When tax season rolls around each spring, you may dread your taxes, or you may look forward to your tax refund. If you are a Canadian expecting a tax refund, it can be tempting to spend your money immediately, but have you considered saving it instead? If your tax refund is a large sum, then you may be interested in investing it in life insurance. Depending on your needs, investing your tax refund in life insurance may or may not be wise, so consider your options to make an informed decision carefully.1
Using your tax refund to invest in a life insurance policy can reap substantial long-term rewards and cover significant expenses down the road that you may not otherwise be able to afford. Not only can your investment’s value compound, but the insurance policy also provides protection for your family and loved ones in case you pass away. Let’s learn more about investing a tax refund in a life insurance policy and why it can be a wise decision.
Reasons to Invest Your Tax Refund
Spending your tax refund on a large purchase or vacation can be very alluring, especially if you have been anticipating your tax refund for a specific item or event. However, if you invest your tax refund, you may reap benefits both now and in the future. Here are a few reasons that you should consider investing your tax refund:
Life is filled with unexpected twists and turns that can wreak havoc on a budget. It only takes the loss of a job or a car repair to set a family back months. Yet too many Canadians do not have any emergency savings. Setting aside some money, such as your tax refund, could mean the difference between financial comfort and financial ruin should the unexpected happen.
Compound interest is a powerful tool to make small investments much larger. Put simply, compound interest means you earn interest on the original amount you invested, and then you continue to earn interest on the interest. If you invest your tax refund in an appropriate insurance policy and keep it there for a long time, compound interest gives it the potential to grow exponentially.
Everyone has financial goals, from paying off a credit card to saving for a big trip or a home renovation. Investing your tax refund can help you reach your financial goals, no matter how large or small.
A sense of security is probably the number one reason to invest your tax refund instead of spending it. Knowing that you have the money set aside can give you added confidence that you made a wise financial decision and peace of mind that your loved ones will be well protected in the future.
Using Your Life Insurance Policy as an Investment
The primary purpose of life insurance is to pay out a death benefit to your beneficiaries after you pass away. But that isn’t the only reason to buy coverage. Many Canadians also purchase life insurance to build cash value.
While both term and permanent life insurance pay out death benefits, only permanent life insurance can grow as an investment. It includes an investment component called cash value, which can grow tax-deferred, which means that you don’t pay any taxes on the cash value until you withdraw the proceeds. While alive, you can withdraw or borrow against the funds to pay for any expenses you wish. However, the cash value is not added to the death benefit, so any money you withdraw needs to be paid back. That’s why investing your tax refund in your life insurance cash value can be wise.
How the cash value of your life insurance grows will depend on the type of policy you have, how long you have had the coverage, the amount you pay into the account, and the terms of your specific policy. If you purchase whole life insurance, the cash value grows at a fixed rate set by the insurer. Because it is a fixed rate, your investment will not be subject to fluctuations in the market. However, if you purchase universal life insurance, the cash value grows based on market rates and the performance of your investments.
If you don’t need more life insurance coverage, there may be better investment options for your tax refund. It may be worth examining your investment options if you have sufficient life insurance coverage through your job or have already accumulated enough wealth to take care of your family. In cases like these, exploring other types of investments might be better to see if another option would be more suitable for your needs.
How to Invest Your Tax Refund in a Life Insurance Policy
Investing your tax refund in a life insurance policy can be one of the wisest financial moves you could make. To invest your tax refund in an insurance policy, you must purchase a permanent life insurance policy suited to your needs. Canada Protection Plan has various available permanent life insurance options that can accommodate applicants with medical histories of all kinds. Contact your CPP life insurance professional to discuss a permanent life insurance policy, how you may be able to contribute your tax refund, or get a quick quote online.
You may consider using life insurance as an investment for your tax refund if you receive a substantial refund. While it may not provide immediate benefits beyond peace of mind, it can be used to cover expenses down the road without dipping into any personal savings or going into debt. If you purchase a permanent life insurance policy, you can invest your tax refund with no issues and watch as compound interest works its magic and your savings grow. Contact Canada Protection Plan to talk about investing in life insurance today!
421638 CAN (03/23)
- 1 Foresters and Canada Protection Plan (CPP), and their employees and life insurance representatives, do not provide, on Foresters behalf, financial, estate, legal or tax advice. The information given here is merely a summary of our understanding of current laws and regulations. Clients and prospective purchasers should consult their financial, estate, tax or legal advisor regarding their situation.