# Tax implications of cashing out Life Insurance policy



## bumblebee (Jan 15, 2015)

Tax implications of cashing out Life Insurance policy

I have a client who years ago was suckered into buying whole life insurance for his son from London Life. My retired 65 year old client is the owner and the 30 year old son is the beneficiary. What he wants to do is cash out the policy (cash out value is about $6,000) and give it to his son. This is where things become tricky as the 65 year old client makes a modest pension (40k/year); While the son took most of this year off work to travel and will not have any income in 2016. So what I suggested is that my client transfer ownership of the policy to his son and then have his son cash out the policy -- thereby reducing the tax implications.

Seems straightforward enough? Am I missing something? And yes, both father and son are in 100000% agreement of where this money will end up...the father is completely comfortable with the idea that once the policy has been transferred the son can theoretically do whatever he wants with the policy.

TIA


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## twa2w (Mar 5, 2016)

Yes you are missing something. The father is disposing of an asset worth 6000 and will have to report and pay tax on the gain.
CRA has an interpretation bulletin on determining the fair market value of the policy. You may also want to check with the insurance company.

there is no free lunch


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## My Own Advisor (Sep 24, 2012)

No free lunch is right....I wrote about this myself, my own case study:
http://www.myownadvisor.ca/should-you-cash-in-that-childhood-life-insurance-policy/


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## Nerd Investor (Nov 3, 2015)

twa2w said:


> Yes you are missing something. The father is disposing of an asset worth 6000 and will have to report and pay tax on the gain.
> CRA has an interpretation bulletin on determining the fair market value of the policy. You may also want to check with the insurance company.
> 
> there is no free lunch


Actually in this case, there is a free lunch. There is a provision in the Act that specifically provides tax-free rollovers when transferring a policy to a child, grandchild etc. In this case, your client can transfer the policy to his son on a tax deferred basis and the son will be taxed if he collapses the policy.


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## twa2w (Mar 5, 2016)

Nerd Investor said:


> Actually in this case, there is a free lunch. There is a provision in the Act that specifically provides tax-free rollovers when transferring a policy to a child, grandchild etc. In this case, your client can transfer the policy to his son on a tax deferred basis and the son will be taxed if he collapses the policy.


Yes i stand corrected. I forgot about that section of the act.


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