Taxation of withdrawals in life insurance

Taxation of withdrawals in life insurance


 

Insurance and finance go hand in hand. These are indeed two closely related products that are also very easily juxtaposed. For example, you have plenty of time to take out life insurance to save, just as in another vein, you insure your property, including your savings. However, many people do not realize how much insurance relies on numbers, how it leans on them. After all, we buy life insurance to protect ourselves, but more importantly to someday reap the benefits.

Let’s focus on permanent life insurance, since that’s the one that gives us the best cash value, if not the only one. First and foremost, be aware that the tax terms in life insurance vary from product to product, depending on the insurer, the province, the amount, etc. The great advantage of permanent life insurance is that it allows us to accumulate investments within the insurance policy, tax-sheltered.

Life insurance from a tax point of view

One thing is certain, a withdrawal, whether it comes from life insurance or another investment, is seen as additional income. As such, it has its share of taxation, which depends on many factors, including the duration of the contract, the payment dates or the type of withdrawal (total or partial). That's why you need to make smart choices about withdrawals and savings goals.

Insurance is treated like any other product, which is why it is taxable. Thus, not only must the entire amount be subject to provincial sales tax (9% in the case of Quebec), the premiums collected by insurers are also taxable (3.48% are remitted to the Quebec government) . And all this is without counting the part imposed on a withdrawal, since the latter is calculated as income and ultimately added to your annual return.

 

The cash surrender value of life insurance

Concretely, the surrender value is the amount that the insured can receive in the event of withdrawal or surrender on his life insurance. This amount is progressive and its value depends on the premiums paid and the various charges taken from the capital.

Thus, in the event that you decide to cash in your cash surrender value, you will receive a T5, form from which you will withdraw the information to be included with your annual income tax return.

For many, the cash value is THE big advantage of life insurance. This is true in the sense that it is an excellent means of financial improvement. However, beware. If you buy back your life insurance, you will pay the applicable taxes first, and second, you will no longer have life insurance. You will therefore find yourself at age 70 with surrendered insurance, without any other protection.

It is interesting to use the cash value, but be careful, because not only will you continue to pay the same premium, you will also be charged an annual interest rate of around 8%, which will therefore inflate the annual premium. . By doing this, at the time of your death, your beneficiaries will not withdraw the full amount of your life insurance, since you will have drawn part of it yourself.