Which is better Term or Whole Life insurance? part two…

#2. Which is better Term or Whole life insurance?

This is like trying to say which is better an apple or an orange.   While both an apple and an orange is a fruit they are both very different.   Both an apple and an orange is good for you and is a very healthy choice to make you will enjoy them for very different reasons.    Likewise, term and whole life insurance are both life insurance products that are very good for you for different reasons.   These policies are not right or wrong, they are simply an appropriate match for your needs or not a match for you at this time.

What is the Difference between Term and Whole Life?

This article is in three parts,

  1. The different purpose of Term verses Whole Life insurance.
  2. The different Tax strategies of a life insurance policy
  3. The investment options of a Term and a Whole life insurance policy

please check out all three blogs and then call Michael Spears at 403-831-7820 to set up your policy plan.


Step two: The different Tax strategies of a life insurance policy

The tax advantages of of a life insurance policy are similar to an R.R.S.P. with your safe and secure investments.

Keep in mind that when we consider Tax strategies there is a common sense principle to consider.

  • If you hold investments that are unregistered then every year you may incur taxable income from:
    • interest income
    • dividends
    • or capital gains

While nobody wants to pay tax, we know that with every pay check the employer holds a portion of our earnings to pay our annual income tax.   We also see that whenever our investments report a profit that this will cause us to pay more tax.   So what can we do about this?

We have two good options.

  1. Tax deferral by putting the money in a Tax shelter
    1. Putting money in an R.R.S.P. is a Tax shelter that defers your tax payment until you withdraw the money.
  2. Tax avoidance by using approved tax credits and deductions in our tax return.
    1. Hire a good bookkeeper to advise you on all the possible tax credits and deductions…
  3. Tax Evasion = Cheating and hiding..
    1. This is Crime and we do not recommend it…

Another good option to defer and to avoid tax is a Life insurance policy.  

  • A life insurance policy is also a tax shelter and a method of avoiding tax.

Tax shelter

There are two reasons that a Life insurance policy is a tax shelter.   First, since your money is held securely for your beneficiaries and paid to them tax free.    For those with a term insurance policy this benefit is not as noticeable since the amount of the benefit paid out is the same from day one and so the actual value is affected by inflation.   Whereas when a person has the Participating Whole Life insurance policy in which the amount of the benefit will increase and remain tax sheltered, then this benefit is noticeable as the dividends that are paid into the policy are earn tax free, and are tax sheltered and then paid out tax free.

The other way that a life insurance policy is a tax shelter is that when you own a participating whole life policy that provides you with cash surrender value, then you have the opportunity to take a loan out against the policy as collateral.   Which means that you have cash paid to you from the loan which is tax free.

 

A life insurance policy is also a way to avoid tax

You also avoid tax with a Life insurance policy because your family will receive the benefit without paying tax on the money transfer.    Keep in mind that when your unregistered investments and real estate transfers to your kids they will pay tax on the transfer.   However when your kids receives the money from a life insurance policy they will not pay tax on this transfer.     If you have significant funds that you intend to have your kids inherit, then it would be smart to put this money into a Whole Life insurance policy or into a Universal life insurance policy so that your kids will be guaranteed to receive the money tax free.

Keep in mind that Tax EVASION is a crime, but finding ways to plan for your money to AVOID paying tax is a smart financial plan.    Life insurance is a smart part of your plan.

A life insurance policy has many benefits to your financial plan in addition to protecting your family.    

Michael Spears

403-831-7820

www.nbbn.ca