What, if any, are the tax implications of transferring my life insurance policy to my child?
Generally speaking, transferring a life insurance contract to a third party constitutes a taxable disposition of the policyholder's interest in that policy. According to the Income Tax Act, such a disposition requires calculating the policy gain, if any, which equals the excess of the proceeds of the disposition over the adjusted cost basis (ACB) of the contract. However, when the transfer involves the policyholder's child, it is not considered to be a disposition. The proceeds of the disposition are therefore presumed to equal the initial adjusted cost basis of the policy and the new policyholder is presumed to acquire the policy at the same adjusted cost basis.
The following conditions must be met in order for such a transfer not to have any tax implications:
- the interest of the policyholder in a life insurance policy, other than an annuity contract, is transferred to his child for no consideration;
- the child of the policyholder or beneficiary of the transfer is the person whose life is insured under the policy.
(Note: the term "child" includes grandchildren, great-grandchildren and a minor child who is wholly dependent on the taxpayer for support and of whom the taxpayer has custody).
As an example, let's take the case of a mother of two children: a girl and a boy. The mother takes out a life insurance policy under which her son is the life insured. This means that she can transfer the policy to her son or daughter without any tax implications. She can even transfer it to one of her children's children.
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I have a life insurance policy with a company and they sent me a T5 slip. Why?
The Income Tax Act provides a tax exemption for most life insurance products that only contain insurance coverage. However, certain life insurance policies have a big savings component-for instance, a high cash surrender value-and are subject to tax on the accrued income that has accumulated within the policy. Accrued income is the investment income you have earned from the savings component of your policy. Even if no money has crossed your hands, the Income Tax Act states that insurers must declare this income on a T5 slip as provided under section 12.2 of the Act. Accrued income is calculated on each anniversary date of your policy, not at the end of the calendar year. That is why you do not receive a tax slip at the end of the first calendar year after you purchase the policy.
Are my life insurance premiums tax deductible?
Generally speaking, life insurance premiums are not tax deductible. However, when you borrow money from a financial institution, and it demands that you assign the policy as collateral on your loan and the interest on the loan is tax deductible, the law allows you to deduct whichever is less, the insurance premium or the net cost of pure insurance. If a part of your premium goes toward savings, this portion will not be tax deductible since the law is set up to allow only the insurance part of the premium to be deducted. In order for your life insurance premiums to be tax deductible, the purpose of your loan must be to earn business or property income.
Moreover, the premiums you pay for a private health insurance plan are considered medical expenses.
I was wondering about the tax implications of withdrawing the cash value of my insurance policy. I was also wondering about how much I will have left in cash and what then happens to the insurance policy.
The withdrawal of part or the total of the cash value in a life insurance policy constitutes a disposition for tax purposes. What this means is that there could be an amount taxable depending on the value of the policy. The amount is usually reported on a T5 slip and no income tax is deducted at source.
The taxable amount is the excess of the amount withdrawn over the adjusted cost basis of the policy. In the case of a partial withdrawal, the adjusted cost basis is prorated to reflect the ratio of the partial cash value withdrawn to the total cash value of the policy.
The adjusted cost basis of a life insurance policy is basically the cost of the insurance policy for the holder, which in essence corresponds to the total of the premiums paid, minus the net cost of pure insurance. The adjusted cost basis is calculated by the issuer of the policy.
You have to refer to your particular contract to determine what would happen to your policy if you were to withdraw some of the cash value. Usually, a partial withdrawal will not cause the policy to expire in comparison to a total surrender of the policy.