Personal wealth protection with insurance

Your family’s future fulfilment fund

Financial planning is about organizing things so that you have control, comfort, & confidence with where you are, and where you’re going. Still, and even with the best laid plans, the loss of an income earner, home anchor or dependant could drastically affect your family’s future.

Without question, a critical illness, disability or death is firstly a traumatic human event. But it is often accompanied in cruel succession by financial fallout that can cause individual and family aspirations to be temporarily detoured, permanently diverted or abruptly halted.

This is where insurance can play a pivotal role – literally! It affords everyone a pause to grieve, reflect and focus, and then the option to either continue as planned or adjust to new conditions.

The trajectory of life

Life is about our relationships with others, but there’s also the practical parallel need to survive and thrive economically. In this latter respect, there are many milestones we look forward to on our journey, including getting an education, finding productive and purposeful work, establishing a family and home, saving towards our later years and enjoying that time, and ultimately passing a legacy on to our heirs.

Of course, each person and family is unique, so the routes we take, the order of the milestones, and the time we spend on each will vary greatly. Despite this individual variation, it’s inevitable that some of us will contract a critical illness, suffer a disability or die along the way, disrupting or destroying that neatly planned trajectory.

Although it’s not possible to predict who among us will be struck nor when it will happen, fortunately insurance is available as a tool to help defray that risk.

Insurance is a good news story

A built-in premise of insurance is the good news that you have people you care about, and who care about you. That includes you caring about yourself, which is why disability insurance in particular is such a high priority for a young adult, even before a spouse and children enter the scene. Then, as relationships emerge, children arrive and lives intertwine, your connectedness is what defines you as a family.

Another word for connectedness is caring. You love and care for those closest to you. That’s why you work so hard to earn the income that provides a stable home and promise of a bright future.

But, in contrast to a reprimand you may voice to a misbehaving son or daughter that it’s ‘NOT all about you’, when it comes to fulfilling these financial intentions, it very much IS about you – with extension to the significant other who shares your caring sentiments and financial responsibilities. The bad news then is that if fate intervenes, one or both of you may become unable to deliver on those good intentions.

Bad news in the background: Risk and peril

In the language of insurance, risk is the statistical probability that a peril (an event) may occur, causing personal and/or financial harm or loss. Insurance cannot undo the personal trauma, but the financial relief from an insurance payout can indirectly allow more time and space for physical and psychological healing to take hold.

It’s important to note that insurance is not a gamble for the insured or named beneficiaries to be made better off when a peril happens. Rather, the underlying principle of insurance is to indemnify the insured party, restoring them to their original financial position as if the peril had not happened.

Across the perilous events discussed here, there is certainly overlap of negative financial consequences, most visibly the lost income of the afflicted person, whether temporary or permanent. In addition, distinct financial effects may attach to each of the events, as expanded following.

On a death …
  • In addition to working through personal grief, funeral and final expenses will have to be dealt with.
  • The problem of reduced income for recurring bills and existing debt may be compounded if new or expanded credit (necessarily and understandably) is used to bridge through this difficult period.
  • The tax system provides some relief for a surviving spouse to use a range of tax-deferred rollovers on death.
    In future though, those desirable spouse tax features will not be available to a single income household.
  • Family routines and longer-term plans may need to be reconsidered, adding to financial uncertainty.
With the onset of a disability …
  • Time will be needed to recover, with the obvious correlation being that time-resting is time-not-working.
  • This may simply be brief restful recuperation, or in more severe situations it may involve therapy/rehabilitation over months or years, with attendant professional, facility and medicine costs.
  • Some people will make a 100% return to their pre-disability condition, whereas others may require ongoing treatment and medication, all of which may have implications for future work and income prospects.
In the case of a critical illness …
  • A critical illness is a life-threatening condition, the ‘big three’ being heart attack, stroke and cancer.
  • Once diagnosed, time is of the essence to explore treatment options, decide which way to go, and act.
  • As with disability generally, routines will be disrupted but with response time and options more compressed.
  • Availability of specialists and dedicated facilities will dictate timetables, and if those are not immediately nearby, additional time and cost of travel and accommodation will add further complications, stress and expense.
  • A spouse work leave may be needed, as well as childcare if substantial travel time is involved.
Bearing the cost, or sharing through insurance

If each of us was to bear these risks individually, it would be a heavy financial burden. Against the relatively remote possibility of a peril happening, a large proportion of income would have to be set aside to accumulate enough of a money reserve for the purpose. This would significantly suppress current spending and lifestyle, and still leave one exposed to a shortfall during the many years it would take to build an adequate reserve.

A more cost-effective option would be to pay a premium to an insurer that agrees to cover that large cost if the event happens. To be clear though, you can’t just be paying to have the insurer stand in your shoes and face the same risk as you, as that would require such a high premium so as to make it unfeasible for you to proceed.

Rather, insurance takes advantage of the statistical law of large numbers, or LLN. While we can’t predict if a specific individual will experience an event, it is possible to reliably estimate how many people may be affected across a population. Thus, an insurer takes on many contracts, spreading the collective risk. By applying LLN, it can then set premiums so that its business is viable, hand-in-hand with being affordable for those seeking coverage.

Nature of the deal

It is this spreading of risk across a population that allows insurance to insulate an insured party from having to bear the full financial impact of a random event. For premiums paid, each coverage has its own way of paying out:

Life insurance …
  • Provides a tax-free lump sum payment on a person’s death.
  • It can be paid directly to a spouse or other person, or be managed by the executor of the deceased’s estate.
  • Whichever route it takes, there is no reporting or restriction on how the money is used.
Disability insurance …
  • Provides tax-free* periodic payments to replace a portion of the income the person would have been earning. (*Payments are taxable if an employer paid the premiums, though not if charged as a taxable employee benefit.)
  • Following diagnosis and a waiting period (ranging from 30 to 365 days, with 90 being most common), payments begin and continue for the contracted duration during which the person remains disabled.
Critical illness insurance …
  • Provides a tax-free lump sum payment once a covered condition is diagnosed.
  • Commonly this is limited to a return of premiums paid if the person dies within 30 days of diagnosis.
  • Otherwise, the full amount is immediately available, with no reporting or restriction on how the money is used.
A deeper dive into life insurance

[The balance of this article is specific to life insurance, though much of the content applies (with some modification) to disability insurance and/or critical illness insurance. Please consult a licensed insurance advisor for further information and guidance.]

For how long do you need coverage?

Some risks exist for a limited period of time, and others may continue regardless how long you live. Not surprisingly, these are known respectively as temporary and permanent needs.

  • Temporary needs include essential matters such as making sure a mortgage can be paid off without having to sell the home. Other examples include child-raising costs, education funding, fixed-term debts like car loans, and child or spousal support if there has been a marital separation. Even income replacement is technically a temporary need, though one that may persist for decades, depending on a person’s current age.
  • Permanent needs include funeral and final expenses. Income tax may be triggered, though rollover to a spouse may defer some of that concern. If a person’s assets are illiquid (for example, a business that must remain intact), insurance can equalize inheritances, and if there are special needs then insurance can help fund a trust.
  • Joint needs – As well, there may be some needs that align with the later death of 2 or more people. The most familiar application is to cover the income tax liability when a second spouse dies, assuming assets rolled over tax-deferred at the first death. A key benefit here is that because the insurer doesn’t have to pay until the later death, the premium is lower for joint-last coverage than if there were two policies for half the amount on each.

Most of the time there will be both temporary and permanent needs, and these will change over a lifetime. With an understanding of which types of need you have, you’ll be better prepared to decide how you would like to pay for the coverage(s), which is where we turn next.

How would you like to pay?

All else being equal, an insurer will charge a higher premium as a person ages, with the year-to-year increases becoming larger as one grows older. Some people may be content with those increases, but others will be anticipating that their insurance needs will continue for many years ahead. In response, insurers offer a range of ways you can choose to pay premiums:

  • ART is annual renewable term (or YRT/yearly renewable term) coverage where the premiums go up every year. While this begins at low cost, it can become quite expensive at advanced ages. Not all insurers offer this option, and those that do usually set an upper age limit after which the policy cannot be renewed.
  • When the letter “T” appears before a number, it refers to the number of years that premiums are fixed. For example, T10means that the premiums are the same for ten years, with a stepped-up higher amount for each subsequent ten years. Other possibilities are T5, T15, T20, T30, and one insurer has pick-a-term up to 50 years.
  • T100 offers level premiums up at age 100. At the century mark, such policies usually endow, meaning that no more premiums are paid and the policy pays out whenever death occurs.
  • For permanent needs, a cash value policy may be considered. Familiar types include whole life where the insurer provides a return on higher premiums, universal life where the policyholder may choose among investment options within the policy to earn returns, and limited-pay policies that range from 8 to 20 years of fixed premiums, after which the policy is fully paid-up.
Rider benefits that ‘ride-along’ with main coverage

Apart from the premium to pay for the main coverage, most policies have an annual administration/policy fee.
If you have more insurance needs but don’t want to incur another policy fee, you may be able to purchase additional features that ‘ride-along’ with that main coverage. The risk premium on those additions would still be due, but with no further policy fee. The most common riders are:

  • Term insurance rider – This may be for the same or different amount and duration as the main coverage.
    For example, if you have a whole life policy for permanent needs, you might add a T10 for a temporary need.
  • Spousal rider – This is usually for temporary term needs. Complex needs would call for a separate policy.
  • Child rider – Medical underwriting is not usually required, and coverage may eventual be transferred to the child.
  • Disability waiver – If you become disabled, the insurer waives premiums for the duration of your disability.
  • Guaranteed insurability – You may add coverage at a later date without going through medical underwriting.
  • Accelerated benefit – If diagnosed with a terminal illness, a portion of the death benefit may be paid while living.
  • Convertible – Rather than being a rider that costs a premium, this is a feature of some contracts. For example, a T10 policy may allow conversion to a level cost permanent policy (at attained age) without medical underwriting.
To whom and how may proceeds be paid?

An insurer will pay the death benefit on life insurance once it receives proof of death, usually in the form of a licensed funeral director’s Proof of Death Certificate. Otherwise, each province has a vital statistics office that can assist.

By default, the death benefit is paid to the estate of the policyholder, but all life insurance policies allow for the designation of one or more beneficiaries on the contract. This is usually preferable for faster payout than would be the case if the family had to wait for an executor to be formally in place to distribute the proceeds from the estate. This also keeps the proceeds from being available to creditor claims against the deceased person, and concurrently bypasses any probate fee/tax on estate assets in provinces where that is a concern.

The designation may be to one or more beneficiaries, either in equal or other proportions as the policyholder wishes. It is also possible to have one or more contingent beneficiaries if a first named beneficiary is already deceased.

Still, where there are special needs of beneficiaries, it may be better to have the proceeds go to the estate where a trust may be set up to handle an inheritance. Examples of special needs include minor beneficiaries who cannot legally own property, some disability needs, and vulnerable beneficiaries such as those with matrimonial conflict, substance abuse or creditor exposure.

If the use of a trust is more formality than deemed necessary, another option most insurers offer is for the policyholder to pre-select an annuity distribution to one or more beneficiaries, rather than a lump sum payout.

Where you own coverage

As a final thought, you may have insurance coverage through your employer, commonly disability insurance and life insurance. As a member of an employee group, you are entitled to those benefits without having to submit to medical underwriting. However, coverage amounts and policy options are generally capped, and portability is restricted or not allowed if you leave the employer.

For personally owned insurance, you can shop the market and choose what coverage amount and policy options are most suitable for you. As well, rather than having premiums dictated by a group profile, an insurer will base them on your individual characteristics, including potential preferred rates for those with healthy living habits. And finally, if you change employers, that will have no effect on the insurance you own.

All that said, the paramount point is to determine what will provide the best protection for your family. With your workplace coverage in mind, you can then decide the appropriate type and amount of personal coverage you need, and get started on your plan

US W-8BEN limits withholding tax for Canadians on US investment income

Fulfilling foreign compliance while streamlining your own tax reporting

The purpose of a tax treaty is to coordinate tax laws between countries, allowing people to manage their finances without the spectre of double taxation, and to make use of preferred tax rates or procedures negotiated between the parties. One feature of the Canada–United States Treaty is a reduced withholding tax rate when a resident is paid income from the other country.

Like Canada, the US has domestic procedural rules and forms to facilitate this preference, managed by its Internal Revenue Service (IRS). The main requirement for affected Canadians is to file the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (individuals), which is more commonly known by its form number, W-8BEN.

Why withholding tax in the first place?

There are three components to any tax system:

  • The base upon which tax is levied,
  • The rate and mechanics for calculating the tax, and
  • The agents and processes for collecting the tax.

A familiar domestic example is that for salary and wages, we pay income tax at graduated rates (i.e.., increasing rates on income at higher brackets). On each payroll run, employers are required to withhold the estimated tax for each employee, and remit those amounts to the Canada Revenue Agency (CRA). Employees then calculate their final tax amount and file their annual tax returns, claiming the withheld amount as a credit against their tax due.

In this domestic frame, withholding tax is not really a tax at all, but rather a collection mechanism. The employee then either tops-up if there is a shortfall, or claims a refund if too much was withheld, but is not paying another tax.

In the cross-border context …

A country has the right to tax the income earned by foreigners on its soil. Its tax authority will require payors of such amounts to withhold and remit a portion to that authority, thereby satisfying the foreign recipient’s tax obligation.

On the receiving end, Canada has the right to levy tax on its residents who receive such income. Indeed, a Canadian resident is taxable on gross worldwide income, not just the net received. Fortunately, when a foreign tax authority withholds tax, that is generally allowed (see next section) as a foreign tax credit (FTC) that reduces the Canadian tax bill. Effectively, the person’s taxes are being split between the two countries.

The ‘benefit’ of the W-8BEN

As indicated in its full title, the W-8BEN certifies who is the “beneficial” foreign owner/recipient of payments made from a United States payor. Absent this identification, the US payor must withhold at the default 30% statutory rate. At first look, the application of that statutory rate may not appear to be a concern if a Canadian taxpayer can claim the FTC as described above, but this is where we return to the qualifier that it is “generally allowed”.

Interaction with claiming foreign tax credits in Canada

When a Canadian taxpayer claims the FTC, the Income Tax Act (ITA) allows an amount this is the lesser of:

  • Foreign tax actually paid – This is usually the amount withheld, as a foreign tax return is seldom filed; and
  • Canadian tax otherwise payable – This element is in place so that a credit is not given that is greater than the amount of tax Canada itself charges on that same income.

In practice, an additional limitation applies, to confirm that the withholding rate applied by the foreign jurisdiction is in accordance with the relevant tax treaty. In effect, this is a second lesser-of limitation. Returning to the Canada-US Treaty, the negotiated withholding rate on most payments is 15%, so half the US 30% statutory rate.

The whole process is best explained using the following side-by-side illustration.

Illustrating Canadian FTC claim, with and without filing US W-8BEN

Let’s assume a Canadian resident taxpayer at a 40% marginal tax rate receives $1,000 of US-source income. Ultimately, this must be reported in the Canadian dollar equivalent when filing the Canadian tax return, but it’s the effect on the percentage of tax that we’re highlighting, so the currency is not relevant for the illustration.

In sum, regardless whether the W-8BEN is filed, the FTC reduces the Canadian tax by $150 from $400 to $250. But without that filing, the US withholds $300, increasing the combined tax bill from $400 to $550 in the example.

Who completes the form … and how, and when?

For a Canadian investor to get the reduced treaty withholding rate, US law requires withholding agents and qualified intermediaries, including Canadian securities dealers, to obtain the W-8BEN from their clients who directly hold individual US securities and US-listed exchange traded funds (ETFs) and/or who receive US-source income.

Affected income sources include dividends, royalties, rent, annuity payments and interest, acknowledging though that only rarely is withholding applied to interest, such as income from a publicly traded partnership (PTP). While a
W-8BEN doesn’t reduce such withholding, it is useful documentation to help ensure the correct treatment is applied.

Importantly, the filing of a W-8BEN does not create new or increased US taxes, nor does it require the individual to file a US tax return. But to repeat, it can reduce (but not eliminate) US withholding tax.

There is some variation on how the rules apply, according to the way the investor holds their US securities:

  • Canadian non-registered account – Collection/filing of the W-8BEN allows for the reduced treaty rate.
  • Canadian retirement plan – RRSPs and RRIFs fall into this category, which is entitled to 0% withholding under the Canada-US Treaty. Though the treaty supersedes the W-8BEN, dealers usually still collect the form to support the treaty claim, and otherwise protect against a US payor erroneously applying the 30% statutory rate.
  • Other Canadian tax-sheltered accounts – For TFSAs, RESPs, RDSPs and FHSAs, dealers usually collect the W-8BEN so that the treaty rate can be claimed on US-source income. However, be aware that as there is no Canadian tax on income in such accounts, one cannot claim a foreign tax credit for the withholding, whatever amount it may be. Still, the 15% treaty withholding rate is clearly preferable to the 30% statutory rate.
  • Canadian mutual funds and ETFs – Under US tax law, the fund is the beneficial owner that is required to complete the W-8BEN, for which it may then claim the reduced withholding rate at the fund level.

Whether the W-8BEN is completed by the investor or a fund, the tax slips delivered from a dealer will report both the foreign income and foreign withholding tax, facilitating the investor’s FTC claim to reduce Canadian tax.

A W-8BEN is valid from the signature date to the end of the third following calendar year. For example, if the form is signed any time in 2026, it is valid until the end of 2029. If there is a change in circumstances to make the information on the form incorrect, a new form must be filed within 30 days of the change.

More information from official IRS sources

W-8BEN in fillable PDF format: https://www.irs.gov/pub/irs-pdf/fw8ben.pdf

Official instructions: https://www.irs.gov/pub/irs-pdf/iw8ben.pdf

Attorneys and registered plan beneficiary designations

Flexibility in the wake of incapacity

Powers of attorney (POAs) are important tools in estate planning, allowing a grantor[1] to name an attorney to make decisions about oneself and one’s property if incapacity strikes.

This provides a grantor with a high degree of comfort and certainty, knowing that an attorney can act both proactively ahead of complications that may appear on the horizon, and reactively as unexpected events transpire that call for adjustments.

Limits on an attorney’s power

On the property front, an attorney can generally do anything a grantor could do, except make a “testamentary disposition”, being a change of rights that takes effect on death but can be revoked while living. The most familiar example is a gift in a Will, with many courts having extended this logic to registered plan beneficiary designations.

While an attorney is a fiduciary who is required to act in the best interests of the grantor, that power may at times be abused. Accordingly, it makes sense to have limitations, but those can simultaneously be a practical impediment if appropriate changes cannot be made by an attorney, despite being to the benefit of a grantor.

Change in circumstances

Here are some situations where an inability to revisit a beneficiary designation could be problematic:

  • Retirement income – RRSPs are usually transferred to RRIFs once income is needed — which may in fact be accelerated on incapacity — and that’s mandatory for RRSPs at 71. If remaining in RRSP form, withholding tax is higher on withdrawals, and there’s no ability to reduce tax with the pension credit or pension income splitting.
  • Change of financial institution – The attorney may wish to consolidate assets to simplify oversight, as well as to revisit portfolio risk given the likely change in the incapacitated person’s lifestyle needs and life expectancy.
  • Pre-deceasing beneficiary – The interest of a pre-deceasing beneficiary is distributed proportionately among all other beneficiaries. While contingencies are possible, financial institutions will not allow complex rules. There could also be probate tax and creditor exposure in the eventual estate if no beneficiary remains on the plan.
  • Change of province – If a person moves to another province, preferably their assets will move with them. This will be especially helpful if moving to a province that provides lifetime creditor protection on RRSPs and RRIFs.
Summary by province

The following table outlines what an attorney can and can’t do, according to the province where the grantor executed the POA document. The relevant legislation must be consulted to be certain of the scope of activity allowed, with three general categories available:

  • Renew, replace or convert – If applicable, the attorney may designate the same person(s) on the same type of new/receiving plan as had been executed by the grantor on the originating plan.
  • Make, change or revoke – With approval of a court, the attorney may make a change to a designation that does not have to be a carryover of a past/original designation.
  • Change to estate – An attorney, without having to seek court approval, can change the designation from whatever it is presently to the estate of the grantor.

To give effect to some provisions, it is sufficient if an attorney is validly appointed, while others require that the POA document explicitly authorizes beneficiary changes. Again, it is critical to consult the relevant legislation, and ideally for the attorney to obtain legal advice before taking any action.

[1] “Attorney” and “grantor” are used for consistency in this article, though terms vary some by province.