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Train of life | Should we take out life insurance to save tax?

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A couple in their 60s are wondering if they should take out life insurance to ensure their children pay less tax when they die.

The situation

Paul * and Lucie *, two retirees aged 63 and 60, deeply love their children and wish to leave this world by leaving them an inheritance. They write to us because we have just offered to take out a life insurance policy that would grant this wish.

“We are very hesitant considering our age and the high cost of insurance,” they write. We will have to dip into taxable amounts to pay for said insurance. ”

Obviously, no one knows the future, especially important data, the day of the death. Paul and Lucie are worried about the risks of running out of funds if one of them becomes ill or if they have to move to a private seniors’ residence (RPA).

Currently, their net annual cost of living is $ 50,000.

If Lucie does not have a pension plan, Paul, meanwhile, receives an annuity of $ 90,000 per year which is transferable at 60% to the spouse upon death.

“Is the strategy of taking out life insurance right for us?” », Asks the couple.

Numbers

Lucie, 60 years old

Pension plan: none
RRSP: $ 675,000
TFSA: $ 75,000
Life insurance: $ 80,000

Paul, 63 years old

Pension plan: $ 90,000 per year indexed
RRSP: $ 135,000
TFSA: $ 15,000
Life insurance: $ 300,000
House: $ 400,000
Auto: $ 45,000
No debt

The answer

First of all, the famous tax bill that worries the retired couple will happen on the death of the second spouse, immediately specifies Sylvain B. Tremblay, vice-president at Optimum Gestion de placements.

When the first member of a married couple dies, the registered investments are transferred to their surviving lover without going through tax. However, when the last spouse dies, it is as if they were cashing in their RRSPs or RRIFs on the day of their death.

However, contrary to popular belief, it is not the heirs who pay the tax with their own money. It is the deceased. Unless the estate is in deficit and the heirs have accepted it.

PHOTO HUGO-SÉBASTIEN AUBERT, PRESS ARCHIVES

Sylvain B. Tremblay, Vice-President at Optimum Gestion de placements

“The two retirees currently have $ 810,000 in RRSPs which will become RRIFs at age 71. In 10 years, if they had returns of 3%, they will have $ 1 million. With returns of 5%, RRIFs will climb to $ 1.3 million, ”calculates Sylvain B. Tremblay.

If the couple died suddenly tomorrow, the tax bill would be around $ 400,000. In 10 years, it will increase to around $ 500,000 or $ 650,000 depending on the returns obtained. But if the last parent dies at age 90, the bill will have dropped to $ 189,000 or $ 245,000.

Because RRIFs won’t go up forever, recalls the expert. At 71, you must withdraw a sum each year. At age 90, it will be $ 378,000 to $ 491,000, again depending on performance.

Yes, being able to predict the future would be much easier to answer the initial question …

No worries about disease and RPA

From the age of 71, the couple will have to collect a little more than 5% per year from the RRIF, or from $ 53,000 to $ 68,000 depending on the value of the portfolio. To this amount is added Paul’s pension income of $ 90,000, plus the Old Age Security pension and the Régie des rentes du Québec pension. The family income will therefore reach more than $ 150,000.

With a net cost of living of $ 50,000 per year, according to their estimate, retirees can rest easy when it comes to paying for care or rent in a private seniors’ residence. “They even have the means to save $ 10,000 a year,” says Sylvain B. Tremblay.

The cost of life insurance

The purpose of life insurance is to cover a tax bill estimated at $ 500,000.

In the event that Lucie wants to ensure that this amount is paid by life insurance, how much will she have to pay per month? A simple online quote gives you an idea of ​​the amount for a 60-year-old non-smoker.

Lifetime coverage would cost him $ 750 per month, or $ 9,000 per year. If she dies after her spouse at age 90, she will have paid for her insurance $ 270,000. But she could also die younger and have paid less …

Lucie also has the option of choosing to pay the premium over 10 years. She would then pay $ 2,100 per month for a total of $ 235,000. And while we’re at it, a payment in eight years? Cheaper in the end, at $ 227,000.

However, the couple could not afford this life insurance in such a short time without touching their RRSP.

“Life insurance is expensive, it really has to be a necessity,” insists Sylvain B. Tremblay.

“One case where life insurance is important, if not necessary, is when the assets are not liquid,” he explains. Think of those who build a housing stock by financing buildings at 80%. On death, if the deceased are not insured, the estate must pay the capital gain tax calculated on the date of death. If the value of a building has climbed by $ 100,000, the estate will likely have to sell it to foot the bill. ”

“In this case, everything is liquid. The couple does not embarrass anyone, ”he emphasizes.

Paul and Lucie already have a total life insurance amount of $ 380,000 tax-free, which will be paid to the estate along with the TFSAs. The total more than covers the tax payable.

Sylvain B. Tremblay also recalls that the couple has already saved tax by taking RRSPs.

“When you take out life insurance, there is a strong emotional component,” he says. We are not in the logic here. ”

“If the couple is determined to leave more money for the kids, they might choose to save $ 10,000 a year and grow the money tax-free in a TFSA. With a return of 3%, they will have accumulated $ 288,000 in 20 years, when Lucie turns 80.

“The couple could also suggest that their children take out life insurance for them, the father and the mother, and benefit from the premium upon their death. ”

* Although the case highlighted in this section is real, the first names used are fictitious.

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