It is estimated by the Canadian Life and Health Insurance Association that roughly 22 million Canadians have a life insurance policy. The average policy value is $169,000 per individual, and most insured households have two policyholders.
With the popularity of life insurance in Canada, it’s no wonder thousands of people search, “Can I deduct my life insurance premium?” every year at tax time. In most cases, insurance premiums aren’t tax deductible, but there are two exceptions to that rule.
If the life insurance policy is a charitable gift and the listed beneficiary is a charity, the premiums paid can be considered a charitable donation. In this instance, the person paying the premiums can deduct the cost of the policy. They will need a charitable donation receipt that clearly states the amount of the policy premium.
The second way to donate life insurance premiums is if the person insured had to buy the life insurance to use as collateral for a loan. Sometimes a lending institution will only grant funds if the person taking out the loan agrees to also take out a life insurance policy that is equal to or greater than the amount of the loan and then puts that life insurance policy up as collateral. In this case, only a portion of the premium would be considered a deductible expense.
Besides these two very specific instances, life insurance premiums are not usually deductible. However, there are other ways you can get tax savings from your policy. For example, death benefits are typically not subject to taxes in Canada. This exclusion includes any amounts over and above the face value of the policy.
Certain types of life insurance plans, like whole life or universal life insurance policies, offer a lifetime benefit, often increasing as the policy matures. From a tax standpoint, this is a huge benefit, because as the policy matures, the benefit grows and is still sheltered from taxes, even at the time of pay-out.
Another tricky way to get more out of your life insurance policy is to pay the premiums with funds from within the policy. That way, the insured will be paying premiums with pre-tax dollars instead of after-tax dollars.
While premiums paid for life insurance in general aren’t typically tax deductible, there are still ways to leverage the plan to get the most benefits. For a free quote on a life insurance policy, click on the link below.