Insurance strategies provide excellent opportunities for advisors to connect with high net-worth clients. Life insurance can be used to shelter investment income from taxes and preserve the size of clients’ estates. And some specialized insurance products may prove invaluable to wealthy clients.
“Estate preservation is a priority for most high net-worth clients,” said David Brown, a partner with Al G. Brown & Associates in Toronto. “They want to create a legacy for their heirs and for charitable organizations. By their very nature, insurance products are suited to this since they are legacy products. They generate liquidity to create a legacy, or pay for taxes and survivors’ living expenses at a time when it may be difficult to come up with liquidity.”
As long as they have designated beneficiaries, insurance assets bypass a client’s estate and are not subject to probate fees. They also avoid the tax hit that capital gains-producing assets are subject to.
“The deceased is deemed to have sold off his assets off at fair market value at the time of his death,” Mr. Brown said, “so the vacation property that cost him $50,000 several decades ago and is worth $550,000 at the time of his death will see a capital gain of $500,000 that his estate will have to pay tax on.”
Life insurance provides the beneficiaries of a policy with tax-free inheritances. They will receive their bequests as soon the insurance company is notified of the insured person’s death, whereas heirs could see a big drop in investment prices before they receive inheritances that go through the will. Life insurance can also be used by the estate to pay off taxes that are due on capital gains-producing assets and on vacation homes.
Tax on RRSPs and vacation homes can be deferred with spousal rollovers; tax on the capital gains become payable on the death of the second spouse. “And joint last-to-die coverage can pay the taxes payable upon the second death,” Mr. Brown noted. “And because the policy only pays out after both spouses have died, the premiums are lower.”
Life insurance can also help ensure an equitable distribution of assets among the client’s heirs. “Say a client owns a company worth $10 million, and has $5 million in other assets and three children, only one of whom is involved in the company,” said Claude Ménard, PPI Advisory’s Montreal-based senior vice president, marketing. “Given the right circumstances, a life insurance policy can create liquidity to ensure that all three children inherit equal shares of the estate.” Life insurance can also be used to pay the capital gains liability on the business.
A life insurance policy can be the keystone in an intergenerational asset transfer plan. “A client who wants to pass money to a grandchild can take out a life policy that insures the client’s adult child, with the grandchild as the beneficiary of the policy,” Mr. Brown said. “The money in the policy will grow on a tax-free basis, presumably for many years until the grandchild’s parent dies, and then go to the grandchild. This will help ensure that the grandchild doesn’t come into the money at an early age.”
Charitable gifting also plays an important part in estate planning for high net-worth clients, Mr. Ménard said. “The reality is that we have three choices for where our assets will go after our deaths: to our heirs, to charitable organizations and to the tax department.” A life insurance policy, with a charity as its designated beneficiary, will ensure that the charitable organization receives a legacy after the client’s death, and the client’s estate can claim a tax benefit, thereby reducing the tax hit on the estate for his heirs.
“And if the client transfers ownership of the policy to the charity,” Mr. Brown added, “he will immediately receive a receipt for the policy’s fair market value. And the premiums he pays become tax-deductible in his hands, and the charity will probably receive more money after the client’s death than he could afford if he gave it a lump-sum donation.”
Life insurance is not just for the next generation. “The tax-free growth inside a policy can be used as income for the client in retirement – up to 90% of the cash value available within the policy,” noted Don Kellough, a financial advisor with Freedom 55 Financial in Pickering, Ont. “Or the client can use the policy as collateral on a bank loan and use this money to top up his retirement income.”
Many of Mr. Kellough’s high net-worth clients are in their late 40s and early 50s, and some are putting as much as $25,000 to $50,000 a year into whole life, he said. “This is surplus cash they don’t need and want to shelter from taxes.”
But life insurance should not be exclusively used as a retirement plan, he added. “Clients need a balance with segregated funds for safety and stability, and tax-free savings accounts for their liquidity needs.”
A back-to-back annuity strategy can be useful to a client whose estate could be subject to a heavy tax hit and who is risk intolerant, noted Heather Clarke, Winnipeg-based vice president of I.G. Insurance Services Inc., a subsidiary of Investors Group Inc. that distributes the company’s insurance products. “The client will purchase a prescribed annuity with a monthly or an annual payout,” she said. “He will use part of these payments to fund a permanent life insurance policy and keep part to augment his income. After his death, the life policy will pass to his heirs tax-free. There’s plenty of certainty for the client: the cash value in the life insurance policy is guaranteed, his premiums are set and he has named the beneficiary of the policy. And in provinces where there are probate fees, the inheritance will bypass the probate process.”
Permanent life insurance and disability insurance can also be used to provide coverage for key people in a client’s business, Ms. Clarke added. “The policy will provide a sum of money to replace the services of people who are critical to the operation of the business upon their deaths or should they suffer disabilities that prevent them from working.”
Long-term-care insurance can be an important consideration for wealthy clients, Mr. Brown said. “A client may want to ensure a certain level of care in his latter years over what is provided in provincially funded facilities, and he will not want the high cost of this care to erode his estate. The client’s spouse may also have to be provided for during these years, so the client may want to transfer the responsibility for (funding) his own care to an insurance company.”
Medical travel insurance
Adequate medical travel insurance is important for clients who travel. With hospital stays in the U.S. costing around $10,000 a day, Canadian travellers need to ensure that their insurance coverage will cover the gap between what provincial plans will pay outside Canada and what their medical bills could amount to. “A lot of people rely on travel insurance available through their credit cards or through travel agencies,” Mr. Brown said, “but some of this insurance is only underwritten at the time of claim. Have your client find out in advance whether he is eligible for coverage. If he has pre-existing medical conditions, he may not be.”