Life Insurance and Estate Planning

There are numerous examples within this Estate Planning section where funding and liquidity are needed at time of death. These examples include:

  • Funding the estate's capital gains taxes as a result of the deemed disposition on death.
  • Purchasing or redeeming shares as part of a shareholders' agreement.
  • Funding a specific bequest made in a will.
  • Replacing the income of a mother, father or family dependants.

The need to provide for liquidity at time of death can only be funded in one of the following ways:

  • Use cash assets in the estate
  • Sell assets of the estate in exchange for cash
  • Borrow from a bank using existing assets (such as estate assets) as collateral
  • Life insurance.

Of all the above options, life insurance is the only one that will provide the liquidity at the exact time when the funds are required. Life insurance provides a tax effective solution with an attractive investment rate of return to pre-fund these various known future funding and tax liability needs. While it is true that someone may have significant assets in their holding company that they believe can be used to fund the tax liability, a life insurance policy will fund it more efficiently and preserve the overall value of the Holding Company assets for the next generation. In addition, the life insurance proceeds create a Capital Dividend Account credit which enhances its effectiveness in terms of funding the tax liability.  

  • Typical diversified investment holding company.
  • On death of shareholder, estate tax liability is due, as a result of deemed disposition of shares.
  • To fund the tax liability, Estate must sell some of the most liquid assets.
  • The result is that the value of the Estate is reduced.
  • Alternatively, shareholder purchases a life insurance policy and funds it with asset transfer.
  • On death of shareholder, estate tax liability is due, as a result of deemed disposition of shares.
  • Tax-free life insurance is used to pay the tax liability, thus maintaining the value of the Estate.

*As you can see from these charts, Life Insurance is a much more efficient way of funding Estate Tax liability. This is because the payment is made tax-free, so you will be able to use a proportionately lower portion of your other assets in order to meet the Estate Tax liability.

For information on estate planning with life insurance, please see "strategies for estate planning with life insurance".