I have the pleasure of having a number of American life insurance brokers as friends. This affords me the luxury of seeing life insurance from both sides of the border.
While there’s a number of product differences between the two countries, there’s one other vast difference – taxation of life insurance death benefits.
In Canada, the general guideline is that death benefits are paid to the named beneficiaries on a tax-free basis.
In the U.S., life insurance proceeds are considered part of the estate of the deceased, and can be subject to estate taxes. Currently estates (including life insurance proceeds) over $5,250,000 are subject to a hefty estate tax in the U.S., but that number can vary up or down depending on the year. In previous years the limit has been as low as $1,000,000 or $2,000,000.
Proper planning in the U.S. frequently entails setting up an irrevocable life insurance trust to get around this requirement, but this adds another layer of complexity and costs that we don’t have in Canada.
In the end, if you have the option of getting life insurance in Canada vs. life insurance in the U.S., consider your Canadian alternatives. You will also need to look at currency differences, premium costs and policy types.