Life insurance is an important part of financial risk management that protects your loved ones’ financial security as it has the ability to replace your income in case of premature death.
Aside from replacing a breadwinner financially, it also protects your family from other financial obligations that you may leave behind, such as consumer debts, mortgage, business overhead, children’s post-secondary education, and final expenses.
A well-planned life insurance policy gives you and your loved ones the peace of mind in knowing that should something were to happen to you, they are well taken care off, financially but you may be wondering, is life insurance taxable in Canada?
Life insurance death benefits are usually not taxable in Canada. If something were to happen to you, your beneficiaries need not worry about paying taxes on life insurance death benefits as they are completely tax-free, provided that there are named beneficiaries in your life insurance policy.
Naming your loved ones on your life insurance policy is of vital importance if you want them to receive your life insurance death benefits, tax-free.
If you fail to designate named-beneficiaries on your policy, the beneficiary for your life insurance policy will automatically be named to your estate, which, in this case, may be subject to tax.
If your estate is the named beneficiary on your life insurance policy, the death benefit may be subject to tax.
When Life Insurance is Taxable in Canada
Generally, life insurance death benefits are not taxable as long as the named beneficiary is not your estate, however there are cases when life insurance can incur a taxable event.
If you’ve implemented a permanent life insurance policy which allows for tax-free cash-value accumulation from within the policy and these cash-values are invested and has grown in value over-time through interests and compounded rates of return, surrendering your policy gives you access to the accumulated cash (cash surrender values), which in turn results to a tax-implication on the growth of your investment from within the policy, which is considered a taxable income.
Life Insurance Tax Reporting
If there are earnings from your cash-value withdrawal, the insurance company will issue you or your cash-value beneficiary at T5 slip, and the earnings would be reported on Line 121 of the recipients return.
Life Insurance Premiums
Life insurance premiums on individual life insurance are taxable, but the sales taxes are already inclusive on your monthly, annual or lump sum contribution, which means that there are no extra taxes on top of the quoted amount of contribution(s).
Life insurance is an important part of your financial plan, our team specializes in life insurance planning and can help you determine the right amount of coverage and implement the type of life insurance that’s suitable to your needs.