Is Life Insurance Taxable in Canada? Experts Answer (2022)

Verified by Erik Heidebrecht, Certified Life Insurance Advisor

It might feel like you have to pay taxes on everything, but you can breathe a sigh of relief when it comes to life insurance. Payouts from life insurance are not taxable, regardless of policy size. But there are some exceptions to consider.

We'll take a closer look at life insurance and taxability, so your family can keep as much money in their pocket as possible.

Is life insurance taxable in Canada?

In most cases, death benefits from life insurance are not taxable in Canada. Your beneficiaries will get every dollar of the lump sum amount and can use it however they please. For example: helping pay for the funeral, paying off debts (like a mortgage), childcare or covering day-to-day costs.

Being able to pay for these expenses is why we buy life insurance for our families. And if you take the right steps and choose the right policy, the tax office usually won’t see a cent of it. 

See just how affordable life insurance with PolicyMe can be by getting a no-commitment quote on a term life insurance policy that protects you, your family, and your budget.

What you’ll learn in this post:

  • In general, life insurance death benefits are not taxed. They are only taxed in very specific circumstances. 
  • When are life insurance payouts taxed? When you don’t name a beneficiary, when you own a permanent (versus term) life insurance policy with a cash value, when your permanent policy is used as loan collateral, or when you sell your permanent policy while you’re still alive. 
  • Find out how to get the most out of your benefit for loved ones with our list of important steps towards getting every dollar possible for them. 

The different types of life insurance and tax implications, explained

The tax implications of a life insurance policy differ depending on which type of life insurance you buy: term or permanent. 

Policies that last for a specific period of time—such as 5, 10, 15, 20 or 25 years—are known as term life insurance policies. If you pass away during your policy term, your beneficiary will receive your tax-free death benefit.

Unlike a term policy, permanent life insurance offers lifetime coverage. But permanent life insurance premiums can be a whopping five to 15 times pricier than a term policy.

Here’s a quick breakdown of the various types of life insurance that fall under term and permanent:

Is Life Insurance Taxable: Chart detailing the main types of life insurance

Why does term life insurance make the most sense for Canadians? 

In a recent study of the biggest life insurance mistakes parents make, we found that 22% of Canadian parents bought permanent life insurance. 

Why is that classified as a “mistake”? It’s expensive and it doesn't make sense for families that don't expect to have dependents (young kids or aging parents) or debt (like a mortgage) well into the future. 

So why pay those sky-high permanent premiums for the rest of your life when you don’t have to? Term life insurance is a much better value for the average Canadian family.

Here’s a snapshot of how much it costs to buy term versus whole life insurance, a type of permanent life insurance: 

$250,000 20-year term life insurance $250,000 whole life insurance
Male, aged 30 $18/month $135/month
Female, aged 30 $15/month $121/month
Male, aged 40 $28/month $204/month
Female, aged 40 $22/month $178/month
Male, aged 50 $72/month $327/month
Female, aged 50 $51/month $279/month

The methods that companies use to calculate the cost of your life insurance premiums will vary a bit, but it's clear that term life insurance is the more affordable option that suits most Canadian families best.

Our post on how much term life insurance you actually need is a great resource.

Is tax added to my monthly premiums?

Your beneficiary isn't the only one who doesn't have to pay tax for your life insurance. Your life insurance premiums are tax-free too. 

PolicyMe can help you secure a policy that’s a perfect fit for your family and your budget. Here’s how to get ahead on choosing a term life insurance policy: 

  • When you pay your monthly premiums, you won't be charged HST. That's because, like other financial services, life insurance premiums are exempt from GST/HST.
  • We keep your monthly premiums as affordable as possible without compromising quality of coverage. Our streamlined, online process provides an instant quote, and an application takes around 20 minutes to complete. (Because we know your time is precious). 
  • Because of our efficiency, we can offer you the same-quality policy at a lower rate than other Canadian insurance companies.

There is such a thing as buying stress-free—and tax-free—life insurance. Get a term life insurance quote with less hassle, less time and more peace of mind.

When will you need to pay taxes on life insurance?

Life insurance proceeds aren't taxable in Canada. But there are a few exceptions. 

To help you avoid confusion, here's when life insurance benefits are taxable in Canada:

1. You don't have a beneficiary

When setting up your life insurance policy, you should always name a beneficiary. If not, your estate will be designated as the beneficiary and your death benefits may be taxed.

What’s the best way to avoid a tax payment when the executor of your estate files your final tax return? 

That way your money is going exactly where you want it to go, instead of to the CRA. 

2. Your policy has a cash value

If you own a permanent life insurance policy, it may accumulate a cash value that earns interest over your policy term. Usually, this cash value is invested to make interest and increase in worth.

If you want to sell a permanent policy—while you’re still alive and kicking—for its cash value in return, your risk of getting taxed goes up:

  • Income earned as interest is usually taxable by the CRA
  • The growth of your cash value while it’s still locked up in your permanent life insurance policy is exempt from taxation, but when you sell your policy, earnings on the payout of life insurance are considered income

Whole life insurance, a type of permanent life insurance, can get sticky to understand. Here are the facts you need to know: 

Is Life Insurance Taxable: Whole Life Insurance Cash Value Example image

The cash value of your policy will be taxable if beneficiaries receive any interest earnings from your policy, along with your death benefit.

3. Your policy is loan collateral

If you use your permanent life insurance policy as loan collateral, for example to secure funds to pay for your retirement or a kitchen reno, the part of your death benefit used to pay that loan back, may be taxable in Canada.

4. You sell your policy

Depending on where you live, you can sell your permanent life insurance policy. This is generally done if the policyholder requires cash, can't afford to continue paying their premiums or no longer wants the policy.

If you live in Saskatchewan, Quebec, New Brunswick or Nova Scotia, you can legally sell your life insurance policy to another person using a broker or funding company. If passed, the proposed Bill 219 would allow Ontario residents with life insurance to do the same. It is not allowed to sell your life insurance policy in Alberta.

Whether you'll be taxed depends on:

  • The type of policy you had
  • The money you paid into it
  • The payment you got from selling it
  • And if the policy had any cash value 

How do I report a payout on my tax return?

You don't need to report a payout on your tax return unless you receive interest earnings on the death benefit, which is specific only to a permanent policy.

If a payout needs to be reported, the insurance company will automatically issue a T5 slip.

If you surrendered your permanent policy, this form would be issued to you and it will go to your beneficiary if you pass away.

Line 121 of the form will outline the interest earnings that would need to be reported.

How to make life insurance easier for your beneficiaries

Losing a loved one is hard, but know that you can make claiming your life insurance easy for loved ones by taking these simple steps: 

1.  Don’t forget to name your beneficiaries

Properly filing the name of your beneficiary or beneficiaries with your life insurance company can speed up the settlement process and help avoid probate, associated costs and most outstanding debts owed.

2. Let your beneficiaries know that you have them covered. 

Regardless of who you choose as your beneficiary, be sure to let them know. We’re sure you’ll get lots of love and gratitude in return. 

What’s even more helpful? Provide them with your insurance provider's details so they can file a death claim easily without searching through your paperwork.

3. Put everything in writing and record every detail. It’s worth the extra effort. 

Be specific when it comes to how you want your policy's death benefit doled out. 

For example, if you want your children to receive your life insurance payout, list their legal names and social security numbers rather than simply listing “children.” 

If you wish to name a charitable organization as the beneficiary, outline the organization's name, address and tax ID number.

4. Name your secondary beneficiaries too. That way your death benefit will always find a tax-free home. 

There are two common types of beneficiaries:

  • Primary
  • Contingent, also referred to as secondary

A primary life insurance beneficiary is the individual who is first in line to receive your life insurance payout. Typical examples include your spouse, children or other close family members.

If your primary beneficiary passes away before or at the same time as you, a contingent (or secondary) beneficiary will receive your death benefit tax-free if you name them on your policy. 

5. With every life change, update your life insurance too. 

Common reasons to update your life insurance beneficiary include getting married, getting divorced, having a new baby or adopting a child. To amend your policy's beneficiary information, contact your life insurance agent for help.

When you fail to keep your beneficiaries up-to-date, someone other than your intended may receive your insurance payout.

PolicyMe makes it as easy as possible for your beneficiaries to claim their payout. Your beneficiaries simply need to complete the following steps:

  1. Notify us by email or by completing the form of their loss
  2. Complete the required claim forms and provide more documents if requested
  3. Wait for Canadian Premier to review your claim, follow up about any additional information required and process your payment.

In summary: Life insurance payouts are usually tax-free in Canada (with exceptions)

When you buy a term or permanent life insurance policy, the proceeds won’t be taxed. But if you buy a permanent policy, there are extra complications that may make the proceeds subject to taxation.  

Now that you have the intel to help your loved ones when they need it most, it's time to get set up with a term policy that works hard for you when it really counts. 

At PolicyMe, we empower you to personalize your term life insurance policy that’s tax-free and works for your budget. And life insurance isn’t as pricey as you might think. Get a quote below and you may be surprised!

FAQs about life insurance and taxation

What type of life insurance is tax-free?

When a beneficiary's assigned, death benefits from both term and permanent life insurance policies are not taxable in Canada. Any interest earnings on a permanent life insurance policy are taxable.

Is employee life insurance tax deductible?

Employee life insurance premiums are not deductible on individual employees' income tax returns. If you're a business owner who covers the cost of employee life insurance (also often referred to as group life insurance) and the premiums are listed as a reasonable business expense, they are tax-deductible.

Is life insurance considered an inheritance?

When you name a beneficiary, life insurance is not part of your estate, so it is not considered an inheritance. In fact, life insurance proceeds can be used to help pay for any debts associated with your estate. 

Is life insurance subject to capital gains tax?

When you have a permanent policy, such as whole life insurance, you’re purchasing a life insurance policy and sheltering cash that is invested by your insurance provider with a common goal to gain dividends on your premiums. Those dividends or earnings are subject to capital gains tax. 

Are foreign life insurance proceeds taxable in Canada?

Foreign life insurance policies are not treated the same as Canadian policies and often are subject to taxation. If you do own a foreign policy, ask your provider if they can provide written proof that your policy qualifies in Canada. 

If it doesn’t qualify, speak to a tax specialist to clear up any cobwebs about your policy and ask for advice about reducing potential taxes for your loved ones. 

Helene Fleischer

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