If you’re like most Canadians, your employer probably provides you with a basic group life insurance policy. There are two main types of life insurance policies: term and permanent. When you receive a death benefit under either policy, it’s almost always considered non-taxable and doesn’t need to be reported on your tax return.
The only exception is if you decide to cash in your permanent life insurance policy before your death and you receive the cash surrender value. In that case, you’ll have to pay taxes based how much your investments have increased in value.
Permanent Life Insurance
The second type of life insurance is permanent life insurance.
There are two variations on permanent life insurance: universal and whole-life. While term is only meant to last for a set period of time, as the name suggest, permanent life insurance is meant to last throughout your entire lifetime. Permanent is more than just a life insurance policy; it also has an investment component. You’re able to build up your investments inside your insurance policy, tax-free. A lot of people choose permanent life insurance to help their loved ones cover funeral costs when they die.
Life Insurance Premiums
If you’re a salaried employee at a company, you probably have a group insurance policy.
- Employer-paid life insurance policies are considered a taxable benefit.
- As well, any premiums you pay for group life insurance — not considered group term insurance or optional dependent life insurance — are considered taxable.
- These amounts are reported on your T4 slip and reported on your tax return as a taxable benefit.
There are many strategies companies use to their advantage when it comes to life insurance.
“Corporations may deduct premiums paid as part of a group plan,” says Jason Heath, a certified financial planner at Objective Financial Partners, Inc. in Toronto. “Sole proprietors and corporations may deduct premiums if a policy is used as collateral for a business loan. If a charity is named as the beneficiary of a life insurance policy, premiums may qualify as a tax credit for an individual or a deduction for a corporation. Life insurance proceeds are generally received tax-free.”
- Canada Revenue Agency: Group Term Life Insurance Policies — Employer-paid Premiums
- Canada Revenue Agency: Amounts That are Not Taxed
- Jason Heath, certified financial planner; Objective Financial Partners, Inc.; Toronto, Ontario
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