Welcome to
MD Financial Management

Thank you for using MD Chat

Please fill in the fields below so we can get started.

Contact an
MD Advisor

Insurance

Frequently Asked Questions

Permanent Life Insurance

Can I use insurance to reduce the tax burden on my professional corporation?

Yes. You can use insurance to turn surplus corporate income into non-taxable income. Income that is not needed immediately by you or your practice is often left within the corporation to earn passive investment income. But it is subject to the highest corporate tax rate.

Permanent life insurance is an efficient way to free this trapped surplus. After-tax corporate dollars can be used to pay premiums for life insurance. Excess cash can be allocated to investment accounts. Returns generated by these investment accounts held within your life insurance policy grow tax-free. You can allocate your investments to guaranteed interest accounts or accounts linked to market returns.

Name the corporation as owner and beneficiary and, when you pass away, the death benefit amount could flow through to the corporation on a tax-free basis. The portion of the death benefit that exceeds the adjusted cost basis of the policy can be added to the corporation’s capital dividend account and may be paid out to surviving shareholders on a tax-free basis.

How can insurance protect my group practice

Physicians often share office space and related expenses with other physicians. If one partner becomes disabled or is no longer able to practise, expenses still need to be paid. If the partner dies, the heirs may need to be paid for their portion of the business.

A shareholder agreement and permanent life insurance policies can provide an equitable solution. If one partner dies, the insurance payment can be used to buy out the heirs and pay office expenses.

How does insurance help in building tax-advantaged assets?

If you are investing personal or corporate money that you won’t need during retirement, a permanent life insurance product, such as universal life insurance, can help you shelter those investments from tax.

Money invested in a universal life insurance policy can grow free of taxation on annual investment income during your lifetime, and then be passed on to your beneficiaries (or professional corporation), tax-free, after you pass away.

Can I use insurance to care for my family before and after death?

Yes. Insurance not only protects your loved ones after you pass away, it can also be used to provide them with financial security while you’re still living. Permanent life insurance is a simple way to provide substantial assets and an established life insurance policy to your loved ones on a tax-preferred basis.

For example, a policy can be established that insures your grandchild’s life, with your child as contingent owner. You pay premiums for life insurance and have an opportunity to deposit a portion into investment accounts. Returns generated by these investment accounts held within the life insurance policy grow, tax-free. You can allocate your investments to guaranteed interest accounts or accounts linked to market returns. During your lifetime, or upon your death, your child becomes the owner of your cash-rich insurance policy and an established life insurance portfolio of investments.

Alternatively, you could structure the policy so that it could be transferred to your grandchild before your death, enabling your grandchild to use the cash-rich policy to help pay for his or her education. If the grandchild is over the age of majority at the time, he or she—not you—is responsible for any taxes on withdrawals from the policy.

Can I use my heirs’ money to pay for insurance to cover taxes on my estate?

Yes. Your policy can be structured to allow your heirs to pay the premiums into a policy on which you are the insured. The proceeds from the policy can cover estate taxes and fees, and still provide additional money for your heirs, without costing you anything.

How can I use insurance to help create a legacy with my favourite charity?

Establishing a permanent life insurance policy with your favourite charity as the owner and beneficiary generates tax benefits for you and leaves a lasting legacy to a cause you support. You can claim charitable donations in the year premiums are paid, and your charity of choice gets the value of the policy when you pass away.

Alternatively, a policy can be structured to provide for your favourite charity upon your death and offset tax liability on your final income tax return. For example, you can own a permanent life insurance policy and name the charity as its beneficiary. Or you can designate your estate as the beneficiary, and then, through your will, name the charity as a beneficiary to the value of the policy’s death benefit. Either way, the amount donated to the charity can then be claimed on your final tax return. This provides the flexibility needed to structure a policy to maximize giving, while also reducing your estate’s tax burden.

Does permanent life insurance offer disability benefits?

Yes. If you suffer a disability, you may be eligible for tax-free access to your permanent life insurance policy’s investments. This can be a lifeline for those who don’t have enough savings to pay for disability-related costs. It also works for people who don’t want to deplete their savings but need to supplement their disability income.

Can I use insurance to help pay for a child’s education?

Yes. You can establish a policy with your child (or grandchild) as the insured and invest within it on a tax-advantaged basis. When your child turns 18, you can transfer policy ownership to the child. Then he or she can withdraw money from the policy to pay for school expenses. The money will be taxed in the child’s hands, at a much lower rate than yours. This is a tax-effective way to provide money for education.

How can I use insurance to preserve my estate?

Capital assets, such as stocks and certain real estate, are deemed “sold” after your death, something that could result in a taxable capital gain. If the assets have been in the family for decades and have increased substantially in price, the impact of estate taxes could be immense.

Your permanent life insurance death benefit can be used to pay estate taxes, so your heirs aren’t forced to raise money in ways that may hurt your family’s finances. Too often, significant and meaningful family assets, like a vacation property, need to be sold to help pay estate taxes. Or RRSP or RRIF proceeds—sometimes the most liquid assets available to the estate—are used to pay taxes or fees, rather than going to heirs as originally intended.

I’ve heard that insurance can be used to help provide an income to a disabled child—how does that work?

If you want to leave money to your disabled child without affecting government disability benefits, you can work with your MD advisors to create a special kind of trust, called a Henson trust. This trust can be funded by the death benefit proceeds from your insurance policy and can be used for the benefit of your child.

Because the trustee of your Henson trust has absolute discretion over payments to the child from the trust, your child’s interest in the trust is not considered an asset that would affect his or her eligibility for disability benefits. The trustee can use the trust funds to pay for any extras your child requires, within provincial rules, and can keep the bulk of the trust funds intact for when they’re needed at a future date.

Lifestyle Protection

Do I have to pay tax on the payout from my policy?

No. Payouts from policies are normally tax-free.

What can disability insurance provide?

Disability insurance can replace your income, on a personal basis and to your corporation, so you, your family and your business can continue to pay the bills while you recover.

How do I calculate the amount of disability coverage I need?

Everyone has different needs but, typically, you should consider what you need to cover your monthly income and living expenses, plus any other expenses you would want to be covered if you lost your ability to earn an income. Your advisor can help you make a precise calculation.

Can I insure against critical illness?

Yes. Critical illness insurance provides a lump-sum payment if you're diagnosed with one of the covered conditions defined in your policy. The lump-sum payout can help provide the money you need to start on the path to recovery.

Are there restrictions on how I can use the money from a critical illness policy?

No. You can use the money as you please to pay your mortgage, pay down debt, pay for child care or even take a vacation to help you rest and recuperate.

Can I insure myself to provide for a specific financial need, like paying off my mortgage?

Yes. Term life insurance is an affordable way to match the coverage you need for something specific, like paying a mortgage or other debt if you pass away suddenly.

Can I switch my mortgage to another lender and maintain my coverage?

Yes. You can switch your mortgage to another lending institution without jeopardizing your coverage.

Is there special insurance to cover the cost of long-term care?

Yes. Long-term care insurance protects you if you face expensive medical and other care costs as you age. You may be retired, either fully or partially, for upwards of 30 or more years. As continued good health cannot be guaranteed, there is a risk that long-term care expenses may be higher in your later years and you could outlive RRSPs and other savings. Whether for home care or upgrading your level of care in a retirement home, having long-term care insurance support can help you pay for the services you need.

Is there different disability insurance to provide an income to my practice, if I become disabled?

Yes. There is a type of disability insurance (sometimes called “office overhead” or “professional overhead expense” insurance) that can be structured to provide your practice with an income if you become disabled. This can help cover such costs as equipment leases, rent for your office, utilities, payroll and other practice-related expenses.

How do I know whether to buy a policy personally or to have my professional corporation buy a policy?

Your insurance advisor can help you answer this question. Depending on your need, some policies, such as term life insurance and permanent life insurance, may be best owned within a professional corporation. Other policies, such as a personal disability policy, could be paid for and owned personally to ensure the beneficial tax treatment of disability payments.

New Rules for Life Insurance Policies after January 1, 2017

Why is the government introducing this new legislation?

The current legislation has remained unchanged since 1982. Since then, life expectancy and life insurance have changed significantly. As a result, inconsistencies now exist in how some insurance policies are taxed. The changes to the legislation reflect the fact that people are living longer, and will also ensure greater consistency in how different insurance policies are taxed.

I own a life insurance policy. How can I find out if and how the new rules will affect me?

Talk to your MD Advisor or MD Insurance Consultant to find out if and how the new rules will affect you. Together, you can decide what is right for you and your family.

I’m thinking of buying a life insurance policy. Would I be better off buying before January 1, 2017 or waiting until after the new rules come into effect?

Before doing anything, talk to your MD Advisor or MD Insurance Consultant, who are specialists in life insurance. They can answer any questions you may have and help you to understand the implications of the new tax regulations and what’s best for your individual situation. Together, you can decide what is right for you and your family, ensure you have the correct insurance coverage in place, build value for your beneficiaries and maximize the tax effectiveness of your policy.

What’s changing under the new legislation?

The most significant changes introduced by the new legislation on January 1, 2017 include revisions to the underlying assumptions used in the policy exempt test. All life insurance policies are tested annually against a test policy to determine if the policy has remained focused on protection (exempt) or has become too focused on investment accumulation (non-exempt). Additionally, the method to determine the maximum savings allowed in a policy will be adjusted. Changes to the test policy under the new legislation will result in:

  • A reduction in the maximum amount of premiums that can be deposited in a policy.
  • A reduction to the maximum amount of cash that can be accumulated in a policy.
  • An increase in the duration of minimum “quick-pay” premium payment periods.

 

What’s not changing under the new legislation?

The purpose of permanent insurance has not changed and the many benefits that permanent insurance offers still exist, including tax-free death benefits and tax-advantaged accumulation to help you build, protect and transfer your wealth. Even under the new rules, life insurance will remain a great planning tool and, for incorporated clients, will still be a tax efficient way to take money out of a corporation and give it to beneficiaries.

I already have a life insurance policy. Will I be affected by these changes?

Generally, policies issued before January 1, 2017 will be grandfathered and remain subject to the old taxation regulations. This means that nothing will change with regard to your existing insurance policy. However, if you make certain changes to your existing policy after January 1, 2017, the policy may lose its grandfathered status. Some of the changes that will result in a loss of grandfathered status include:

  • Adding insurance coverage that requires medical underwriting, such as increasing a face amount or adding a term life rider.
  • Converting a term life rider to permanent life coverage.
  • Converting a term policy to a permanent policy (even without medical evidence).
  • Converting a term life rider to a new permanent policy will result in the new policy being issued under the new rules.

 

Examples of changes that will not affect grandfathered status include moving from smoker to non-smoker status, reducing an underwriting rating and transferring policy ownership.

If you are considering changes to your existing insurance policy, talk to your MD Advisor or MD Insurance Consultant, who are experts in life insurance. They can answer any questions you may have and help ensure you understand the implications of the new tax regulations and what’s best for your individual situation. Together, you can decide what is right for you and your family.

What is a tax-exempt life insurance policy?

Insurance legislation under the Income Tax Act enables you to make deposits into tax-exempt life insurance policies, within policy limits, in excess of the actual cost of the insurance. The investments held in a tax-exempt policy can grow on a tax-advantaged basis, which means the growth is not subject to annual taxation. Although there are some limitations, this tax-exempt status potentially enables you to build a substantial amount of cash value within your insurance policy.

Will these rule changes make life insurance less attractive as a financial-planning tool?

Even under the new rules, life insurance will continue to be a great planning tool and, for incorporated clients, will still be a tax-efficient way to take money out of a corporation and give it to beneficiaries. A permanent life insurance policy helps preserve wealth and provides a tax-free death benefit to named beneficiaries. It also delivers permanent life insurance protection and tax-advantaged cash value accumulation.

I’m considering making changes to my existing life insurance policy. How will these changes affect me?

Generally, policies issued before January 1, 2017 will be grandfathered and remain subject to the taxation regulations that were in effect when they were issued. This means that nothing will change with regard to your existing insurance policy. However, if you make certain changes to your existing policy after  1, 2017, the policy may lose its grandfathered status. Some of the changes that will result in a loss of grandfathered status include:

  • Adding insurance coverage that requires medical underwriting, such as increasing a face amount or adding a term life rider.
  • Converting a term life rider to permanent life coverage.
  • Converting a term policy to a permanent policy (even without medical evidence).
  • Converting a term life rider to a new permanent policy will result in the new policy being issued under the new rules.

 

Examples of changes that will not affect grandfathered status include moving from smoker to non-smoker status, reducing an underwriting rating, or transferring policy ownership.

If you are considering changes to your existing insurance policy, talk to your MD Advisor or MD Insurance Consultant, who are experts in life insurance. They can answer any questions you may have and help ensure you understand the implications of the new tax regulations and what’s best for your individual situation. Together, you can decide what is right for you and your family.