For insurance advisors looking for more ways to connect with high net-worth clients, specialized products that focus on areas such as wealth preservation and minimizing taxes could hold opportunities. Niche products for special risks – exotic travel, for example – may also be appealing.
Although many advisors believe that they have walked their HNW clients through the basics of life and health insurance policies, it’s common for some advisors to miss the lesser known insurance products, says Heather Clarke, vice president of Winnipeg based I.G. Insurance Services Inc., a subsidiary of Investors Group Inc. that distributes the group’s insurance products. “There are some advisors,” says Clarke, “who are very focused on investments, and they may just stick to the basics of risk protection.”
Insurance strategies that preserve the size of estates and keep taxes to a minimum are of particular interest to HNW clients. According to an October 2011 study by RBC Wealth Management, a division of Toronto-based Royal Bank of Canada, “transfer of wealth upon death” and “tax minimization,” were found to be two of the top three priorities among HNW clients.
That interest is understandable. Death can trigger a wide range of negative financial events, such as capital gains taxes or the call on a large loan that may be linked to your client’s business operations. Insurance can be used to cover these types of liabilities.
Notes David Brown, partner with Toronto-based Al G. Brown & Associates Inc.: “Insurance can provide that liquidity and settle these liabilities, so that the future of the estate isn’t compromised.”
To assist HNW clients in protecting the future value of their estates, here are some strategies that insurance experts suggest:
– joint last-to-die policies. Under a joint insurance policy with a “last-to-die benefit,” a single premium insures the lives of two people. The benefit is not paid until the last insured person on the policy dies.
This strategy is often used by affluent couples; if the surviving spouse does not need a death benefit to live on, the policy can be used to pay taxes that may arise on other assets when the surviving spouse dies. These typically include assets such as stocks or property, registered retirement income funds and other property that can be transferred without taxes between spouses.
“This is a very effective type of policy for a HNW client who wants to protect his or her personal estate and avoid putting the burden of doing so on his or her partner,” says Lorne Marr, owner of Markham, Ont.-based Lorne S. Marr Insurance Services Ltd. Marr adds that these policies also can be useful for two business partners who wish to ensure the continuity of their business for future generations.
– back-to-back annuity. This strategy is used primarily for retired clients who want to boost income and leave an inheritance for their children. Here, your client purchases an annuity and a life insurance policy. The life policy preserves the original investment for your client’s heirs. Clarke provides an example of how it works:
A 65-year-old male HNW client in the 50% tax bracket has $500,000 in non-registered GICs, paying interest at 3%; annual after-tax income is $7,500. But assuming the client wants to boost income, he buys a prescribed annuity (an annuity in which taxes are spread evenly over the term of the payout) with his $500,000.
In so doing, his annual income is increased to $29,247. Only $177 of the annual payout is taxable (as the annuity’s rate of return; current low interest rates mean that rates of return on annuities are very low). The balance of the income generated is considered return of capital. The resulting tax is $89, leaving our HNW client with $29,158. He has gained $21,658 ($29,158 minus the $7,500 in original GIC income) in annual income.
To avoid losing the original capital, this client also would purchase a $500,000 life insurance policy (assuming he qualifies) using the annual after-tax income from the annuity ($29,158) to pay the policy’s $15,166 premium. The client is left with $13,992 ($29,158 minus $15,166) in annual after-tax income. Upon his death, his heirs would receive $500,000.
– “key person” insurance. Clients with a major stake in their businesses and whose presence is critical to the operation’s success may want to consider key person insurance.
Says Clarke: “This insurance covers any loans or capital gains taxes that could be called upon the client’s death and ensures that the business can continue.”
Many clients are so focused on their businesses that dealing with the risk of dying seems like a low-priority item. Says Clarke: “It’s up to advisors to make the case for legacy planning.”
– specialized medical coverage. For HNW clients who travel to remote locations where full-service hospitals may be non-existent, you may want to suggest specialized medical coverage, says Brown: “The client may want an airlift to a hospital in a more medically advanced region, and regular medical insurance doesn’t cover that.”
– ransom and kidnap insurance. If your client travels to regions in which tourists are at high risk of being kidnapped or held for ransom, you may want to suggest this insurance.
Foreign Affairs and International Trade Canada recommends a high degree of caution when travelling to countries such as Kenya, Mali and Nigeria. Canadians travelling in these countries have been victims of hostage-taking situations and express kidnappings, in which the assailant drives the tourist to an ATM and forces him or her to make a cash withdrawal.
© 2012 Investment Executive. All rights reserved.