Whole Life: An Investment Asset Class
For most, life insurance is used to protect your loved ones if you die prematurely. It will cover the costs of the mortgage and replace the income you may have provided to the household.
For the affluent, life insurance can provide a significant means for maximizing the legacy for the next generation. Unrealized capital gains that arise on death can create a significant tax burden on an estate, and market volatility can be a real risk to the value of the estate if an untimely death requires assets to be liquidated to pay for taxes at inopportune points in the market. Insurance can be a valuable diversifying asset to manage risk and tax costs on the intergenerational transfer of wealth.
Whole life insurance provides not only an insurance death benefit but also has an associated investment account, subject to certain CRA rules, which has two primary wealth maximizing benefits:
- The investment income and growth accumulate tax-free ; and
- Insurance proceeds are paid tax-free on death
Life insurance policies are particularly attractive for owners of private corporations who might otherwise find their assets tax-trapped inside the corporation, given the additional tax burden of extracting wealth from a corporation on the death of the shareholder. By using investment assets to buy life insurance, owners of private corporations can convert highly taxable investment assets to tax-free insurance proceeds making life insurance a valuable tool to multiplying the legacy of ones estate.
Buying Your Own Disability Policy
Consider buying a policy if you dont have any or enough disability coverage at work or are self-employed. Employer-sponsored disability insurance usually pays only a portion of your base salary, up to a cap. Its a good idea to supplement that coverage if your salary far exceeds the cap or you depend on bonuses or commissions.
An insurer will consider other sources of disability insurance to determine how much coverage you can buy. Generally, you cant replace more than 75% of your income from all the coverage combined, Hoffman says.
Buying your own policy lets you:
Customize the coverage with extra features, such as annual cost-of-living adjustments
Choose the insurance company with the best offerings
Keep the coverage when you change jobs. Employer-paid coverage ends when you leave the company.
Control the disability insurance. The coverage stays intact as long as you pay for it. But employer-sponsored coverage will end if the employer decides to stop providing disability benefits.
Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.
The annual price for a long-term disability insurance policy generally ranges from 1% to 3% of your annual income, according to the Council for Disability Awareness. A variety of factors affect the cost.
What You May Not Deduct For Business Insurance
You may not deduct the cost of life insurance for anyone associated with your company if you are the direct or indirect beneficiary.;Business disability insurance for you as the business owner is tricky. If you deduct disabilityinsurance premiums for yourself as the owner, then the benefits paid to you if you are disabled are considered taxable income to you. According to Mass Mutual, premiums for disability insurance for a sole proprietor are not deductible as business expenses, but the benefits are not taxable. It’s best to check with your tax professional before you buy disability insurance for yourself as a business owner.;
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Hospital Confinement Indemnity Insurance
If youve ever experienced an injury or illness that required a hospital visit or stay, you know how expensive the bill can be even after health insurance pays its share. And that price tag keeps rising as costs associated with inpatient hospital services increase and a greater share of deductibles and copays shift to individuals. In fact, many adults are financially vulnerable and would have difficulty handling an emergency expense as small as $400.3
A hospital indemnity insurance policy gives cash benefits to your employees* for covered hospitalizations, because even with the best health insurance, an entire hospital bill may not be covered.
What does hospital indemnity insurance cover?
Some hospital indemnity plans provide only hospitalization benefits, while others provide benefits for diagnostic procedures, outpatient surgery and ambulance costs. Features of these plans include:
- No deductibles or copayments
- No networks, so the insured can be treated at the hospital of their choice
- No precertification requirements
- Individuals own the policy even if they change jobs or retire, it stays with them
Who needs hospital indemnity insurance?
Generally speaking, everyone is susceptible to injuries or illnesses that could require a hospital stay and, therefore, everyones a good candidate for supplemental hospital indemnity insurance.
What If I Decide To Be Cremated
Cremation is certainly an alternative that can reduce the cost of a traditional funeral, but even cremation can be expensive when you add a memorial service or decide to bury the ashes.
National Median Cost of an Adult Funeral with Viewing and Cremation 2017
|Basic Service Fees|
|Transport of remains to funeral home||$325|
|Other preparation of the body||$250|
|Use of facility and staff for viewing||$425|
|Use of facility and staff for the funeral ceremony||$500|
|Total Costs for Funeral and Cremation||$6,260|
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What Is A Tax Deduction
Just about everyone needs to pay income tax every year, but you donât pay tax on your entire income. You can deduct the cost of certain expenses you incurred during the year, like student loan interest. These deductible expenses decrease the amount of your income that is subject to tax. If your income was $70,000 but you had $10,000 of deductions, the income tax rates will now apply to just $60,000 of income.
Learn more about how tax deductions work.
What You Can Expect To Pay For Coverage And How To Get It
Your lifestyle and needs are uniquely your own and your business is a unique entity with its own customer base, processes, assets, and liabilities. Your policy needs to be tailored with a specific benefit amount and length that reflects those requirements, along with other provisions that address additional concerns, for example, by getting a Cost-of-Living Adjustment rider to account for inflation*.;
A policy with a smaller benefit amount, longer waiting period, and shorter benefit period will cost less than a policy with a larger benefit, shorter waiting period, and benefit payments stretching into retirement. Factors such as age, gender, lifestyle, and occupation will also affect your premium costs.;One rule of thumb: expect to pay between 1% to 3% of your annual income;for a policy that offers the coverage you need.;
The most comprehensive type of disability insurance policy is;non-cancellable and guaranteed renewable. That means that as long as you pay your premiums, the insurance company cannot raise your rates, change your monthly benefits or revise policy provisions unless you ask to revise your policy.
Some policies are only;guaranteed renewable, with such a policy, the insurer can raise premiums, lower benefits, or change policy provisions but only if they get approval to do so for the entire rate class from your states insurance department.
Types Of Disability Insurance
There are two main types of disability insurance; short-term and long-term coverage. Both replace a portion of your monthly base salary up to a cap, such as $10,000, during disability. Some long-term policies pay for additional services, such as training to return to the workforce.
Short term vs. long-term
Typically replaces 60% to 70% of base salary
Typically replaces 40% to 60% of base salary
Pays out for a few months to one year, depending on the policy
Benefits end when the disability ends. If the disability continues, benefits end after a certain number of years or at retirement age.
May have a short waiting period, such as two weeks, after you become disabled and before benefits are paid
A common waiting period is 90 days after disability before benefits are paid
Disability policies vary in how they define disabled. Some policies pay out only if you cant work any job for which youre qualified. Others pay out if you cant perform a job in your occupation. Some policies cover partial disability, which means they pay a portion of the benefit if you can work part time. Others pay only if you cant work at all.
Disability Insurance Through Your Employer
Many employers offer group disability insurance as part of your benefits package. In some cases, the premium for these plans can be paid with pre-tax dollars. This sounds like a good deal because you wonât owe taxes now on a work benefit. But if you ever need to collect your benefit, you will owe taxes on the money you receive. That means you wonât take home the entire face value of your benefit. Instead, a benefit that covers 60 percent of your income might leave you with only 40 to 50 percent of your income after taxes .
RELATED CONTENT: What Is Disability Insurance? Our disability insurance guide can help you learn more about disability insurance and how it can benefit your financial plan.
There are also cases where you may be able to purchase additional disability coverage through your work with after-tax dollars. In that case, your benefit would be tax free.
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How To Deduct Business Insurance Expenses
Costs you pay for most kinds of business insurance are deductible for tax purposes on your business income tax forms. Below is a look at the various types of business insurance and their deductibility and info where to deduct these business insurance expenses, depending on your business type and tax form.;
As A Business Owner Youre Committed To Making Careful Smart Choices To Keep Your Business Growing And Your Employees Happy
But did you know that strong benefits can help you achieve both? Supplemental insurance is a simple, affordable way to help your employees protect their financial security in the event of a serious accident or illness.
Traditional health insurance pays doctors and hospitals, while supplemental insurance pays benefits directly to employees,* no matter what other insurance they have in place.
If theyre sick or hurt, it can be used in any way they see fit whether thats for leftover medical expenses and other bills threatening their financial security. Its their money to use their way.
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Where Can I Find Help
Social Security’s Ticket to Work program may offer you help as you think about starting a business. You can work with a State VR agency or an Employment Network that has a Benefits Counselor on staff to learn more about unincurred business expenses and other Social Security Work Incentives.
To find a Ticket program service provider, call the Ticket to Work Help Line at 1-866-968-7842 or 1-866-833-2967 Monday through Friday, 8 a.m. to 8 p.m. ET. Ask a representative to send you a list of service providers or you can search for providers on your own using the Find Help tool.
To find a Ticket program service provider, call the Ticket to Work Help Line at or Monday through Friday, 8 a.m. to 8 p.m. ET. Ask a representative to send you a list of service providers or you can search for providers on your own using the Find Help tool.
What If Ive Been A Small
If youâre thinking about quitting your job and starting a small business, consider purchasing the disability insurance policy before you quit while youâre still earning an income. That way, you wonât have to wait for two years of profit before youâre eligible for long-term disability coverage. Make sure the policy is non-cancelable, which means that the carrier canât raise your premiums as long as you keep paying them, and guaranteed-renewable, which prohibits the insurer from altering your coverage.
If youâve already struck out on your own, but canât wait the two years for coverage, youâre not out of luck. Here are some scenarios under which you can still get LTDI coverage if you havenât been in business for two years:
Business Overhead Expense Insurance Vs Personal Disability Insurance
- Benefit Periods; Usually, BOE insurance policies have short benefit periods that do not exceed two years. Remember that BOE insurance is not protecting your ability to generate incomethat is what a personal disability policy does. Instead, BOE insurance allows you to keep your practice open, or at least pay for its expenses until you recover. In the case of a long-term disability, it offers you up to two years to make a business decision, such as whether to shut down or liquidate your practice, without worrying about accruing debt from business expenses.
- Maximum Benefits; Personal disability insurance pays a monthly benefit as defined in the policy. BOE insurance policies offer a maximum monthly benefit, but only pay the actual overhead expenses if they are less than the maximum benefit. For example, if the maximum monthly benefit is $1,000 but actual business overhead expenses are only $600, the benefit paid is $600. With some insurers, that unused $400 benefit can be applied to increase future monthly maximums or to extend the benefit period.
- Taxation As long as premiums for personal disability insurance are paid with after-tax dollars, the benefits are tax-free. business overhead expense policy benefits are subject to income tax, but the premiums are tax deductible as a business expense.
How Does Social Security Count Unincurred Business Expenses In My Earnings From Self
Once you start to work, Social Security will determine if you are engaging in substantial gainful activity , or earning enough income to affect your eligibility for disability benefits. If you receive SSDI, Social Security will deduct the cost of the unincurred business expense from your Net Earnings from Self-Employment when they determine if you have worked at SGA levels. The formula for determining your NESE is gross income from your business minus business expenses, multiplied by .9235. Thus, only a portion of your net earnings is counted in determining your self-employment income.
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Can I Get Disability Insurance If Im Self
If youâre self-employed, thereâs a good chance your marketing, logistics, purchasing and accounting departments are all staffed by a single person â you. That means without you, the business grinds to a halt and so does your income.
While forging your own path is perhaps the most rewarding aspect of self-employment, it can also keep you up all night. If itâs tough to miss a single day of work, what would happen if you couldnât work for weeks or even years? While many companies offer their employees disability insurance through a benefits package, protecting your livelihood as a sole proprietor can feel like youâre alone on an island.
Fortunately, you can rest easy. You can, and should, get disability insurance if youâre self-employed. As an entrepreneur, you have a few options.
PERSONAL DISABILITY INSURANCE
Whether youâre a business owner, sole proprietor, contractor or freelancer, you can easily purchase personal disability insurance. In fact, many people who receive the benefit through work purchase additional coverage.
Something to Consider: If you are self-employed, you may need additional protection to sustain the business if you canât work â especially if you have employees. Your personal disability insurance will cover your income but wonât cover losses incurred by the business.
GROUP DISABILITY INSURANCE
If you have a few employees, you can, as they say, kill two birds with one stone by offering group disability insurance.
Disability Benefits For Veterans
You may be eligible for disability benefits if you’re on disability from your service in the Canadian Armed Forces or Merchant Navy.
You may get social assistance payments from:
- your province or territory
- your First Nation
These payments will depend on your household income, savings and investments.
You may also be eligible for health-related benefits from your province or territory. These benefits may include benefits that help cover the cost of:
- medical aids or devices
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Will I Pay Taxes On Disability Insurance Benefits
If you pay for your DI premiums with after-tax income, you wonât be taxed again when you claim disability insurance benefits. Private insurance you buy outside of your employer is almost always paid with post-tax income.
For employer-sponsored plans, you could owe taxes when you claim DI benefits if you or your employer paid your disability insurance premiums with pre-tax income. In this case, your benefits are categorized as income and the percentage of your premiums that you paid with pre-tax income would be reported as taxable income. Not all employers pay DI premiums plans with pre-tax income, so itâs important to check the details of your plan. If your plan does use pre-tax income, make sure to plan for smaller benefits. For example, a benefit thatâs supposed to be worth 80% of your income could end up being worth 70% or less after factoring in taxes.
What Is The Medical Expense Tax Credit
The Medical Expense Tax Credit can give you some financial assistance if you have paid for medical services out of pocket. Premiums paid for private health insurance plans are often eligible for deduction by the Canada Revenue Agency, but does that also apply to the self-employed?
Premiums paid to private health plans can be deducted from your business income, but you must be the sole proprietor of your business, and it must be your primary source of income.
To figure out which expenses count for deduction, visit the Tax Planning Guide website, which lists them along with what you cannot claim. Canada Revenue Agencys website gives an even more detailed list.
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