How Can Life Insurance Supplement an Estate Plan?

Life insurance can be a useful tool in estate planning to offset tax liabilities and supplement the assets that may otherwise be available to leave to a surviving spouse or other family members.

An article by Michael Grob, featured in the most recent issue of the Step Journal, highlights the potential of life insurance in estate planning, with a focus on the utility of insurance within the context of high net worth individuals who have assets in multiple jurisdictions.

Last year, the Canadian Life and Health Insurance Association released statistics from 2014, which suggests that the size of Canadian life insurance policies continues to grow, despite prolonged low interest rates and slower than average investment growth.  During 2014, the value of life and health insurance policies increased by 11.5% to $721.2 billion.  While these figures suggest that the use of life insurance in estate planning is increasing, Mr. Grob states that it is less commonly used to its potential in the cross-border context.

There are many reasons why life insurance policies are such an effective estate planning tool, and why they may be especially suitable when cross-border issues may also present themselves.  These reasons, which are highlighted within Mr. Grob’s article, can be summarized as follows:

• Availability of liquid funds available for use by an estate upon death, including for the satisfaction of foreign taxes and/or inheritance tax, where there may otherwise be complications in obtaining probate that will delay the payment of these estate liabilities;
• Tax concessions generally associated with life insurance (in Canada, life insurance proceeds are not typically taxable, nor are they normally subject to probate fees when a designated beneficiary other than the estate is identified);
• Accessibility to life insurance in other jurisdictions, even if local access is limited, through international providers;
• Variety of different options regarding policies and their terms; and
• Equalization of inheritances left to survivors; for example, in circumstances in which a business will be left to one child and the testator wishes to establish a life insurance policy to benefit the other(s) or to provide a corporation with sufficient funds to buyout the business interests left to one or more shareholders.

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With all of the benefits associated with the use of life insurance policies, it is important to consider the potential of life insurance in achieving clients’ objectives when assisting them with estate planning.