Adequate life insurance coverage can provide you and your family with a guarantee that your current lifestyle and family goals will be provided for should something happen to you. While life insurance is considered a key component of most financial plans, the first step is to assess your personal situation and establish your needs.
Do you have an up-to-date financial plan based on your family's requirements? By making a thorough assessment of your circumstances, a life licensed Investment Advisor can work with you to define your goals and assist you in determining both the proper amount of life insurance and which type of insurance is right for you.
There are two types of life insurance: term and permanent. Generally, term insurance covers temporary or short-term needs, whereas permanent insurance is purchased for long-term or lifetime needs. A comprehensive personal financial review, which includes an insurance needs analysis, will help you evaluate your situation. Let's review what your needs and goals might be.
If something were to happen to you today, which meant that you were no longer contributing financially to your family's income, would their financial security be in jeopardy because of debt? The goal is to assess all the immediate expenses that would need to be paid if you were to pass away. The key objective is to leave your family and loved ones without any financial worries.
Immediate expenses include any current debts. Under this category, you would need to consider any outstanding balances on your credit cards or a line of credit. An outstanding mortgage would also fall into this category, under the umbrella of current debts to retire.
In addition to eliminating any current debts, you may also want to provide enough insurance coverage to create a children's education fund. Other basic goals, like providing for future income needs, also need to be assessed. A thorough insurance-needs analysis will assist you in reviewing your requirements.
If your death triggers tax liabilities, these would be considered long-term debt. Your Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) as well as your stock portfolio, possibly some business interests, and real estate may all be sources of potential tax liabilities.
As an example, let's consider what happens at your death to your RRIF. If you do not have a surviving spouse, then the total fair market value of your plan must be taken into income, and taxed in your final return. However, by designating your spouse as beneficiary of your plan, he or she would be eligible for a spousal rollover of your RRIF assets. On the death of your spouse, the total fair market value of the plan becomes taxable as income to him or her in the year of death.
Let's assume at death your RRIF is worth $300,000. If you are in a 50% tax bracket, then half of the plan's assets, or $150,000, would be owed as tax.
Assets that may trigger capital gains at death include property such as a family cottage. If you have held property or assets over a long period of time and have had even a moderate growth rate, you may be surprised at what you owe.
Let's illustrate the impact using a cottage, which is considered a second property and not a principal residence. Let's assume it was originally purchased at $20,000 and today's market value is $200,000. Of your $180,000 growth, which is a capital gain, 50% is taxable. Therefore, only $90,000 would be taxable. In a 50% tax bracket, you would owe $45,000 in tax. If you want your family to continue to own and enjoy the cottage you'll need to plan its transfer to the next generation in the most tax-efficient manner possible.
Life insurance can often provide the solution to many financial needs and objectives. Whether you have a temporary or permanent need to offset a financial risk, life insurance may be the answer you're looking for.
A needs analysis will assist you in analyzing all your requirements. A life licensed Investment Advisor can work with you to evaluate your personal situation and help you to design a plan that meets your goals.
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