Are Life Insurance Payouts Subject to Taxes in Canada?

• The death benefit (the lump-sum payment made to your beneficiaries when you pass away) is typically tax-free in Canada.

• Beneficiaries receive the full amount of the death benefit without needing to report it as income, providing financial security for your loved ones.

While the death benefit is usually tax-free, there are some scenarios where taxes may come into play:

• Estate as Beneficiary:

If the death benefit is paid to your estate rather than directly to a named beneficiary, it could be subject to probate fees and claims by creditors.

Naming specific beneficiaries can help avoid this.

• Policy Loans:

If you borrow against the cash value of a permanent life insurance policy and pass away before repaying the loan, the outstanding loan amount is deducted from the death benefit. While this isn’t a tax, it reduces the benefit your beneficiaries receive.

• Taxable Gains on Cash Value:

For permanent life insurance policies (e.g., whole life or universal life), the cash value grows on a tax-deferred basis.

If you withdraw funds or surrender the policy during your lifetime, the growth (above the premiums paid) may be taxable as income.

• Corporate-Owned Life Insurance:

  If a corporation owns the life insurance policy, the tax treatment of the death benefit or cash value may differ depending on how the policy is structured and how the proceeds are used.

Life insurance offers several tax advantages:

• Tax-Deferred Growth:

  Permanent life insurance policies allow cash value to grow tax-deferred, making them a valuable estate planning tool.

• Wealth Transfer:

  By naming a beneficiary, you can transfer wealth tax-efficiently without triggering income tax on the death benefit.

• Business Succession Planning:

  Corporate-owned life insurance can be used to fund buy-sell agreements, pay off business debts, or provide tax-efficient benefits to shareholders and heirs.

• Name Specific Beneficiaries:

  Avoid probate fees by ensuring your beneficiaries are named and updated as needed.

• Understand Policy Features:

  Be aware of the tax implications of accessing cash value or taking policy loans.

• Seek Professional Advice:

  Tax laws and insurance rules can be complex. Consult with a life insurance advisor and a tax professional to structure your policy for maximum tax efficiency.

Life insurance in Canada is generally not taxable, with the death benefit providing a tax-free financial safety net for your beneficiaries. However, certain situations—such as accessing cash value, corporate ownership, or naming your estate as the beneficiary—may have tax implications. To ensure your policy aligns with your financial goals and minimizes tax exposure, it’s always best to work with an experienced life insurance advisor.