Life insurance is a unique product in Canada. There are a few key pieces of legislation that make insurance planning so effective.
1.) The death benefit is almost always paid out tax-free. There are circumstances were a death benefit would not be tax-free, the most common being from a policy held within a RRSP. You also can choose a variety of policies with either a fixed death benefit or with a growing benefit, increasing over time.
2.) Money that is invested inside a life insurance policy, known as the policy’s Cash Value, is allowed to grow and compound tax sheltered. There are limits, but they are based on the amount of insurance. The more the insurance face value, the more money can be invested and tax sheltered.
3.) The tax laws around borrowed funds, or leveraging, provides tax free income to the borrower. Money borrowed is not money earned, and hence is not taxed. Life insurance policies with cash value can be used as collateral for a loan. This allows life insurance policy holders in Canada to invest extra money into their policies over time, have the advantage of a tax sheltered investment plan, and borrow money from their insurance policy tax free.
These unique legal features of life insurance and leveraging money allow you to invest substantial funds into a life insurance policy, reduce taxation both now and ultimately to your estate, and possibly even have access to tax free income in the form of loans.
Allen LaRose 