How to use permanent life insurance to protect your estate’s wealth

When you’re young, life insurance can be used to protect your family by providing money to replace your income.

However, as you approach retirement, there’s less need for income replacement, and the focus switches instead to wealth protection. Wealth protection is a permanent concern, requiring permanent solutions. 

In this article, we’ll discuss three of the main concerns when it comes to efficiently protecting your estate’s wealth (and that of your beneficiaries), and how permanent life insurance can provide solutions to these concerns.

Preserving your estate’s value

Let’s first look at estate liquidity. Let’s say, after your death, your estate has a large tax bill because of capital gains (when your assets, including second properties, increase in value). If that tax bill is more than your estate’s liquid assets (assets that are easily turned into cash) where would the money come from to pay it? Let’s look at your options:

Selling assets to pay for the tax bill

Selling assets could reduce your estate’s long-term income potential. Killing the goose that lays the golden egg is not a good long-term strategy. Also, there could be transaction costs and additional taxation involved in turning those assets into cash, which could reduce the effectiveness of this option.

Borrowing money to pay the tax bill

The first concerns are whether the estate is in a position to borrow that kind of money and who would be likely to provide the loan. Whichever way the loan is secured, it would have to be repaid — probably with interest — which would make it an inefficient solution.

Saving up for the tax bill

With this option, the main challenge would be knowing when you would need the money. How would you know how much to save each year? Also, tying up large amounts of passive investments may not be a good long-term investment strategy. 

Using permanent life insurance

In most cases, for a very small percentage of the tax value annually, permanent life insurance can provide a solution with three key benefits:

• It provides the cash amount you need when you need it. The money could be received, ready to cover all the estate’s financial obligations, as early as 30 days after death.
• The cash is tax-free.
• If the deceased owned a private corporation (or had shares in one), insurance could be even more efficient. The corporation would receive a tax-free payout, which could then be transferred to the deceased’s estate on a mostly tax-free basis, using the company’s capital dividend account.

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Written and published by Lawrence Bailey as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Advisor.

Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).