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Role of life insurance in estate planning
Life insurance can play an important role in estate planning. Having coverage could help provide financial security to your loved ones, should you pass away. Here at TD Insurance we offer TD Term Life Insurance and TD Guaranteed Acceptance Life Insurance.
In this article:
- What is an estate plan?
- Is an estate plan the same thing as a Will?
- Some benefits that come with having an estate plan
- How can life insurance be useful in estate planning?
- What types of life insurance plans are used in estate planning?
- How do I choose the right life insurance coverage for my estate plan?
What is an estate plan?
An estate plan is essentially a document or set of documents that lays out what you’d like to happen after you become incapacitated or pass away.
Is an estate plan the same thing as a Will?
An estate plan usually includes a Will; however, a Will is only one part of an estate plan. A Will is a legal document that outlines a person’s wishes for the distribution of their estate.
An estate plan usually includes other key documents as well, such as: power of attorney for property, beneficiary designations, life insurance and more.
Some benefits that come with having an estate plan:
- A Will can provide clarity to your loved ones regarding your wishes
- The creation of a Will or trusts to control how and where your assets are distributed
- Naming the guardian of your choosing for your dependents
- Managing and potentially minimizing the tax impact on your assets
Remember, it's a good idea to review your estate documents every three to five years, or as circumstances in the lives of you, your beneficiaries or your executor necessitate a review.
How can life insurance be useful in estate planning?
Life insurance can be an effective part of your estate plan by addressing certain needs and goals. Let's take a closer look at some of the ways life insurance can be helpful.
1. Estate preservation
Including life insurance in your estate plan can help protect the value of your estate. The death benefit can be used to cover significant expenses such as estate taxes and probate fees, preventing these costs from reducing the inheritance you intended to leave for your beneficiaries.
2. Cover end-of-life expenses
Life insurance can also play an important role in helping cover other end-of-life expenses like outstanding medical bills, funeral costs, estate administration fees, and so on. With life insurance, your beneficiaries will have funds available for these types of expenses.
3. Estate equalization
Inheritance planning can be challenging. How do you decide how your assets should be divided? If you have multiple assets like real estate holdings, a business, or a family cottage, the process can be more complex. In such cases, life insurance can be helpful in facilitating an equitable distribution of your estate among your beneficiaries, allocated however you choose.
4. Charitable donations
Have you thought about leaving money to an organization or cause you care about? What charity is close to your heart? With life insurance, you can name a charity as a beneficiary of your life insurance policy, which means that your life insurance payout will be donated tax-free to them. Naming a charity as a beneficiary of your life insurance policy can also provide tax benefits to your estate.
What types of life insurance plans are used in estate planning?
The two main types of life insurance products used in estate planning are term life and permanent life insurance.
Term life insurance in estate planning
Term life insurance is a type of life insurance that provides coverage for a fixed policy duration. During the term duration, premiums are guaranteed not to change. Term lengths can vary, with 10- or 20-year plans being among the more popular options. Many term life insurance policies can be renewed annually or converted into more permanent coverage.
Permanent life insurance in estate planning
Permanent life insurance does not expire. It is typically designed for lifelong protection. The policy owner's beneficiaries receive the life insurance death benefit when the insured passes away. This is as long as the premiums are paid, and no policy exclusions apply.
Permanent life insurance policies usually have higher premiums than term policies because they offer lifetime coverage, a guaranteed death benefit, and there can be a cash value component. The cash value is an amount accumulated by investing a portion of your premium payments in funds within the policy. These policies also tend to have fixed premiums.
When it comes to estate planning, permanent life insurance can be helpful for wealth transfer purposes, estate liabilities including taxes, and charitable donations.
How do I choose the right life insurance coverage for my estate plan?
1. Assess your needs and evaluate your financial situation:
Everyone's financial situation is a little different, so consider your life right now and what your future plans could hold.
Having some trouble determining how much coverage is right for you? Read our article about how much life insurance you may need in Canada which can provide you with some ideas to consider when calculating your life insurance coverage. You can also use a life insurance needs analysis calculator or speak to a licensed life insurance advisor. If you're considering coverage from TD Insurance, try the TD Life Insurance Calculator to help you determine the amount of life insurance coverage you may need.
2. Consider the different types of life insurance:
Does term life insurance or permanent life insurance make more sense for you? Consider your plan options and learn more by exploring different types of life insurance plans available in Canada.
3. Understand potential tax implications:
The life insurance payout is tax-free and not included when calculating the Estate Administration Tax (also known as probate tax) if the benefit goes directly to the named beneficiaries and not your estate.
4. Consider your beneficiaries:
Who or what organization do you want to leave your life insurance death benefit to? This can be whoever you choose. However, common beneficiaries include your spouse or children.
Keep in mind, there are some instances when you'll likely want to update your beneficiary designations. These can include marriage or a common law relationship, a growing family, divorce, or death of the primary beneficiary. You can learn more about beneficiaries in our understanding life insurance and beneficiaries article.
5. Review your estate plan to address changing priorities:
Your estate plan is a set of dynamic documents that you should periodically review and update (with your estate planner) as your life changes.
Ready to get started?
When it comes to estate planning, life insurance can be a helpful financial product offering financial protection for your loved ones. To learn more about TD Life Insurance plans, visit us online and explore both term life insurance and guaranteed acceptance life insurance plans.
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TD Term Life Insurance plans are individual life insurance plans underwritten by TD Life Insurance Company. See Insurance Policy(ies) for coverage details, including limitations and exclusions.
The content on this page is for general information purposes only and does not constitute legal, financial or insurance advice. Speak to a life licensed professional advisor regarding your specific situation. The information contained herein, is subject to change without notice.