Estate planning is an emotional task with major financial consequences – it can feel overwhelming at times. On the bright side, you have many helpful tools at your disposal. For example, have you considered estate planning with life insurance?

Getting your taxes and paperwork in order is crucial, but it pays to think outside the box when creating your financial plan. Life insurance can preserve the value of your estate by helping you manage certain costs (like taxes and probate fees) that can chip away at the inheritance you want to leave your heirs. Here’s how to make the most of your life insurance for estate preservation.

The death benefit from a life insurance policy can provide an immediate source of cash once it’s paid out, so your family can make use of the tax-free proceeds to pay the capital gains taxes due.

Managing taxes for estate preservation

When you plan your estate, you need to consider everything from how to protect your assets right now to where they’ll go (and grow) after you’re gone. A legally drafted will is a good first step, but don’t stop there – working to minimize your taxes before and after you pass on is another important element of wealth preservation.

You may have found ways to maximize your current after-tax income. That’s great! But how about reducing the taxes due on your assets after you die? They may still be vulnerable to taxation during the execution of your will, which could significantly reduce the amount that’s left for your heirs.

This is where a life insurance policy can help. While premiums aren’t typically tax deductible, the benefit paid out won’t be subject to income tax – your heirs will receive every dollar¹.

Using insurance to keep the cottage in the family

Cottages are major assets, but they can cause major hardships if your estate planning falls short. Has your cottage appreciated in value? Will your estate be able to cover the resulting tax liability? Transferring the cottage to the next generation can be both a blessing and a curse: your family will be on the hook for the capital gains tax that comes due when the cottage is sold or inherited.

In many cases, the tax owing on the cottage is so high that the family finds they must sell the property to pay the tax bill (a very disappointing discovery). Thankfully, there are other ways to fund the capital gains tax liability: you could pay the tax now by transferring the cottage to a family trust, or you could set aside the funds now to cover it in the future. Another method is to use life insurance.

The death benefit from a life insurance policy can provide an immediate source of cash once it’s paid out, so your family can make use of the tax-free proceeds to pay the capital gains taxes due. If this sounds like a good option for your situation, you can prepare now by purchasing a joint last-to-die policy with you and your spouse as the insureds. This way, you may be able to reduce some of the insurance cost, and the insurance will pay out on the second death (when the money is truly needed).

How much life insurance is enough for your estate?

Simply having a life insurance policy may not provide enough money to pay all the debt and income tax that your estate owes; the type of insurance and the amount of your policy will impact how far it can go. It’s worth taking the time to weigh your options and goals so you can choose the right life insurance plan.

There’s no one-size-fits-all solution when it comes to selecting the right insurance plan for estate preservation. As your life changes and you get older, your coverage needs can evolve. And while a term life policy can help with some short-term estate needs (like paying off the remainder of a mortgage), permanent life insurance is often the better option when it comes to estate planning with insurance.

At the very least, you’ll want a life insurance policy that will help offset costs like the income tax and probate fees payable by your estate. But other factors can play a role, too, like outstanding debts or complicated arrangements involving beneficiaries. A qualified insurance advisor can help you navigate the details and any concerns you may not have considered.

What goes into your estate planning checklist?

Once you’re ready to plan your estate, take some time to jot down questions to guide the strategy you’ll build with your financial advisor. Here are just a few things to think about:

• How can I minimize capital gains taxes?
• How will I preserve my assets from unnecessary probate?
• How can I preserve my RRSPs or RRIFs in their entirety for my heirs?
• Do I have an updated will?
• Have I established a power of attorney?
• Would I like to control how and when my heirs will have access to my assets?
• Is my life insurance policy sufficient for my needs and expectations – today and after I die?

Estate planning is an important task that deserves your close attention. Start by considering your assets and where you’d like them to go, but keep in mind that life can be unpredictable – you’ll want to keep on top of the changes to your estate, your family, and your financial needs as time goes on.