10 Reasons Why Wealthy Canadians Want Life Insurance

For most Canadians, life insurance is seen as a necessity for income protection. But for high-net-worth individuals, it’s not about need—it’s about strategic advantages. Recently, Sun Life insurance director Dave Larkins shared insights on why wealthy Canadians choose life insurance, not just as protection but as a powerful financial tool. Here are the top 10 reasons affluent Canadians are opting for life insurance.

1. Covering Terminal Tax Liabilities

As Canadians pass on valuable assets—such as family businesses, cottages, or other real estate—their beneficiaries often face significant tax obligations. When these assets transfer to the next generation, the capital gains tax is due, potentially putting the next generation in a tough spot if they lack sufficient liquid assets to cover it.

Example: Consider a family cottage that’s been in the family for generations, now worth millions. Upon transfer, the capital gains tax could be hundreds of thousands of dollars. Without life insurance, the inheritors might have to sell the cottage just to cover the tax. A life insurance policy specifically earmarked to cover this tax liability can ensure cherished family assets stay in the family, preserving both the property and its memories.

2. Minimizing Taxes on Passive Investments

Permanent life insurance can serve as a tax-efficient investment vehicle, especially for those whose portfolios are subject to high passive income tax rates. With permanent life insurance, any investment growth within the policy remains sheltered from annual taxes, provided it stays within government limits.

Why It Matters: This allows the policy’s cash value to grow tax-free over time, giving wealthy Canadians a way to accumulate and transfer wealth more efficiently. Many high-net-worth individuals use these policies to shelter part of their portfolio from taxes, which can add up to significant savings over the years, especially compared to conventional investments where annual gains are taxed.

3. Facilitating Intergenerational Wealth Transfer

As the wealthier generation ages, there’s a need to ensure a smooth transfer of wealth to children, grandchildren, and beyond. Life insurance is a reliable way to set aside funds specifically for intergenerational wealth transfer, which not only helps protect heirs from a heavy tax burden but also preserves wealth for multiple generations.

Example: A “cascading” life insurance policy structure allows each generation to pass along the policy to the next, providing a death benefit that can be reinvested by the family. This enables wealth to span generations, giving families the potential to create lasting legacies that benefit future generations without the erosion of taxes and fees.

4. Estate Equalization Among Heirs

Many high-net-worth families struggle with the challenge of dividing assets equitably among heirs. For example, if one child is set to inherit a family business while others are not involved, or if one sibling wishes to keep a family cottage while others do not, life insurance can provide a solution to balance out inheritances.

Example: If one child inherits a business, a life insurance policy can be used to create an equivalent benefit for other children, ensuring fairness without forcing the sale of the business. This makes life insurance a valuable tool for preserving family harmony across generations.

5. Supporting Charitable Giving

High-net-worth Canadians often want to leave a meaningful impact through philanthropy. Life insurance can be a powerful tool for this by allowing substantial donations to chosen charities, either during their lifetime or after passing.

Example: A policy can be structured with a charity as the beneficiary, maximizing the donation while potentially creating tax benefits. For those passionate about causes, this is a strategic way to leave a legacy that aligns with their values and vision.

6. Funding Buy-Sell Agreements for Businesses

In a business with multiple owners, life insurance is an essential safeguard. It ensures that if one owner passes away, funds are available to buy out the deceased partner's share. This continuity plan protects the business and provides liquidity to the family of the deceased, ensuring the business doesn’t suffer financial strain or ownership disruption.

Example: In a family-owned business, a buy-sell agreement backed by life insurance means that surviving partners can smoothly buy out shares, ensuring ownership remains stable and relationships between family members remain intact.

7. Providing a Safe Investment Alternative

High-net-worth Canadians often prioritize safety alongside growth. Life insurance policies, especially permanent ones, offer steady growth with tax-deferred gains, making them a lower-risk alternative to other fixed-income investments.

Why It’s Safe: The invested assets within certain types of life insurance policies, such as participating policies, tend to be conservatively managed. This structure provides a reliable growth vehicle, especially appealing to those looking for stability without the volatility of equities.

8. Accessing Liquidity While Retaining Coverage

Life insurance policies can provide liquidity through cash values, accessible through policy loans or withdrawals. This allows policyholders to access funds for personal or business needs without sacrificing the core death benefit protection, making it a versatile asset within a broader wealth management plan.

Example: For wealthy Canadians who need access to funds while alive, such as for business opportunities, life insurance cash values offer a way to get liquidity without disturbing their primary insurance or long-term goals.

9. Efficient Estate Value Transfer

Life insurance is a highly efficient means of transferring wealth. Unlike other assets that may undergo probate or incur taxes and fees, life insurance proceeds go directly to beneficiaries, often bypassing the estate and providing immediate funds for taxes or other expenses.

Why This Matters: For affluent families, this streamlined process is invaluable, ensuring that heirs receive the intended value promptly. It provides a ready source of funds to cover estate taxes or other immediate needs, preserving the value of the estate and protecting other assets from liquidation.

10. Capital Dividend Account (CDA) Benefits for Corporations

For business owners, life insurance offers a powerful tax advantage through the Capital Dividend Account (CDA). When a corporation owns a life insurance policy and is the policy beneficiary, the death benefit credit is directed to the corporation’s CDA. The funds can then be distributed to shareholders tax-free.

In Simple Terms: Think of the CDA as a special corporate “account” that allows funds to flow out tax-free. Life insurance boosts this account, making it easier for business owners to transfer wealth out of the corporation without triggering taxes. This advantage is particularly useful for families who want to retain control of their business and manage assets within the corporate structure.

In Summary:

Wealthy Canadians are increasingly recognizing that life insurance can serve as a versatile, tax-efficient strategy for wealth preservation, legacy planning, and business continuity. With the right approach, life insurance is not just about protection; it’s a valuable asset for navigating the complexities of generational wealth, taxes, and estate planning. Whether the goal is protecting family assets, ensuring equitable distribution, or making an impact through philanthropy, life insurance offers solutions that align with the unique needs of high-net-worth individuals.