Insuring Wealth — And Your Edge With Millionaires
Scot Blythe / July 02, 2002
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Who are those advisors? Generally, they're full-service brokers. The reasons for dismissal are various, and poor service is part of it. But it's actually deeper, Sjögren says.
Advisors who try to cherry-pick a high net worth investment account are in danger of overlooking several factors. First, the number of advisors seeking clients is growing faster than the number of millionaires, and private investment counselling firms are cashing in. Second, what millionaires don't want is more investment advice. Their number-one concern — something advisors often fail to heed — is how their family is going to be looked after.
Integration Opportunity
This need should raise an alarm bell — or an idea light bulb. Wealthy individuals are frequently business owners or retired business owners. They probably already have lawyers and accountants. What they don't have is someone who oversees all their interests, and the interests of their families, including cash flow, tax and estate management.
That's an opportunity for dual-licensed planners. They have a low profile among the wealthy, Sjögren says, which is neither positive nor negative. "Insurance is rarely integrated," he adds. All the same, "we find millionaires have a very high regard for their insurance agents."
Insurance Solutions
Insuring millionaires depends on what needs to be funded, says Glenn Stephens, a lawyer and estate planning specialist with Equinox Financial in Toronto. Clients may be concerned about the tax liability on an estate. They may need a way to pass on a business, either to a child or to a partner. Or they may want to pass on a significant amount of wealth to a charity.
It's actually a little more complex, Stephens adds, and he's written a book on the subject (Estate Planning With Life Insurance, published by CCH Canadian Ltd.). At its most basic, insurance can be used to fund the tax liability on death. When it comes to a family business, insurance might be used both to fund the tax liability and to ensure that children who don't participate in the business get an equitable inheritance. "Sometimes some kids get shares and the other kids are left out in the cold unless there's something else for them and insurance will often fill the gap," Stephens says.
If the concern is about an orderly transition in a business where the partners are not family, then insurance can have a role in funding a buy-sell agreement. It can eliminate concerns about tax liabilities, forced sales and bank loans. What is key there, Stephens notes, is the most efficient way to pay for the insurance, which is generally through a holding company. That spares the business owner an additional personal expense.
That's useful to keep in mind. Although the high net worth are wealthier, they are also extremely frugal, particularly when it comes to taxes, Sjögren notes.
Variety Of Vehicle Options
What insurance product to use is another matter. The options range from whole life to universal life to term-to-100, and there is an intense debate among insurance specialists about what one is the cheapest and most reliable vehicle.
Universal life is widely acknowledged as an effective tax shelter, but its index-linked investment component is not robust. Overly generous investment growth assumptions may lead to a policy lapse, as the investments fail to generate the income to make the policy self-funding.
That has led some, seeking stability in premiums, to look again at participating or whole life. But their returns in the form of policy dividends are tied to an insurance company's actuarial and investment acumen. Another route is term-to-100 insurance, which can be used alone or wrapped with a universal life policy to get an investment component.
Uses And Misuses
Robert Haisman, a planner with Assante in Sarnia, Ontario, suggests using "lazy and redundant money" — money that a couple isn't likely to have to draw on for living expenses — to fund a universal life policy built on a term-to-100 chassis. Then, depending on a couple's needs, there could be riders covering critical illness, for example.
But, Haisman says, advisors have to be clear about the uses and misuses of insurance. Insurance is not a tax shelter for clients to "build cash that they can reach in and play with." The idea is not to provide investment management, but multigenerational wealth management. In other words, looking after the family, the foremost concern of the wealthy Canadians.
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Scot Blythe is Advisor.ca's investments editor and can be reached at sblythe@advisor.ca.
(07/02/02)
Filed by Scot Blythe
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