When you consider the idea of ‘Buying Canadian’, you may find yourself asking, what’s the difference between life insurance policies from Canada versus the rest of the world? Life insurance doesn’t seem like the kind of thing that would vary from one place to the next. You pay the insurer the premium, and they pay the death benefit when the insured person dies. It’s a pretty simple concept that should be pretty standard no matter where your life insurance policy is from, right? While it seems like this may be the case, I thought that it might be worthwhile to examine some of the things that make Canadian life insurance unique.
In this Article:
- Can a Canadian Buy Insurance from Another Country?
- Unique Aspects of Canadian Life Insurance
- Differences for Canadians
- Planning Opportunities
- Conclusion
Can a Canadian Buy Insurance from Another Country?
This is at the heart of why we are exploring this topic in the first place. The question was originally raised to me about maybe buying an American life insurance policy where the death benefit is paid in US Dollars, which typically are more valuable than the Canadian Dollar, so you would get kind of a supercharged payout. Looking at the end payout is one thing; of course you would need to account for the fact that you would have to pay the premium in US dollars as well, but that’s not as much fun to think about. Unfortunately, the answer isn’t as simple as a currency conversion that could potentially result in your beneficiary receiving more money. While the rules are quite complicated for figuring it out, what you need to understand is that different countries have different rules when it comes to defining what a life insurance policy actually is and how it is taxed. In Canada, we have something called the ‘Exempt Test’ that insurers use to make sure that the cash value growth in a life insurance policy is not subject to annual taxation and that the death benefit payment is tax-free to the beneficiaries. If you did buy a policy from the US, you need to make sure that it meets the qualifications laid out by the Exempt Test for that same preferential tax treatment to apply to the policy. The difficulty lies in the fact that since the Exempt Test is a Canadian rule, this means that policies from outside of Canada may not have the data readily available to run the Exempt Test. So while the simple answer is yes, a Canadian can buy a life insurance policy from another country, the truth of the matter is that it can be a really complicated process, and you should make sure that you speak with an advisor familiar with this type of transaction before making any purchase of life insurance from another country.
Unique Aspects of Canadian Life Insurance
Knowing that the option is there to purchase life insurance from countries other than Canada, let’s take a look at the aspects of life insurance policies in Canada that make them unique.
- Tax treatment of life insurance in Canada – The tax-free payout of life insurance death benefits is similar in many countries, but this is not the only way that tax rules apply to a life insurance policy. In Canadian policies, there is the ability to have tax-deferred growth in the cash value inside permanent life insurance policies. This growth is accessible in tax-efficient ways like policy loans and collateral assignments, as well as making Canadian life insurance policies very tax-efficient products.
- Corporate Planning – Canadian corporations are allowed to own life insurance policies where they are the beneficiary on the life of one of their key employees. When a life insurance policy pays the death benefit to the corporation, a credit is created in the corporation’s capital dividend account, allowing money to be paid out to shareholders tax-free. The Capital Dividend Account is a unique planning tool available to Canadian corporations.
- Strong Regulation Leads to Stability – Canadian life insurance companies are overseen by the Office of the Superintendent of Financial Institutions and provincial regulators as well. The system that they operate in is fundamentally a conservative one, with insurers being required to maintain high levels of cash reserves. Canadian life insurance companies are also backed by Assuris, which is a system similar to CDIC for banks, that makes sure that the policy owners have protections (up to $200,000 in death benefit or $60,000 in cash values) in the event that a Canadian Life insurance company fails.
Differences for Canadians
There are factors that affect why people buy life insurance in Canada that are different from those in other parts of the world. Some of the differences would include:
- Canada’s Public Healthcare System – With the public healthcare system in place, Canadian’s don’t need to worry about the idea that they will leave behind massive medical bills for their beneficiaries to try and pay. This makes planning more straightforward as Canadian life insurance buyers can focus on income replacement and estate planning without the worry of medical expenses.
- Participating Insurance from Canadian Insurers – In the whole life policy market, there is a strong history of Participating (PAR) insurance being a cornerstone of Canadian life insurance. The PAR accounts that generate the annual dividends payable to policy owners date back as far as the late 1800’s for some Canadian insurers. It is this type of stability that has made PAR life insurance so popular in Canada.
- More Conservative Canadian Insurers – Canadian insurers who operate within the strict guidelines laid out by both federal and provincial regulators are far less aggressive than some of their international counterparts when it comes to investment strategies. With fewer speculative investments in their portfolios, Canadian life insurance companies are among the most financially sound in the world.
- Lack of an Estate Tax in Canada – Since Canadians don’t face an estate tax like other places in the world, life insurance policy owners can focus on their estate plans without having to consider any extra money for the payment of this type of tax.
Planning Opportunities
Many Canadian financial advisors integrate life insurance with a family’s overall financial security plan. Having a strong foundation that protects you in the event of an unexpected death means that your family is looked after even if you aren’t around to be able to do so. Aside from this aspect of personal financial planning, the Canadian life insurance market is exceptionally well-suited for corporate planning opportunities. We mentioned the Capital Dividend Account (CDA) earlier, and it bears repeating here. When a corporately owned life insurance policy in Canada pays the death benefit, and the corporation is the beneficiary, a credit is created in the CDA. This is an account that allows shareholders to be paid out tax-free from the proceeds of the policy. This ability to have the death benefit of a corporately owned life insurance policy retain the ‘tax-free’ nature of personally owned policies is a powerful tool for Canadian life insurance companies when an advisor gets the concept of insurance involved in corporate planning.
Conclusion
When we go back to our original question, the answer is yes, a Canadian can buy life insurance from a different country. But that’s a really simple answer to a complicated question. The more important thing to consider is whether a Canadian buys life insurance from outside of Canada. The life insurance products available to Canadians from Canadian sources stand apart from policies issued outside of Canada because of their tax efficiency, the strong regulatory environment that supports them, and the way that you can integrate them into your financial plan both personally and professionally. This becomes particularly important if you are a high-net-worth individual or a business owner. If you are a Canadian who is looking at buying life insurance and are considering the option of buying a policy from a country other than Canada, I would suggest consulting an expert first. The team at Strata Wealth can provide you with the expert advice you need to make sure that you understand what your options are and help guide you to a policy that makes the most sense for you and your unique situation.
