How does life and estate insurance work?

How does life and estate insurance work?

Are you thinking of protecting your loved ones in the event of death? The best way to do this is:

to write a will; and
to take out life insurance.
When someone dies, their assets and liabilities come together to form an “estate”. This succession is shared between the various legal heirs mentioned in the deceased's will.

If you do not make a will, your assets and liabilities will be distributed “automatically” to your spouse, children, brothers or sisters depending on your situation.

However, the liabilities of the deceased, and therefore their debts, will need to be settled by the heirs in order for them to benefit from the assets. Sometimes the debts are so heavy that they force the legal heirs to refuse the inheritance so as not to incur excessive charges. This is where taking out life insurance really makes sense.

Life insurance will allow your loved ones, upon your death, to receive a tax-free lump sum payment to pay off your debts, funeral expenses, mortgages, and outstanding taxes and thus protect your accumulated assets.

The payment can be made in two ways:

if the deceased has mentioned specific beneficiaries in his life insurance contract, the payment will be sent directly to them, outside the estate
if the deceased has mentioned his legal heirs present in his will as beneficiaries, this will take place in the succession.
Who are the beneficiaries of life insurance?

To choose your beneficiaries, you have three options:

the revocable beneficiary (ies), which you can change at any time: you can appoint these beneficiaries without asking their authorization. They will benefit from the payment of the death benefit outside the estate without having to wait for any administrative delay.
the irrevocable beneficiary (ies): they are an integral part of the contract. You cannot change the beneficiary, surrender or assign the life insurance policy without obtaining the authorization of the named irrevocable beneficiary (ies). It takes away your flexibility.
no named beneficiary: the payment is therefore made in the estate and shared between your legal heirs as mentioned in your will, or automatically if no will has been drawn up.
What is the taxation of life insurance?

The very first major advantage of life insurance is that the amount paid to beneficiaries is tax-free. This is one of the few contracts that allows you to benefit from a guaranteed lump sum payment that is completely exempt from tax upon the death of the insured.

The beneficiary will receive 100% of the amount of the insurance benefit mentioned in the policy, without delay.

There are situations in life that require us to have cash that we do not have. Generally, we have two reflexes: to make a partial or total surrender of our life insurance or to apply for a consumer credit. Partial or total redemption has a significant financial and fiscal impact while a consumer loan is subject to high interest rates.

If you use the cash values ​​of your life insurance to have cash quickly, the surrender amount will be subject to tax. The taxable amount is equal to the surrender value and the readjusted price of your contract. You will need to report this amount on the T5 tax slip sent by your insurer.

In addition to surrender, there are therefore solutions such as the guaranteed loan or the policy loan explained below to allow you to have funds without affecting the total cash surrender value of your life insurance.

Partial surrender of life insurance

Each subscriber can at any time make a partial surrender or withdrawal of his life insurance to have funds quickly and as he sees fit (savings, retirement, etc.).

Be careful, however, to take note of the limits of a partial buyback:

The amount of the death benefit is reduced as much as the redemption
To the redemption, of course, the insurer's fees and interest are added
The part of the redemption producing a return is taxed, unlike the death benefit
Each redemption is final
In some cases, you are required to make a full and not a partial redemption.
If you have mentioned irrevocable beneficiaries, you will need to first obtain their authorization before making a partial surrender.

There are possibilities to benefit from funds without touching the cash values ​​of your life insurance, the tax credits.

The loan on life insurance policy

The policy loan is a short or medium term loan. It allows the subscriber not to touch the total surrender value of his life insurance and to benefit from an equivalent short or medium term loan