Assignment of life insurance
An assignment of life insurance gives a lender an interest in a life insurance policy as collateral for a loan. The Income Tax Act describes the case where the interest is assigned to a restricted financial institution in the course of a borrowing, and the institution requires it.
A lender may require an interest in a life insurance policy as collateral for a loan; the Canada Revenue Agency’s bulletin IT-309R2 notes that in some situations a lender may require more than one person’s life to be insured for a borrowing. The Income Tax Act speaks of an interest in a policy assigned to a restricted financial institution in the course of a borrowing from it, where the institution requires the assignment as collateral.
The tax rule that mentions it
Paragraph 20(1)(e.2) of the Act allows a limited deduction for premiums on a policy assigned in that way, if its conditions are met. That bulletin, IT-309R2, explains the rule but is archived and no longer updated, so read the Act itself. Whether the deduction applies is for an accountant. See key-person risk and the insurance review checklist.
What to check or ask
- Whether the lender requires the assignment, and on whose life
- Who owns the policy and who is the beneficiary
- What releases the assignment when the loan is repaid or the business is sold
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentARCHIVED - Premiums on Life Insurance Used as Collateral
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