when levied, can vary by province, with some provinces (Manitoba and Quebec) having no fees.   

Jane, a 65-year-old woman living in Ontario, has an active TD 20-Year Term Life Insurance policy with a coverage amount of $1,000,000. She also has a house valued at $500,000. Jane eventually passes away. Her life insurance policy does not have any listed beneficiaries, so her death benefit payment is directed to her estate.

Her life insurance death benefit and her home make up the total value of Jane's estate, which is $1,500,000. In Ontario, there's no probate fees on the first $50,000.¹ So, the value of Jane's assets in her estate that are subject to probate fees sits at $1,450,000. With a 1.5% probate fee, in this scenario, $21,750 would be the total amount owed. Note: If Jane had named a beneficiary, the life insurance death benefit would not have been considered an asset of her estate, and only $6,750 would have been owed in probate fees.

+ 500,000 Value of home

= $500,000 Jane's total estate

$500,000 Jane's total estate

- $50,000 Probate fee exemption

= $450,000 of Jane's estate subject to probate fees

1.5% Probate fee

$450,000 x 1.5% = $6,750 would be the total amount owed with a beneficiary

Individual term life insurance premiums:

With term life insurance, a policy owner makes regular premium payments to their insurer to keep their policy active for a defined term. These term life insurance premiums are not tax-deductible. The premiums a policy owner pays are considered personal expenses.

Group term life insurance premiums:

For group term life insurance plans, employers generally pay the employees premiums. And employer-paid premiums are taxed as part of the employee's income. Premiums in this case are not tax deductible for the employee.

Businesses paying their employees term life insurance premiums can deduct the premiums as they are considered a business expense. If you're a business owner offering a group term life insurance plan to your employees, you should connect with a tax professional or financial advisor to learn more. 

• Name a beneficiary: specify the person(s) by name who should receive the payout.
• Review your life insurance policy regularly: It is good practice to review your policy regularly as your life changes (e.g., marriage, children, new home etc.)
• Seek professional advice: consult a tax advisor for professional advice to help ensure your policy aligns with your financial goals. 

Term life insurance is straightforward, affordable and designed to protect your loved ones. Typically, the death benefit will be received by your beneficiaries tax-free. But as with most financial matters, there are exceptions to be aware of.

A few proactive steps mentioned above — like naming a beneficiary and reviewing your life insurance policy regularly, can help ensure your coverage works as intended.

Explore TD Term Life Insurance plans and choose the plan that's best for you and your family.