Final Expenses Estate Taxes

Table of Contents

1. Introduction
2. Insurance for Final Expenses and Estate Taxes?
3. What Final Expenses Are
4. Tax on Passing on Assets?
5. "Why Pay for Insurance When I Can Just Save?
6. Doing the Math: Premiums vs. Taxes and Funeral Costs
7. Alternatives: Savings, RRSPs, and the CPP Death Benefit
8. Real-Life Scenarios: Practical Examples
9. Is Insurance Always Necessary? No.
10. Take Advice

Introduction

People think of life insurance often as temporary income replacement for young families, but as people look ahead in their 40s to 60s, and into retirement, another use comes up: covering final expenses and reducing taxes due at death by paying less in insurance.

While it can sometimes be as straightforward as funeral costs (average in Canada is $10,000), it is also about ensuring loved ones lose out by sudden tax bills or probate that they receive less, or have to sell cherished assets at a loss. Some say premiums are wasted money; others rely solely on government benefits or personal savings. In reality, we do best when we make a plan, and a well-structured insurance is the cost-effective plan in most situations. Here is why.

Insurance for Final Expenses and Estate Taxes?

Insurance provides a payout at an uncertain time—your passing. That payout can cover funeral costs, taxes from transferring RRSPs or property, and final fees. Planning ahead means that on one of the worst days of your family’s life, nobody struggles to find cash quickly, and instead, know that insurance has all this looked after. That tomorrow looks as clear as yesterday.

If you own assets (ex. A business, a cottage, registered investments), in most cases, most of these become taxable when you die. Rather than forcing your family to scrounge for funds—perhaps selling property at a discount—they can rely on a tax-free insurance benefit paid out in the coming days.

What Final Expenses Are

Final expenses vary, but commonly include:

• Funeral and Burial Costs: Around $10,000, sometimes higher for cultural traditions or more elaborate funerals.
• Medical and Care Costs: End-of-life care, home modifications, or caregivers.
• Settling the Estate: Legal fees, probate (where applicable), and debts must be settled before inheritances are released.

Without insurance, these funds must come from your savings, investments, or selling assets at an inopportune time. Final expense insurance gives loved ones a permanent lump sum to take care of these without worry.

Tax On Passing Assets?

At death, the Canada Revenue Agency generally treats your assets as though sold at fair market value. A $200,000 RRSP added to your final tax return can push you into a higher bracket, owing tens of thousands of dollars. Appreciated properties, like a cottage, face capital gains tax on their growth. These taxes erode the legacy you want to leave behind.

A life insurance policy can offset this by providing a ready, non-taxable fund, preserving your estate and avoiding a forced sale of assets. And this is often done at a fraction of the cost of the tax bill.

Why Pay for Insurance When I Can Just Save?

Some say they will just save money themselves. Consider:

• Certainty vs. Market Fluctuations: Your savings might not be as large as you hope, especially if investments dip.
• Longevity Risk: Using savings during retirement can leave less for final expenses. 
• Tax Efficiency: Insurance proceeds are tax-free and avoid probate. Savings may face delays or taxes.
• Life Expectancy: Savings may cover final expenses— if you live long enough. A sudden passing would leave a huge gap between what is needed and what has been saved.

Doing the Math: Premiums vs. Taxes and Funeral Costs

Imagine a $50,000 life insurance policy. Over your lifetime, premiums might total $15,000 to $25,000, spread in manageable payments. 

Without insurance, you might face $30,000 or more in estate taxes plus $10,000 to $30,000 in final expenses, easily totaling $40,000 to $60,000. The insurance premiums now look like a fair trade for immediate, guaranteed coverage that spares loved ones from tough financial decisions.

A more specific example: A 40-year old male buying $50,000 of permanent coverage could pay close to $500 per year. If he passes at age 80, that $50,000 benefit costs $20,000, and is all received tax-free and quickly. 

Alternatives: Savings, RRSPs, and the CPP Death Benefit

Other strategies include:

• Savings and TFSA: Flexible and contain risk, and can be depleted or face market losses.
• RRSPs: Taxes can be deferred if you have a spouse, but eventually someone pays. If single, the tax hits at once.
• CPP Death Benefit: Only $2,500 at most, barely a dent in funeral costs or larger tax bills.

Insurance can complement these options by providing a known amount that arrives without delay.

Real-Life Scenarios: Practical Examples

Example 1: The 58-Year-Old Couple with a Cottage
Karen and Robert’s lakeside cottage doubled in value. Without insurance, their children face a significant tax bill at death. A modest life insurance policy covers this tax, so their children keep the cottage intact. The cost of insurance over time is less painful than forcing a rushed, discounted sale.

Example 2: The 65-Year-Old Widow with an RRSP
Angela, 65 and single, has a $200,000 RRSP that would be fully taxable at death. By securing a small permanent life policy, her nephew receives the RRSP funds and uses the insurance payout to cover taxes, keeping more of her hard-earned wealth in the family.

Is Insurance Always Necessary? No

Insurance is not always the answer. If you have no assets, no dependents, or ample liquidity, it may not be worth it. A trustworthy advisor will confirm if insurance adds value or not.

For many, especially those anticipating a hefty tax bill or wanting seamless final expense coverage, insurance offers peace of mind at a predictable cost. It just makes financial sense.

Take Advice

By integrating insurance into your estate plan, you simplify an uncertain future. Your loved ones are not burdened by sudden costs or forced decisions. Instead, they receive the legacy you intended.

If you want to explore insurance solutions for offsetting taxes or final expenses, consider reaching out. As a professional advisor familiar with these matters, I am ready to help. You can also consult a knowledgeable colleague at Emma Life Insurance. Together, we will design a plan that preserves your legacy as you envision it.