When are Life Insurance Premiums Tax-Deductible?
Paying into a life insurance plan is an investment in your family and helps ensure their financial security after your death. While there are tax implications when the insurance plan is paid out, there may also be opportunities for portions of your life insurance premiums to be tax-deductible. Working with a tax expert to fully understand your insurance policy can help you identify potential tax breaks that may result in savings or an increased tax return.
With Tax Day fast approaching, it’s essential that you understand life insurance strategies for business owners and the types of tax deductions available.
Are life insurance premiums tax-deductible?
As a single earner in Canada, life insurance premiums are not tax-deductible because they are considered a personal expense. If you are the owner of a business, however, you may be able to claim certain life insurance premiums you pay on your employees’ behalf. It is recommended that you work with the best financial services company in Montreal to ensure you claim the maximum deductions.
Life and Accidental, Death & Dismemberment (AD&D) premiums paid by an employer are considered a taxable benefit for the employee. This means that when the beneficiaries receive the benefits, they are tax-free.
Are there exceptions?
Some exceptions allow for life insurance premiums to be tax-deductible. IMC Financial has compiled this guide to help you get the most out of your Canadian Income Tax return:
- Loan Collateral: As an individual, you cannot deduct life insurance premiums as an expense unless your financial institution requires them as loan collateral. Keep in mind that even if you qualify, you will likely only be able to deduct a small portion of the cost.
- Charitable Gift: Individuals are permitted to donate their life insurance policy to their favourite charity. As an added benefit, the charitable gift is tax-deductible for the policy holder’s estate. Options to donate your life insurance policy include transferring ownership of your current policy to the charity, adding the charity as a beneficiary on your current policy, or creating a new policy under the charity’s name. Consult with your tax expert to determine the best option for you.
- Employer-paid Premiums: Businesses in Canada (other than sole-proprietorships) can deduct a portion of the life insurance premiums paid on their employees’ behalf as business expenses. There are exceptions to these deductions, including group term insurance and optional dependent life insurance.
What are the Tax Advantages of Life Insurance?
Depending on the circumstance, your life insurance policy may provide you, your estate, or beneficiaries of your policy with certain advantages at tax time. The following guide outlines some of the potential tax benefits of life insurance:
- Tax Breaks for Employers: Employers may be eligible for tax breaks on individual insurance plans they pay into on their employees’ behalf. There are also specific considerations for employee group benefits and employee co-pay programs.
- Tax-Free for Beneficiaries: The money paid out to beneficiaries is considered a tax-free lump sum, meaning they will receive the total amount of their benefit when the policyholder dies. This is a particularly important consideration when your spouse or immediate family are the beneficiaries of your policy since they will not be burdened by a hefty tax fee when they need those funds the most.
- Benefit to your Estate: If you choose your estate as the beneficiary of your life insurance plan, the proceeds after your death can be used to pay off outstanding debts, liabilities, and taxes, while the remainder becomes part of your estate’s total assets. Your estate can also use the proceeds from your insurance policy to pay funeral expenses and legal fees resulting from the disbursement of your estate.
- Pay-Out in Trust: Many insurance policies in Canada allow for beneficiaries to be named “in trust.” This means that if the policyholder dies and underaged parties are named as beneficiaries, their portion of the insurance pay-out can be held in trust until they reach a certain age. Twenty-five years old is a typical age for a trust to be accessible in Canada.
Is Your Life Insurance Taxable?
IMC Financial has outlined the following list of considerations to help you determine whether your life insurance is taxable:
- Surrender Cash Value: If you surrender the cash value of your insurance plan before or after your death, your life insurance pay-out may be taxable.
- Estate as Beneficiary: If your estate is listed as the beneficiary of your life insurance policy, your life insurance pay-out may be taxable.
- Individuals as Beneficiaries: If you have one or multiple beneficiaries named on your insurance policy, the pay-out for them is not taxable.
Your Trusted Financial Services Leader
Understanding Canada’s tax rules for life insurance premiums and pay-outs will help ensure you receive the maximum benefit and eligible deductions during tax season. IMC Financial is Montreal’s first choice for insurance and financial services, and our team of experts will work with you directly to make the most of your exceptions, deductions, and benefits.
Whether you’re an individual or sole proprietor with a personal insurance plan, or an employer with multi-employee insurance benefit programs, IMC Financial is a team you can trust. Our expert accountants and financial advisors can guide you on your tax options and provide you with a whole life insurance quote based on your budget.
For more information, please do not hesitate to contact me.