Life insurance after retirement can be a wise move in many cases
Life insurance can be used for leaving a tax-efficient legacy to charity.
Do you need life insurance after you retire? If you have a paid-for house, your children are grown up and you have lots of savings you might think life insurance is no longer needed. But life insurance can still be useful for estate planning after you retire.
CASH FOR ESTATE
Maybe your will says you are bequeathing your cottage to one child but not to the other. Life insurance could help your executor make an equalization payment to the other child and pay capital gains tax. The child inheriting the cottage might even help pay premiums to keep your life insurance policy in force.
Similarly, if you leave farmland to one child but not to the other, you could use life insurance for an equalization payment.
SURVIVOR PENSION
Suppose you are married and you are a member of a defined benefit (DB) pension. At retirement time you need to choose a pension income option. You ask yourself: “Do I take the higher single-life pension income option or do I take the reduced income under the joint pension option to protect my surviving spouse?”
Most people take the reduced pension with automatic joint and survivor benefit because it’s required by law — unless the pensioner’s spouse signs a waiver to agree to the pension stopping upon the pensioner’s death.
The pension survivor option works a lot like life insurance. Taking a 20-per-cent reduction in pension benefits, for example, is equivalent to paying a premium on a life insurance policy with benefits payable on death. But what if the pension beneficiary dies first? The ‘premium payments’ (reduced pension) must continue for the rest of the pensioner’s life — even though the pension will not pay anything to anyone when the pensioner dies.
Ask your financial adviser how much it would cost to buy a life insurance policy to provide enough cash flow to replace the survivor pension benefits. Having life insurance coverage allows you to take the single-life pension option and use the increased income to pay life insurance premiums. Then, if your spouse predeceases, you can stop paying premiums, surrender the policy and continue to receive the higher company DB pension benefits.
BUY-SELL AGREEMENT
If you operate a business with one or more partners, and you die, will your partners have cash to buy out your share of the business? Insurance on each partner’s life will guarantee that your buysell agreement is funded. Especially if your share of the business forms the bulk of your estate, the life insurance will make it easier for your executor to liquidate and provide security for your spouse.
BLENDED FAMILY
Do you have a spouse and children from a former marriage? Maybe you have adult children of your own, too. In such a blendedfamily situation it can be difficult to have a will drawn up that provides security for your surviving spouse and something for your children. Life insurance that names your children as beneficiaries would make sure they would immediately inherit something of value.
GIFT TO CHARITY
Life insurance can be used for leaving a tax-efficient legacy to charity. For example, if you have no spouse, you could designate your favourite charity as the beneficiary of your RRIF. The size of the gift would likely diminish over time as the RRIF is depleted. The charitable donation receipt should wipe out the big tax bill arising from the RRIF on your death. Meanwhile, you could designate your family to receive your guaranteed life insurance death benefit.