Lifestyle | Should we buy life insurance to save tax?


A couple in their 60s wonders if they should take out life insurance to ensure that their children pay less tax when they die.

Posted Nov 21, 2021

Isabelle Dube

Isabelle Dube
The Press

The situation

Paul* and Lucie*, two retirees aged 63 and 60, deeply love their children and wish to leave this world by leaving them a legacy. They write to us because we have just offered them the possibility of taking out life insurance that would make this wish come true.

“We are very hesitant considering our age and the high cost of insurance,” they write. We will have to draw on taxable funds to pay for said insurance. »

Obviously, no one knows the future, especially an important fact, the day of death. Paul and Lucie worry about the risks of running out of funds if one of them falls ill or if they have to move into a private residence for seniors (RPA).

Currently, their annual net cost of living is $50,000.

While Lucie does not have a pension plan, Paul receives a pension of $90,000 per year, 60% of which is transferable to the spouse upon death.

“Is the strategy of taking out life insurance good for us? asks the couple.

Numbers

Lucia, 60 years old

Pension plan: none
RRSP: $675,000
TFSA: $75,000
Life insurance: $80,000

Paul, 63 years old

Pension plan: $90,000 per year indexed
RRSP: $135,000
TFSA: $15,000
Life insurance: $300,000
House: $400,000
Car: $45,000
No debt

The answer

First of all, the famous tax bill that the retired couple is worried about will happen on the death of the second spouse, immediately specifies Sylvain B. Tremblay, vice-president at Optimum Gestion de placements.

When the first member of a married couple dies, the registered investments are transferred to their surviving lover tax-free. However, when the last spouse dies, it is as if he were cashing in his RRSPs or RRIFs on the day of his death.

However, contrary to popular belief, it is not the heirs who pay the tax with their own money. It’s the deceased. Unless the estate is in deficit and the heirs have accepted it.

PHOTO HUGO-SÉBASTIEN AUBERT, LA PRESSE ARCHIVES

Sylvain B. Tremblay, Vice President at Optimum Investment Management

“The two retirees currently have $810,000 in RRSPs which will become RRIFs at age 71. In 10 years, if they had returns of 3%, they will have 1 million dollars. With returns of 5%, the RRIFs will climb to $1.3 million,” calculates Sylvain B. Tremblay.

If the couple died suddenly tomorrow, the tax bill would be around $400,000. In 10 years, it will increase to around $500,000 or $650,000 depending on the returns obtained. But if the last parent dies at age 90, the bill will have dropped to $189,000 or $245,000.

Because RRIFs won’t grow forever, says the expert. At age 71, you must withdraw a sum each year. At age 90, $378,000 to $491,000 will remain, again depending on returns.

Yes, being able to predict the future would be much simpler to answer the original question…

No worry about sickness and RPA

From age 71, the couple will have to cash in a little more than 5% per year of the RRIF, or $53,000 to $68,000 depending on the value of the portfolio. To this amount is added Paul’s pension income of $90,000, plus the Old Age Security pension and the annuity from the Régie des rentes du Québec. The family income will therefore reach more than $150,000.

With a living cost of $50,000 net per year, according to their estimate, retirees can rest easy when it comes to paying for care or rent in a private seniors’ residence. “They even have the means to save $10,000 a year,” says Sylvain B. Tremblay.

The cost of life insurance

The purpose of life insurance is to cover an estimated tax bill of $500,000.

In the event that Lucie wants to ensure that this sum is paid by life insurance, how much will she have to pay per month? A simple online quote gives you an idea of ​​the amount for a 60-year-old non-smoker.

Lifetime protection would cost him $750 per month, or $9,000 per year. If she dies after her spouse at age 90, she will have paid $270,000 for her insurance. But she could also die younger and have paid less for it…

Lucie also has the option of choosing to pay the premium over 10 years. She would then pay $2,100 per month for a total of $235,000. And for that matter, a payment in eight years? Cheaper in the end, at $227,000.

However, the couple could not afford this life insurance in such a short time without touching their RRSP.

“Life insurance is expensive, it really has to be a necessity,” insists Sylvain B. Tremblay.

“One instance where life insurance is important, even necessary, is when assets are illiquid,” he explains. Think of those who build a housing stock by financing buildings at 80%. Upon death, if the deceased are uninsured, the estate must pay capital gains tax calculated at the date of death. If the value of a building has gone up by $100,000, the estate will likely have to sell it to pay the bill. »

“In this case, everything is liquid. The couple does not put anyone in the embarrassment, ”he underlines.

Paul and Lucy already have a total amount of life insurance of $380,000 tax-free, which will be paid to the estate with the TFSAs. The total more than covers the tax payable.

Sylvain B. Tremblay also recalls that the couple has already saved tax by taking out RRSPs.

“When you take out life insurance, there is a strong emotional component,” he says. We are not logical here. »

“If the couple absolutely wants to leave more money for the children, they could choose to save $10,000 a year and have the money grow tax-free in a TFSA. With a return of 3%, they will have accumulated $288,000 in 20 years, when Lucie turns 80.

“The couple could also suggest that their children take out life insurance for them, the father and the mother, and benefit from the premium upon their death. »

*Although the case highlighted in this section is real, the first names used are fictitious.

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