Original article appeared in Ontario Dentist, March 2002
By Susan Roberts
Some dentists mistakenly believe that as long as they have a will, their estate planning is complete. Although an up-to-date will is a crucial part of an overall estate plan, it is by no means the only thing to consider. An equally important consideration is having the right type of life insurance in place. Without doing so, your heirs could suffer unnecessary financial hardships. Among the types of life insurance available on the market are term and permanent. Although both types are designed to provide money for your beneficiary upon your death, each is designed to address different needs.
Term life insurance is designed to address shorter term or temporary needs (which could possibly span decades), such as providing money to raise your children should you die when they’re young, and funds to cover your funeral expenses and outstanding debts. Premiums for term insurance are typically cheaper when you’re young and healthy, and increase as you age. In most cases, the amount of term insurance you can purchase begins to reduce at age 65 and ends at age 80 (or earlier), so it’s not ideally suited for estate planning.
On the other hand, one of the main purposes of permanent insurance is estate planning. Essentially this means having a pool of money available for your family to pay the taxes due at your death (or to pay off other debts) so that your heirs will receive the inheritance you intended. Premiums for permanent insurance remain the same each year and are guaranteed not to increase, and you can keep the insurance as long as you pay the premiums.
As well, if you don’t have assets to leave to your heirs, permanent insurance can provide a method of leaving them a generous bequest. If you wish to leave money to a charity, permanent insurance can allow you to do so in a manner that’s tax advantageous.
Without the right type and amount of life insurance coverage to help your family cope with the tax consequences of bequeathing them certain kinds of assets, it could be financially difficult, if not impossible, to have your assets distributed as per your intentions.
To illustrate this point, consider the following simplified
hypothetical case:
A widow, Helen is a 55 year-old Ontario dentist with three grown children. She
owns a $350,000 house.
An antique collector, Helen purchased 18th century furniture early in her career for $10,000. A recent appraisal shows the furniture would now fetch a price of $110,000. Her Muskoka cottage has also significantly appreciated in value. Purchased for $50,000, its market value is now $300,000.
Then suddenly, Helen dies in a car accident. She had purchased a small amount of term life insurance to cover matters such as her funeral costs and outstanding business expenses. However in preparing her will, Helen didn’t consider the crushing financial effect the capital gains taxes would have on the value of her estate due to tax laws.
As a result of what is known as a “deemed disposition,” the government assumes you have effectively sold all of the capital property you own at its fair market value when you die. It then demands taxes on the capital gains (the growth in the value of the asset) on those assets. Since her house is claimed as her principal residence, the capital gain on her cottage — $250,000 — is subject to tax. Fifty per cent of the capital gain ($125,000) is taxable income. Since the deemed sale of her assets and the resulting capital gains would put Helen in the top tax bracket (a rate of about 50 per cent when surtaxes are included), the tax owing on the cottage is about $62,500. Using the same calculations, the tax owing on the antique furniture is around $25,000. Helen’s estate is left with a combined tax bill that’s close to $100,000.
This is in addition to probate fees the estate must pay. Presently, probate fees in Ontario are the highest in the country — $5 per $1,000 on the first $50,000 of the estate and $15 per $1,000 on the value of the estate exceeding $50,000. The probate fees for Helen’s estate will be about $11,500.
So how will Helen’s children arrange for the payment of these taxes? The unfortunate reality is that they would likely be forced to sell the cottage or furniture just to cover the taxes on these assets. However, had Helen obtained permanent insurance, such as a Term 100 plan (or prepared to have these taxes paid through other means), her family may have been able to avoid this burden — even if she had died at a very old age.
If a part of your estate plan will involve leaving money to a charity, permanent insurance offers a tax advantageous way to do so. There are two ways you could accomplish this. One method is to make the charity the sole beneficiary of your insurance — which would make your premiums tax-deductible. Another way is to name your estate as the beneficiary of your insurance and have your will dictate the amount of money you wish to donate to the charity. Under current tax laws, the money given to a charity by your estate will count as a charitable donation made in the year of your death, which will count as a tax credit to offset up to 100 per cent of your taxable income (including deemed capital gains) in your final year.
When determining how much permanent life insurance coverage you need, consider consulting a licensed insurance agent from CDSPI Advisory Services Inc. — A CDSPI Affiliate, as there may be complex variables that apply to your particular life insurance planning needs. As a CDA or ODA-member dentist, insurance planning advice from CDSPI Advisory Services Inc. is available to you at absolutely no cost.
Depending on your situation, you may wish to include both term and permanent life insurance coverages in your estate plan. When you’re younger, consider purchasing term coverage at a lower premium than what you would pay for permanent coverage. Then, as you enter your 40s, and begin thinking about protecting your estate, you may consider purchasing permanent insurance. As your temporary needs for term coverage begin to diminish (for instance, your children have all finished school and are working), you can reduce your term coverage amount accordingly over time.
A word of caution: Don’t wait too long to apply for permanent life insurance as you will need to be in good health in order to be approved for coverage. Additionally, it’s wise to consult a lawyer or tax professional when creating a complete estate plan.
Susan Roberts is the Insurance Service Supervisor for the Canadian Dentists’ Insurance Program. Administered by CDSPI, the Program offers dentists both permanent and term life insurance coverages. For no-cost insurance planning advice from a licensed agent, dentists outside Quebec and PEI can contact CDSPI Advisory Services Inc. — A CDSPI Affiliate, at extension 5002 by dialing 1-877-293-9455 or (416) 296-9455.