If you are looking to buy financial products, there are many places that you can go. Some of the most common financial institutions to choose from are banks, trust companies, credit unions, life insurance companies, and mutual fund companies.
The lines that used to distinguish institutions have become increasingly blurred. At one time, if you wanted to buy stocks, you went to see a stockbroker. If you wanted a GIC, you went to the bank. For life insurance, you went to a life insurance company. Now banks, life insurance companies, and mutual fund companies are all in the same game and no matter what you want, chances are you can get it from any of these institutions.
In this article, I want to touch on some of the basic advantages of investing with a life insurance company:
- Guarantees. When you buy a segregated fund through a life insurance company, there are typically guarantees of capital under two circumstances. The first is when you die and the second is when you reach a 10-year maturity period. While this may seem incredibly advantageous, remember that the life insurance company is not offering you these benefits for free. They come at a cost and in some cases a very expensive cost. If you are going to buy a segregated fund, make sure you take the time to find out the fees that are being charged.
- Creditor Protection. Safeguarding assets from seizure by creditors is an important and often overlooked aspect of asset management. One valuable protection strategy utilizes the preferred status accorded by Canadian law to certain products offered by life insurance companies. Generally, assets held within life insurance contracts and annuity products, including most insurers’ RRSP, segregated fund contracts and term deposits cannot be seized by creditors, provided that certain conditions are met when the contracts are arranged.One of the attractive features of life insurance policies is the element of creditor protection. In recent years however, this protection has been challenged on many fronts. Despite these challenges creditor protection benefits still exist in many circumstances.
- Probate Protection. When you have to probate an estate at death, there is the potential for significant fees and time delays depending on the complexity and size of the estate. One of the ways to minimize fees and time delays is through the use of investments with insurance companies. Essentially, investments held with an insurance company transfer directly to the named beneficiary at death.
- Pension Income Credit. Persons age 65 and over who receive annuity income from a qualified pension are eligible to claim a maximum tax credit of $1,000 on their tax return. There are many types of pension incomes that qualify for the credit as discussed below, but amounts received from OAS, CPP and QPP do not qualify for the credit.When a person is age 65 and older at any point in the year, the definition of pension income for purposes of the tax credit includes:
- Income from a superannuation, pension fund or pension plan;
- An annuity payment out of an RSP or an annuity purchased with a refund of RSP premiums received on the death of a spouse;
- A regular payment out of a RIF, a LIF, or an LRIF;
- An annuity payment out of a deferred profit sharing plan purchased by the person or by the plan.
- The income (or interest) element of GICs held with a life insurance company.
- The income (or interest) from a non-registered, prescribed annuity.
So, if you have GIC interest income or life annuity income through non-RRSP money, having that money through a life insurance company may help you qualify for the $1000 pension income credit. So, if you are over the age of 65 and you look at line 314 on your income tax return, check to see if you have anything in this line. If not, talk to your financial advisor about how to take advantage of the pension income credit.