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What is Wealth Replacement Insurance?

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Donors who want to leave a meaningful gift to their preferred charity but don’t want to diminish the inheritance they are planning for their heirs, may benefit from wealth replacement insurance.

When a donor purchases a wealth replacement insurance policy and names their heirs as beneficiaries, this can help the donor fulfil their charitable giving objectives during their lifetime. This also enables them to see the positive impact of their philanthropy without diminishing their family legacy.

In this article we take a closer look at the benefits of a wealth replacement insurance policy and how knowledgeable financial professionals at charitable foundations like Gift Funds Canada can help.

Making the family legacy a priority

A donor’s assets can appreciate over time increasing the overall value of their estate and the potential for philanthropic contributions. Depending on how a donor’s estate is structured, an increase in the value of assets may result in increased capital gain taxes after the donor passes, which can leave heirs no choice but to liquidate assets to pay the taxes arising from the estate. This liquidation of assets impacts what the heirs will receive as it can diminish the family legacy. By donating an asset during the donor’s lifetime and purchasing wealth replacement insurance, the donor will know exactly what their heirs will receive when the time comes.

Benefit to named heirs

When a donor chooses to purchase a wealth replacement insurance policy, their heirs will receive the proceeds of the insurance policy instead of securities, real estate or other appreciated, gift-in-kind assets that the donor wishes to donate to their preferred charity. Even if the proceeds of the policy are not equal in value to the donated assets, the donor can be confident that the proceeds of the policy will be paid to the named beneficiaries in full.

Additionally, the heirs named as beneficiaries will receive the proceeds of the policy tax-free after the donor passes and the heirs will receive their inheritance much faster.

Benefit to the estate

A unique aspect to wealth replacement insurance is the assets gifted to charity during the life of the insured and the proceeds of the life insurance policy do not become part of the donor’s estate. As a result, they are not subject to probate fees, creditor claims or potential claims by other beneficiaries.

Benefit to the donor

Aside from the peace of mind in knowing their heirs are taken care of and being able to enjoy the philanthropic contribution to a cause they care about, there are several other benefits to a wealth replacement insurance policy.

Donors wishing to donate gifts of appreciated securities, during their lifetime, will minimize or even eliminate the capital gains taxes that will be payable upon death, which may, in turn, reduce the overall value of their estate. Donors also have the option of acquiring a policy that increases in value as a donated asset may have done. This would involve purchasing a policy with an increasing death benefit. In many cases, the donor may be able to pay the policy’s premiums with the tax savings arising from the charitable gift. In contrast, a gift left under a will, or a testamentary gift, will not generate tax savings during the donor’s lifetime. A Gift Funds Canada advisor can help navigate these details to best suit the donor’s wishes.

Another option donors may wish to consider is leveraging a charitable gift annuity or other form of annuity in order to pay the premiums. In this case, donors can enjoy lower policy premiums by purchasing a “last to die” policy that will pay out to their heirs only once both spouses have passed away.

The benefits of wealth replacement insurance can be far reaching, enabling donors to support their preferred cause in life and feel confident that their heirs will be taken care of after they’re gone.

To learn more about wealth replacement insurance visit the Gift Funds Canada website.