Insurance as a legacy tool: How to leave more for the next generation

For many Canadians, the goal isn’t just to build wealth. It’s to pass it on. You’ve worked hard to provide for your family, and you want to ensure your success continues to benefit the next generation. But without the right planning, a significant portion of your estate could be lost to taxes and other costs before it ever reaches your loved ones.

That’s where life insurance can play a powerful role. When used strategically, it can help preserve, grow, and transfer wealth efficiently – giving your family more of what you’ve built.

The challenge: Taxes and timing

At the end of your life, Canada’s tax system treats you as if you sold all your assets on your final day. That means things like investments, cottages, rental properties, and even shares of your business can trigger capital gains taxes.

Without preparation, those taxes can create a cash flow problem for your estate. Assets may need to be sold quickly – often at a less-than-ideal time – just to cover the bill.

Life insurance offers a practical solution. It provides a tax-free payout to your beneficiaries or estate, exactly when it’s needed most. That money can be used to pay taxes, clear debts, or ensure that your family can keep important assets instead of being forced to sell them.

The opportunity: Tax-advantaged growth

Permanent life insurance (such as whole life or universal life) offers more than just protection. It can also act as a tax-efficient investment vehicle.

• Tax-deferred growth: Your policy’s cash value grows without annual taxation on investment gains.
• Tax-free death benefit: Proceeds are paid to your beneficiaries without triggering income tax.
• Flexible access: You may access policy value through loans or withdrawals, often with minimal tax impact.
   

For high-net-worth individuals or business owners, this can be an effective way to grow assets within an insurance structure, particularly once RRSPs and TFSAs are maximized.

Passing wealth efficiently

Life insurance helps simplify the estate transfer process. Instead of leaving behind taxable assets that must go through probate and settlement, insurance proceeds typically bypass the estate and go directly to named beneficiaries.

• Faster access: Funds are available quickly when your family needs them most.
• Privacy: Insurance proceeds are not part of the public estate record.
• Lower costs: Reduced probate and legal fees leave more for your loved ones.
   

For business owners, insurance can also be structured within a corporation. Proceeds are received tax-free and, in many cases, can be paid to heirs through the capital dividend account, allowing funds to flow out tax-free. This strategy is commonly used in business succession and family wealth transfer planning.

Real-life example

Consider a couple in their 60s with a family cottage they want to leave to their two children. The cottage has appreciated significantly over the years, and when they pass, it will trigger a substantial capital gains tax.

Rather than forcing their children to sell the property to cover that tax bill, they set up a permanent life insurance policy designed to cover the projected taxes. The insurance payout provides the liquidity their estate needs, allowing the cottage to stay in the family – and their legacy to live on.

Beyond wealth: Leaving impact

Legacy isn’t just about money. Many families use life insurance to leave a meaningful gift to a charity or cause they care about. By naming a charity as a beneficiary, you can make a larger donation than might otherwise be possible, while also generating a tax credit for your estate.

This approach allows you to extend your values into the next generation, ensuring your success benefits both your family and your community.

When to review your strategy

Your insurance and estate plans should evolve as your life does. Major life events – such as selling a business, purchasing property, welcoming grandchildren, or retiring – can all impact your estate planning needs.

That’s why periodic reviews are essential. They help determine whether your current coverage still aligns with your estate goals and whether there are opportunities to strengthen your legacy plan.

We specialize in helping clients protect what they’ve built and ensure it’s transferred efficiently and thoughtfully to the next generation. We’ll review your existing coverage, identify opportunities for tax efficiency, and design a strategy that fits your long-term goals.

The bottom line

Life insurance isn’t just about protection. It’s about potential. Used wisely, it’s one of the most effective legacy tools available, helping you transfer more wealth, reduce taxes, and ensure your family’s financial future remains strong.

You’ve spent a lifetime building your success. Let’s make sure it continues to make a difference for the people and causes you care about most.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.