Life Insurance is a powerful and critical tool in Estate Planning. Life Insurance can provide immediate source of cash so your family can make use of tax-free proceeds to pay for Probate Taxes, Capital Gains Taxes, and other expenses that your estate might incur.
Life Insurance's role in Estate Planning
Life Insurance plays an important role in Estate Planning. Without life insurance, your estate may not be able to pay its probate taxes, final expenses, mortgage, credit card debts, and have money available for your family members to maintain a standard of living.
Basics of Estate Planning
Estate planning is an emotional and overwhelming undertaking for most families. The consequences of not taking the time to develop a plan now can leave your family under untimely financial stress.
Legal and tax advice is recommended when it comes to estate planning as it's quite a broad field. However, you can prepare yourself by considering the following basic things so when the time comes to put a plan together then you are ready to have a meaningful conversation with your financial advisor:
Do I have an updated Legal Will and Power of Attorney
Do I have dependent children or beneficiaries for which assets distribution may be different or with certain conditions
Will my Insurance coverage be sufficient to preserve all assets
How can I minimize unnecessary Probate and Capital Gains Tax
Probate Tax and Capital Gains Tax can be a major cost to consider when it comes to estate planning. Assets that are generally included in the value of the estate include real estate in Ontario less encumbrances such as a mortgage, bank accounts, investments, vehicles, all property of the deceased that was held in another person's name, goods, intangible property, business interests, and insurance proceeds that are left in the estate.
Probate Tax
Probate Tax is also referred to as an Estate Administration Tax or Probate Fees. Probate Tax is paid to the Government of Ontario when an estate is probated. The Probate Tax is charged on the value of the estate of a deceased person.
If you are interested in calculating Probate Tax then you can visit Ministry of the Attorney General website.
If you are interested in learning more about Probate Tax then you can visit Government of Ontario website.
Naming Beneficiaries on Life Insurance Policy
If you do not name a beneficiary when purchasing a Life Insurance Policy then the insurance proceeds will go to your estate by default. This attracts probate tax.
A beneficiary is a person or persons who will receive the death benefit from the life insurance policy when you die. You can name your spouse, children, dependents, another family member, a friend or a charity as a beneficiary. Certain conditions apply when you name minor children as beneficiaries.
It's always a good idea to name your beneficiaries in your life insurance policy when making the purchase.
Final thought
Not having a plan can lead to stress and anxiety for your family. Estate Planning should not be expensive and overwhelming. Once the plan is in place, you won't need to worry anymore except for the small amount of time spent on your annual review of the plan. Ensure that you have a Legal Will, Power of Attorney, and sufficient Life Insurance.