Estate Planning with Life Insurance Flashcards

What is the primary advantage of naming a specific individual as life insurance beneficiary rather than naming 'the estate'?

Answer: The death benefit bypasses probate and is paid directly and privately to the beneficiary

When a named beneficiary is designated, the death benefit passes outside the estate directly to the beneficiary — avoiding probate fees, estate delays, and public disclosure. If 'the estate' is named instead, the proceeds become part of the estate, subject to probate costs, creditor claims, and distribution delays.

What is 'estate equalization' in the context of life insurance planning?

Answer: Using life insurance to provide a cash inheritance to heirs who cannot receive an equal share of illiquid assets such as a family business or farm

When a client's estate contains illiquid assets — a business, a farm, or real estate — that will pass to one heir, life insurance can be used to provide equivalent cash value to other heirs. This equalizes inheritances without forcing a sale of the primary asset.

When a beneficiary designation is irrevocable, what restriction is placed on the policy owner?

Answer: The policy owner cannot change the beneficiary, assign the policy, borrow against it, or make material changes without the irrevocable beneficiary's written consent

An irrevocable beneficiary designation removes the policy owner's unilateral control: any change to the beneficiary, policy assignment, policy loan, or surrender requires the irrevocable beneficiary's written consent. This is commonly used in divorce settlements or creditor protection strategies.

A business owner has most of their estate tied up in a private corporation and real estate. How does life insurance most directly solve an estate planning problem for this client?

Answer: It provides immediate liquidity at death to cover taxes, debts, and estate costs without requiring a forced sale of business assets

At death, illiquid estates face a liquidity crisis: taxes, executor fees, and debts must be paid in cash, often forcing a fire-sale of assets. A life insurance policy provides an immediate, tax-free cash injection exactly when it is needed, allowing the family to settle obligations without liquidating the business or property at a discount.

Which type of trust, established in a will and funded with life insurance proceeds, is commonly used to protect assets for minor children until they reach adulthood?

Answer: Testamentary trust

A testamentary trust is created by a will and comes into effect upon the testator's death. It is commonly funded by life insurance proceeds and managed by a trustee who distributes funds for a minor child's benefit until the child reaches a specified age. Unlike an inter vivos trust, it is established through the will rather than during the client's lifetime.

Under Canadian tax law, how is a life insurance death benefit treated when paid to a named individual beneficiary?

Answer: The death benefit is received completely tax-free by the named beneficiary

Life insurance death benefits paid to a named beneficiary (other than the estate) are received completely tax-free in Canada. This is one of the most powerful features of life insurance in estate planning — it delivers a large, guaranteed, tax-free sum at a time when the estate most needs liquidity.