Transition in Life Insurance's Role
Upon retirement, many Canadians retain life insurance to safeguard their estates against potential tax implications. For instance, upon the death of one spouse, RRSP/RRIF assets can seamlessly transfer to the surviving spouse without incurring taxes. However, subsequent transfers to beneficiaries other than the spouse can trigger tax implications, which can be mitigated by utilizing the tax-free proceeds from an insurance policy.
Existing Insurance Coverage
Three years before retirement, a comprehensive review of all your existing insurance coverage is very important. Analyzing ongoing costs and escalating premiums associated with term policies against potential tax savings for the estate from tax-free death benefits offered by these policies is crucial. Permanent policies also present an opportunity to fund future estate tax obligations and serve as an additional income source during retirement.
Leveraging Permanent Life Policies
Permanent or Universal Life policies, with higher premium payments than term insurance, can grow in a cash reserve in a tax-free manner. This reserve can function as a strategic addition to tax-assisted investment avenues such as RRSPs and TFSAs, offering potential cash reserves with reasonable costs, particularly in the early retirement planning phase.
Withdrawals from the cash reserve fund might incur tax obligations like those from an RRSP or RRIF. These policies can offer you access to tax-free funds through bank loans secured by the policy. The loan may be structured without immediate principal or interest payments, ensuring liquidity without immediate financial strain.
Investment Opportunities and Considerations
Insurance companies provide a range of investment options for the cash reserve fund, varying from guaranteed returns to equity-indexed or actively managed funds. Investing these funds should align with your overall investment asset allocations and financial goals and disposition.
The Need for Expert Evaluation
If you are contemplating retirement and possess substantial capital and investment assets, there is temptation to view insurance solely as income protection. However, it is wise to get help from an insurance specialist to review existing policies and conduct an objective cost-benefit analysis. Advanced strategies may emerge, potentially providing an additional income source during retirement or giving you strategies to offset some potential estate tax obligations.