Is life insurance taxable in Canada? 2024 guide
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Discover the methodologyEmbarking on the journey of life insurance often sparks a common query: Is life insurance taxable in Canada? Will my payouts be entangled in taxes? How does it all work? Fear not, we got you covered.
Read our guide to unravel the mysteries of life insurance taxation in Canada, providing answers to these vital questions and more.
Once you've got the tax puzzle sorted, compare the best life insurance plans using our free comparator, get multiple free tailored quotes, and find a policy that not only fits your needs but also gets both tax advantages and payout benefits.
Is life insurance taxable in Canada? 5 key takeaways
- Life insurance payouts in Canada are usually tax-free for beneficiaries.
- Keep your policy updated with designated beneficiaries to avoid potential taxation and delays.
- Specific cases like collateral loans or charitable beneficiaries might be subject to taxes.
- Whole life insurance can provide tax advantages by growing cash value tax-free.
- Group term life insurance premiums are typically not tax-deductible for employees.
When is life insurance taxable in Canada?
Technically, all life insurance qualifies as “tax-exempt” life insurance in Canada because your beneficiaries aren’t required to report the payout, sometimes called a death benefit, as taxable income. It’s important, however, to stay on top of your policy, regularly updating information about your life insurance beneficiaries to make certain they receive the funds directly from the insurer and not from your estate.
If you’re hoping to avoid inheritance tax on life insurance for your survivors, it’s important to take the following steps to protect your investment in their financial well-being:
Life insurance tax tips
- Name a beneficiary: In the absence of a named beneficiary for your policy, the benefit will revert to your total estate and may be taxed. It’s important to check with your insurer periodically and update your policy as needed, as in the case of a divorce.
- Choose your policy carefully: In the case of permanent life insurance or other policies with a cash value, your beneficiaries will pay interest on any interest or dividends the policy earns over time.
- Avoid selling: In the event that you surrender your policy for its cash value, you can expect to pay taxes on the interest earned. Your survivors also won’t receive a death benefit upon your passing and will instead pay inheritance taxes on any remaining funds they receive as part of your estate.
In general, however, neither you nor your beneficiaries are likely to pay taxes on a death benefit. If you'd like to get a better idea of what the benefits are, you can use our comparator below to compare the best plans in Canada and get free life insurance quotes in seconds right here.
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Is life insurance taxable income to the beneficiary in Canada?
Provided you have properly designated your beneficiaries and the policy payout does not include interest or dividends, your life insurance benefit is not taxable in Canada.
It’s important to provide your insurer with the names and social insurance numbers of your beneficiaries and name them in your policy. Otherwise, your benefit might revert to your estate. In that case, your beneficiaries will need to pay inheritance taxes on any funds they receive, and there’s a risk that creditors might claim the policy value.
Is life insurance a tax deduction?
When discussing tax deductions and life insurance, it’s important to remember that your policy actually has two components - your monthly premiums and the death benefit - each with its own tax implications.
If you’re hoping for a tax deduction for life insurance premiums, you may be somewhat disappointed to learn that the CRA (Canada Revenue Agency) considers these nondeductible personal expenses.
Exceptions to the rule? If you use your life insurance policy as collateral against a loan from a bank or other registered financial institution. Note that this only applies to a loan you’ll use to earn income, such as a business loan.
Likewise, if you name a registered charity as the beneficiary of your policy, premiums paid toward your life insurance are tax deductible. We suggest consulting with a tax professional or financial advisor, in either case, to ensure you properly claim your deduction.
In short, the answer to the question, “Is my life insurance premium tax deductible?” is generally, “No,” unless you intend to bequeath the value of your policy to a charity or assign it to a financial institution as collateral for a loan.
Good to know
A certified financial advisor can help you pick the best life insurance for your tax situation.
What are whole life insurance tax benefits?
Depending on your long-term financial goals, whole life insurance can have significant tax benefits as you grow your legacy.
Specifically, you can use your whole life insurance as a tax shelter in Canada. The money you pay into your policy grows tax-free for the duration of the policy, which means more for your family members after your death - and less for the CRA.
Be aware, however, that interest earned or dividends paid out in cash are subject to taxation. The better option? Reinvest them in your policy to increase their cash value and minimize the tax burden on your heirs.
How whole life insurance and taxes work
- At the age of 35, Eugene decides to purchase a whole life insurance policy to provide an inheritance for his son, Marc. The policy includes savings and an investment component, and Eugene has the option to receive any interest or dividends earned as cash payouts on an annual basis. A financial advisor, Eugene understands that any payouts will be subject to tax. Instead, he reinvests interests and dividends in the policy. While Marc will eventually pay tax on this portion of the benefit, Eugene believes that amount will be offset by the overall increase in the value of the policy.
- Following the death of his father, Marc learns he is the named beneficiary of a whole life insurance policy worth $1 million. His accountant explains that, while he will not pay taxes on $750,000, the accumulated value of the premiums his father paid over the course of a lifetime, he will owe taxes on the $250,000 earned as interest and dividends.
You can check out multiple whole life insurance policies that give the best tax benefits right here using our free comparator below. Get free personalized life insurance quotes and start saving today.
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Is term life insurance tax deductible?
While the premiums paid towards your term life insurance are considered personal expenses and therefore aren’t tax deductible in Canada, you can rest assured that your beneficiaries won’t pay taxes on the death benefit, provided they receive it directly from your insurer.
How term life insurance tax works
- Patricia lives in Edmonton. She names her two daughters, Marcy and Anna, the beneficiaries of her term life insurance policy. Each year, during her annual meeting with her financial planner, Patricia confirms that her insurer has listed each daughter and her social insurance number as a beneficiary of the policy. When Patricia passes unexpectedly, Marcy and Anna each receive $30,000 directly from the life insurance company, together with documentation to submit to the CRA establishing that the money is a non-taxable death benefit.
Another example of life insurance tax:
Frances, a Windsor resident, purchases a term life insurance policy with the intention that her son, Peter, should receive the death benefit in the event of her passing. Mistakenly believing that the provisions in her will suffice when it comes to directing the funds, she does not communicate with her insurer beyond paying her premiums.
Following Frances’ death, Peter learns that the value of the policy will pass to his mother’s estate rather than to him, directly. As such, he will need to pay inheritance taxes on whatever he receives after settling any outstanding obligations.
Is cash surrender value of life insurance taxable in Canada?
In the event that you opt to surrender the cash value of your life insurance policy and the value exceeds the adjusted cost base, you will pay taxes. Note, however, that the CRA considers any profit as income, rather than capital gains, and taxes them accordingly.
Is group term life insurance taxable?
Group term life insurance is generally offered as a group benefit by employers who take responsibility for all or part of the monthly premiums.
As an incentive to offer this supplementary protection to their valued employees, CRA allows employers to deduct their portion of the premiums. Employees, however, will treat any premiums paid towards a group term life insurance policy as a personal expense, which CRA does not consider the deductible.
- Acme Corp in Montreal offers all of its employees the option to participate in a group term life insurance policy for the duration of their time with the company. Monthly premiums amount to $60 per employee, of which Acme Corp pays $45 and participating employees pay $15. Acme Corp’s $45 payments are deductible, however, the employees’ $15 payments are not.
Should a participating employee pass away during the term of the group life insurance policy, however, his or her beneficiaries will not pay taxes on the death benefit.
How to claim a life insurance payout?
If you worry that the process of claiming a life insurance payout will unduly burden your loved ones in a time of grief, rest assured that your insurer will provide proactive assistance at every step of the process.
If you’ve named your beneficiaries and kept your insurer updated with their contact information, a representative from the company will reach out to them directly with forms to complete.
The representative will also guide your beneficiaries through collecting any documents required to confirm your passing, such as a death certificate, and help them decide whether to receive the benefit as a lump sum payout or as an annuity.
While your loved ones will never pay tax on a life insurance payout in Canada, the choice between a single payout or multiple annual payouts may nevertheless have other tax implications.
As a precaution, we also suggest storing copies of your life insurance policies and any related documents in an easily accessible location and that you advise your executor of their location. This will prevent unnecessary delays in the event that your beneficiaries need to contact your insurer directly.
