As you get ready for another tax season, make sure to look at your life insurance. It can affect your tax return.
The main reason for buying life insurance is to have financial protection in case of death. In addition to that, your life insurance also has tax benefits. But how do you know which tax benefits might apply to your tax return?
Here’s a simple checklist to make it easier. For detailed advice on your specific situation, you’ll want to talk with your advisor and a tax professional.
Do you own life insurance that can build up cash value over time?
| If this happened with your life insurance last year... | How does it affect your tax return this year? |
|---|---|
| You received a life insurance payout after the death of a loved one. | Your money's not taxable if the policy named you as a beneficiary. |
| Your policy's cash value increased and you didn't withdraw or borrow this money. | Your money's not taxable, so long as it stays in the policy and it's within government limits. (If it exceeds government limits and this could not be corrected, your insurance company would likely have contacted you.) |
| You used your policy's cash value as collateral for a loan from a bank or other third-party lender. | Your interest payments may be tax-deductible if you use the loan to earn income from your business or property. The loan is not taxable. |
| You borrowed money from your policy's cash value, through a policy loan. | Your interest payments may be tax-deductible if you use the loan to earn income from your business or property. Some of your borrowed money may be taxable. Your insurance company will send you a T5 slip to report any taxable amounts. |
| You kept making payments for a policy you donated to a registered charity. | You usually get a tax credit from the charity for your payments. |
| You withdrew some cash value from your policy or you completely cashed out (surrendered) your policy. | Some of your money may be taxable. Your insurance company will send you a T5 slip to report any taxable amounts. |