Life insurance is a contract between an insurance company and a policy owner, where the insurance company, in exchange for premiums paid by the policy owner, promises to pay a beneficiary a sum of money, known as the death benefit, upon the death of the insured person. The owner of the policy may be the person to be insured, some other related person (such as a spouse), or a company with whom the insured has a connection by way of ownership.
Life insurance is a tax-efficient way to pre-fund a known future obligation that will arise at time of death. It is an excellent source of tax-free liquidity at time of death in order to meet any number of financial needs, such as to:
- Provide financial support to dependents or beneficiaries
- Pay capital gains tax liabilities
- Finance shareholder buyout obligations
- Enhance an intergenerational transfer of wealth
- Make a charitable donation
A life insurance policy has significant tax and investment benefits:
- Life insurance death benefit proceeds are tax free
- Tax-exempt growth: Premiums in excess of cost of insurance will accumulate and grow exempt of tax
- Capital Dividend Account (CDA) credit: Life insurance proceeds paid to the private company will be credited to the CDA.