You might be surprised to learn that dying can actually be very expensive. There aren't only funeral costs and other expenses to take care of but also taxes that can cost a lot since you're taxed as if you made a profit on everything you own.
You saved your hard-earned money for your loved ones, the best way to save taxes is to have a retirement plan. When putting together your end-of-life plans, there are many ways to minimize taxes and fees.
Two of the best' options' include a life insurance policy and a stock portfolio.
Here's an overview to help you compare the two:
How Life Insurance Works
Life insurance is designed to benefit your loved ones. It is defined as a contract between the policyholder and an insurer, where the insurer guarantees to pay a specific sum to the insured's designated beneficiary upon the applicant's death.
You can choose from several providers and pick from different policy options. It involves the applicant making regular payments (premium) in exchange for a lump-sum payment called a death benefit.
Be careful when choosing a life insurance policy, as there are many options out there. Understand the difference between many life insurance types and pick what fits you the best.
How Stocks Work
Stocks are assets that can be bought and sold through an online brokerage. Owning stocks means partial ownership of the company. In some cases, ownership may come with certain rights, such as the right to dividends.
All publicly-traded companies, including international names, are available for investors to invest in. Prices, however, change rapidly and depend on many factors, including company performance, government policies, and more.
Life Insurance Versus Stocks: Understanding The Benefits
Life insurance has one significant benefit – a lump-sum amount that can run into millions and be used for any purpose. It offers financial security and can help your loved ones avoid financial issues.
The amount doesn't have to be reported and can be used to pay debts, cover funeral costs, buy property, etc. In addition, the beneficiary will not have to report how this money gets used.
On the other hand, stocks work differently as you do not have to make periodic payments. Also, there are no minimum investment requirements. You can start as low as $1 with no maximum limits. While risky, they come with several benefits, including the ability to sell whenever needed.
You can diversify by investing in multiple stocks or going for exchange-traded funds or mutual funds.
To safeguard your money, always have a will and name beneficiaries on all your registered accounts.
Life Insurance Versus Stocks: Some Drawbacks
Both options come with some drawbacks.
In most cases, cash surrender values are lower than the amount paid. Also, the positioning and purchase decision can be complicated, especially if the insurance is for complex family situations or estate planning.
Alternatively, stocks can be very risky with no guaranteed profits. You can end up losing a part of your investment due to price changes.
Why Choose A Life Insurance Policy
There are two reasons to choose a life insurance policy – no tax deductions and large payments.
Go for a life insurance policy if you can pay the premiums easily. However, it can be challenging for people to pay regular installments if they're already in debt. Also, life insurance may not be suitable for people who do not have a regular income. It is best to purchase a life insurance policy when you are young and healthy as it will be cheaper. If you wait to opt into a policy, it becomes more expensive.
About 70 percent of Canadians have a life insurance policy, and most have bought it on their own. Premiums start as low as $10 per month and can go into hundreds based on factors such as maturity value, your age, and your insurance provider.
Insurance can be an excellent option for people who want safety without any risk. While money increases at a very slow pace, you can rest assured that your family or loved ones will have financial protection when the unthinkable happens.
In addition to this, life insurance is also easier to deal with as it makes wealth transfer or inheritance cheaper thanks to fewer legal and little to no tax obligations. Technically speaking, life insurance is not taxable in Canada, no matter the size of your policy. However, in some very rare circumstances, there may be some tax obligations. For example, this happens when the beneficiary is not a person but the estate – in which case the the payouts are distributed according to your last will and testament.
There may be some additional charges in the case of estates, including accounting, legal, and executor fees and estate taxes. There may also be other deductions, including any taxes or debts owed by the state before any assets or money can be distributed under the will. The best way to avoid this problem is to name a beneficiary directly to your insurance policy. i.e., your spouse.
Why Invest In Stocks
Stocks can be great for people who have huge sums to invest. You don't have to make regular payments, and you can invest and forget since stocks do not require frequent interference. However, you may have to pay platform fees or agent commissions. Also, investing in stocks can be risky and require immense research and understanding of the market.
Choose this option if you have good risk tolerance. Of course, stocks don't come with a guarantee, but your investment can multiply quickly and even double in only a few years. The average return for stocks is around 10 percent per year.
Go for stocks if you are financially secure and have enough savings. However, remember that stocks come with more legal obligations and taxes. For example, investors pay capital gains tax on 50 percent of the capital gain amount.
So, Which Option To Choose?
Choosing between life insurance and investing in stocks comes down to weighing out the advantages and disadvantages of each. If it comes down to affordability, be sure to choose the option that is best suited for your long-term goals and current financial situation.