You can use the 26 guage, it will work just fine.

As for taking the wires of the board, I mentioned what each color is for:
"The wires are as follows: Brown, Red, Orange, Yellow, Green and Blue are the positive leas for the main led. These can be bundled together and will go to the main blade led's positive pad, or simply removed from the board altogether and replaced with a single wire."

"The violet and gray wires are the blade cut-off switch. These will need to be connected to each other later, and do not need to be removed"

"The white wire is the negative for the clash sensor. If you did not order a replacement sensor, de-solder and remove the stock one from the blade connection housing on the blade."

You do not have to remove the wires from the board, but it does make the wiring a lot cleaner. You would need to simply strip the ends of those positive leads for the led strip blade far enough to solder them all together, then add a single wire to run to the blade led positive. The white wire is also the ground for the original led strip, and that would go to the blade led negative.

If you attach the sensor to the board as shown, you will not need to insulate it, since there's nothing in the hilt that will touch them. If you attach the clash sensor to wires, then yes, you'll to insulate the connection, with heatshrink tubing being the recommended method.