Is Life Insurance Taxable In Canada
In general, the death benefit of life insurance is not taxable.
However, there are components of estate transfer, dividends, or interest income from life insurance that may be taxable.
Premium payments made for life insurance policies may be tax-deductible depending on how the policy is used.
Tax returns can be confusing. Come tax season in April, you have to collect all your tax slips, plug them into a reporting system, and either hope you did them right or pay someone to make sure they’re done right.
After receiving a life insurance payout, your beneficiaries may be worried that the money is taxable. They may have other questions too. Is the life insurance payout taxable? Are whole life policies subject to taxes? Are premiums on life insurance deductible?
Life insurance payouts are generally not taxable in Canada. Death benefits made directly to named beneficiaries are tax-free, and beneficiaries don’t need to report the money as additional income. But like many things related to tax or life insurance, there are always exceptions! Policies that generate interest or dividend income, flow through an estate, offer a policy loan, or offer cash withdrawals can lead to tax consequences.
Proper structuring of your policy can help your loved ones continue living their lives with minimal tax consequences. In this article, we’ll help you figure out what you need to know about taxes when purchasing a life insurance policy. These tips will help your family receive the most money without the tax burden.
When can life insurance become taxable?
Life insurance can become taxable due to interest or dividend income from participating life insurance policies, estate administration taxes, or when taking out a policy loan, cash value withdrawal, or collateralization.
Taxes on policy dividends
Participating whole life insurance and universal life insurance policies can accumulate dividends and interest. These dividends aren’t taxable if they are reinvested within the policy, allowing you to grow your policy’s cash value on a tax-sheltered basis. The accumulated value is paid out as part of the tax-free death benefit when the insured person passes away.
However, you will be subject to tax on any interest or dividends you don’t reinvest or receive in cash. For example, some use their policy interest payments or dividends to supplement their retirement income—the interest payments or dividend payout would be taxable in this case.