Why Insurance Elevates Estate Planning and Wealth Transfer

As you are looking to optimize your estate planning strategy, and ensure your assets maintain value while being transferred within your family, opting for an insurance policy may be a safe option. Estate planning with life insurance is an out-of-the-box approach that people can use as a part of their financial plan when working out wealth transfer parameters. 

By using insurance, you can preserve your estate’s worth by mitigating taxes and probate costs that can cause its value to depreciate over time. The last thing you need is costs like those leaving your heirs susceptible to less inheritance, and potentially diminishing their future quality of life. Insurance, therefore, can preserve your estate in a variety of ways. 

Insurance Can Help You Manage Your Taxes 

Asset protection is a huge priority for families looking to successfully manage their resources one their loved one has died. While having a strong will helps, some taxes will incur on your assets after you pass away – potentially compromising asset values. This includes deemed disposition taxes on capital property such as real estate holdings, investment portfolios and family businesses. Your loved ones could be susceptible to taxation throughout your will’s execution, meaning your heirs will receive less money and assets than initially thought. 

A good life insurance policy can offset these potential losses and ensure your heirs receive the financial aid they were counting on after you’ve passed away. Insurance premiums aren’t usually tax-deductible. However, the benefits/proceeds paid out during the policy aren’t subject to income tax, allowing your heirs to receive the money you’ve transferred to them in full. These benefits provide money to cover funeral expenses, legal and probate fees, plus tax liabilities. Additionally, they can be used to create an estate for your loved ones or beneficiaries. 

Insurance Facilitates Estate Equalization

The use of life insurance allows you to equally and legally distribute your estate among your beneficiaries. In one instance, if you have a family cottage that was long purchased and is not your primary residence, its value may have increased. After passing away, you’re deemed to have disposed of that cottage at fair market value, garnering a capital gains tax. Cottages are huge assets that can cause a lot of strife, especially if your estate can’t cover the tax liability. When you’re transferring the cottage within your family, you’re passing on capital gains payments to them that are due following the completion of a sale or when inheritance is confirmed. 

One way to avoid this potential headache is by moving the cottage to a family trust and paying the capital gains tax now or setting aside cash to pay it going forward. However, insurance can pay the tax liability just the same. Death benefits from life insurance policies provide immediate cash sources once they are paid, allowing your family to cover the costs of capital gains by using tax-free proceeds. For example, you could work with your spouse to prepare a last-to-die join policy. By creating said policy, you reduce insurance costs by having some of the insurance money released when the second death between the spouses occurs. 

How Else Can Insurance Be Used for Estate Planning?

You can also use your life insurance to facilitate charitable donations. You can donate proceeds through your will or by naming the charity of your choice as a beneficiary through your insurance policy. Any proceeds or donations made via a will to a registered charity as the result of a person’s death are deemed to have been made by an individual’s estate. Donations can reduce the amount of taxes payable on the estate’s tax return, receiving a subsequent tax credit. You may, however, have to pay probate fees if the donations are deemed to be a part of the estate. 

Alternatively, you can establish an insured annuity, ensuring your loved ones receive an income stream for a specified period or throughout life. Part, or all, of the annuity income would help to pay off life insurance policy premiums with death benefits equal to the annuity principal amount. When you die, the benefit is then transferred to your beneficiaries, replacing the initial capital invested in the annuity. 

How Much Life Insurance Will Cover Your Estate?

A one-size-fits-all solution doesn’t apply when it comes to insurance and estate planning. The insurance policy may not have enough money to cover all of your estate’s expenses, including income tax and debt owed. 

As you age and your quality of life changes, your coverage needs will change, and you need a policy that mirrors those financial and lifestyle changes. A life policy over a specific time helps but provides you short or medium-term help with your estate needs. However, a permanent life insurance policy lets you offset probate costs, income tax fees, and other debts that your estate has to pay. 

Insurance and estate planning go hand-in-hand, helping you optimize wealth transfer and preserve asset values to significantly benefit future generations.

Author Bio

Ryan Faridan is the Principal Advisor at Global Solutions West, an advisory company dedicated to wealth preservation and long-term financial stability. With nearly a decade of experience in risk management, tax planning, and insurance, Ryan has made a name for himself as a Canadian wealth preservation expert.