As you get ready for another tax season,make sureto look at your life insurance. It can affect your tax return.
The main reason for buying life insurance is to have financial protection in case of death. In addition to that,yourlife insurance also has tax benefits. But how do you know which tax benefits might apply to your taxreturn?
Here’s a simple checklist to make it easier. For detailed advice on your specific situation, you’ll want to talk with youradvisorand a tax professional.
Personal life insurance premiums
Because Canada Revenue Agency regards premiums for both term life insuranceand whole or permanent life insurance, as personal expenses, they aren’t generally taxdeductible.
Cash value from a permanent life insurance policy
Permanent life insuranceis more than just insurance.Over time your policycanbuild valueyou can accessforcashduring your life, with certain tax implications.You can accessmoney in your policythrough a loan or a withdrawal.
If you own life insurance that has a cash value component, here are some situations and how they may affect your tax return.
You received a life insurance payout after the death of a loved one.
Yourmoney's not taxable ifthe policynamed you as a beneficiary.
Your policy's cash valueincreasedand you didn't withdraw or borrow this money.
Yourmoney's not taxable, so long as it stays in the policy and it's within government limits. (If it exceeds government limits and this could not be corrected, your insurance company would likely have contacted you.)
You used your policy's cash value as collateral for a loan from a bank or other third-party lender.
Your interest payments may be tax-deductible if you use the loan to earn income from your business or property. The loan is not taxable.
You borrowed money from your policy's cash value, through a policy loan.
Your interest payments may be tax-deductible if you use the loan to earn income from your business or property. Some ofyourborrowed money may be taxable. Your insurance company will send you a T5 slip to report any taxable amounts.
Youkeptmaking payments for a policy you donated to a registered charity.
You usually get a tax credit from the charity for your payments.
You withdrew some cash value from yourpolicyor you completely cashed out (surrendered) your policy.
Some ofyourmoney may be taxable. Your insurance company will send you a T5 slip to report any taxable amounts.
Taxation for employee life insurance
Group life insurancepremiums paid by the employeron behalf of the employee are a taxable benefit to the employee.
Premiums paid by the employee(e.g., for additional or dependent coverage) aren’t a taxable benefit to the employee.
Regardless of who pays the premium, the death benefit paid to the beneficiary is always tax-free.
