For affluent investors, insurance isn’t as much about protecting their human capital — how we most commonly think of insurance. It’s more about protecting and even building their wealth, and it plays an important role in their overall financial strategy.

Protection for the significant assets they’ve accumulated is a key priority; other concerns are estate maximization, legacy wishes and tax efficiency.

Providing clear numbers and rationale for your affluent clients’ unique situations means having a different style of conversation. It’s important to discuss the value of insurance and how the right policy can positively affect their financial plans.

Wayne Miller, Regional Vice-President, National Accounts and Strategic Business Development at Sun Life Financial, has learned from some of the most successful insurance advisors in the industry. In an article recently published for Advocis, Wayne asked top insurance advisors how they make the sales of their careers. He noticed a common thread in their answers — it’s about painting the entire estate planning picture through a series of conversations with clients.

One top advisor shared a story with Wayne. A colleague of the advisor wondered, “How would you compete with a 20-year term policy with a $2,500 annual premium?” The advisor’s solution? “With a $50,000 UL [universal life] premium.”

This advisor recognized what most don’t: the opportunity to take a standard term insurance sale and turn it into something much larger, to help meet your clients’ needs. Not only is this type of sale possible, it can also make clients further appreciate your professional advice.

Wayne identifies seven key conversations, which are outlined below. You may encounter the need to discuss only the first three or four with your affluent clients. The point is to discuss only what’s most relevant for their situations, so they don’t feel overwhelmed.

1. Let’s define your insurance need

Business owners of Canadian corporations are often the types of clients involved in affluent insurance cases. Consider a 55-year-old business owner client, whom we’ll call Bill. Not only is Bill wealthy, but he also stands to benefit even more by having his life insurance owned by his corporation. Assume he’s medically insurable.

A licensed life insurance advisor could address Bill’s need for human capital protection. If he were to die prematurely, any or all of the following could happen:

  1. His family would miss the income he generated.
  2. His business may suffer financially without him there to run it.
  3. If Bill had a buy-sell agreement for his corporation, it would need to be funded.

All three of these consequences suggest the need for an appropriate amount of term insurance. The last two risks can be mitigated through a policy or policies that are owned by the corporation. Usually the owner(s) of the business and their accountant(s) will see the merits of protecting against these risks. The risks are temporary in nature but significant; the term premium is, therefore, reasonable and affordable.

Some advisors would conclude this first conversation and settle a good-sized term sale. But other advisors would continue to have a second conversation with their clients.

2. You could take a longer-term perspective

Like most successful business owners, Bill has an ever-increasing tax liability associated with the capital gain on the value of his business. Experienced advisors might recommend a life insurance policy is the most cost-effective way to fund an estate tax liability. But before settling on term to satisfy the short-term need, how can we show Bill the merits of going with a higher premium permanent life insurance policy that will cover off this longer-term need as well?

To minimize the potential “sticker shock” associated with permanent life insurance, many advisors will recommend a term-to-100 policy or a minimum-funded universal life policy with level cost of insurance. This could be owned personally, but if owned by the corporation, the premiums would be paid corporately and the company, as beneficiary, would receive the death benefit tax-free. The proceeds (less the adjusted cost basis of the policy) could then flow to the new shareholders tax-free via the Capital Dividend Account (CDA). Since Bill leaves his company shares to his family in his will, he’s paid for his policy in a tax-efficient manner using corporate dollars while still achieving his legacy objectives.

By covering both the temporary and permanent life insurance opportunities at once, we’ve increased the size of the sale, while generating great value for the client. This stage typically takes more effort than the first, as we explain the merits of permanent insurance and justify the larger premium.

3. Let’s consider some options to maximize your estate

What happens if Bill has a lot of passive investments in his holding company? The high tax rates on passive investment income mean Bill’s corporate assets grow at a much slower rate. If the investments are liquidated when Bill dies, corporate taxes must be paid on any deferred capital gains. On top of this, the after-tax value would be paid out of the company as a taxable dividend, further reducing the amount available for Bill’s beneficiaries.

In such a scenario, the advisor informs Bill and his accountant that they can significantly reduce his annual tax burden and maximize his after-tax estate value. In the previous stage, the insurance premiums paid by the corporation essentially convert taxable investments into a large CDA that Bill’s beneficiaries can access tax-free upon Bill’s death. Since Bill has significant passive assets in his holding company, we can increase the merits of the life insurance policy two- or three-fold. We can both accelerate and increase the tax benefits by recommending a participating (PAR) life insurance policy. The dividend option for the policy could be set to purchase additional insurance coverage. The higher premium associated with PAR will reduce the taxable investments sooner and the increasing death benefit will increase the CDA benefits substantially.

4. Do you have any concerns about this commitment?

By this stage, we’ve gone a long way from simply protecting Bill’s business against some short-term risks. He has now covered off some permanent needs, reduced some annual taxes and increased the after-tax value of his estate. But we also increased his annual premiums. And for many, locking into a lifetime commitment can be uncomfortable.

Participating life insurance has two features designed to address this concern:

  • Some products come with a guaranteed 20-pay option, whereby premiums are only payable for 20 years.
  • The majority of PAR policies have a premium offset feature.1 Accumulated and future dividends pay the policy premiums after some point in time (often less than 20 years). So, if Bill has enough passive assets to pay 20 premiums easily, this feature could alleviate his concern of having to pay premiums over and above the level of assets in the holding company.

5. Do you have concerns about liquidity?

If Bill and his corporation are still active, the idea of locking up company assets may not be appealing. The corporation may see several uses for those investments down the road, ranging from acquisition to the need to maintain sufficient assets in business down-cycles. If this is a concern, Bill will want his corporate assets to be liquid, even though he understands the tax consequences of holding them in passive investments.

This is where certain participating policy designs come into play. A few companies offer a PAR design with high early cash values. These plans can generate a first-year cash value that equals half of the premium and a cash value after 5 years approximately equal to the sum of the premiums paid over the 5 years. This design has 2 additional benefits over some other designs:

  1. the asset side of the company balance sheet will show a minimal impact from owning the life insurance policy; and
  2. Bill can easily access the equity in the life insurance policy — its cash surrender value.

At this stage, we explain to Bill that he’d have the option to take a loan from the insurance company against the policy’s cash value (noting that there could be tax implications) or alternatively, go to a bank and use the cash value as collateral against a loan.

6. Can your business outperform an investment in permanent insurance?

If Bill and his corporation are still active, they may not have a lot of assets sitting in passive investments. They might have their money constantly in motion as they believe their company’s performance is generating the best return on their assets.

If this is the case, all is not lost in this permanent insurance conversation. Bill can still benefit from all the merits of a high premium participating life insurance policy. He’ll just have to borrow money to replace what was used to pay the premiums. And by doing so, he may be able to deduct the interest paid on the loan for tax purposes. If Bill and his corporation are familiar with corporate borrowing, it will be fairly straightforward.

7. What’s your retirement vision?

If Bill doesn’t need to finance his premiums, he may find another purpose for borrowing against his life insurance policy. If for any reason, he finds he needs more resources to cover his desired retirement lifestyle, he can look to his participating life insurance policy as a source of additional cash flow, because the cash value is growing each year he pays his premiums. This can provide significant equity for Bill to borrow against to supplement his other retirement income flows, if his needs or wants change down the road.

To put this case in perspective, if Bill is 55 and the insurance need is $2.5 million, we could cover his short-term human capital needs with an annual premium commitment of around $15,000 toward a term policy.

The minimum-funded UL policy to minimize his long-term liability comes with a much greater commitment of around $50,000 — a sale that most advisors would be happy to make.

The participating whole life policy, with all the additional benefits and flexibility, would come with an annual commitment of $150,000. This is not only a great sale; the benefits to Bill are considerable.

Through the process, Bill has gone from considering an annual insurance expense of $15,000 to making an annual investment 10 times larger. Few advisors have the confidence and knowledge necessary to make this recommendation to clients like Bill. As advisors aspire to going from good to great, they should take some comfort in knowing it is possible and that clients like Bill will thank us for protecting the promises they’ve made to their families, their businesses and themselves.

Access the resources below to start conversations with your affluent clients:

  • Sun Life Financial’s 2015whitepaper, 5 things advisors often don’t tell wealthy clients, outlines what some affluent clients still aren’t hearing from their advisors about insurance. Learn more about busting the myths about insurance and reinforcing the benefits insurance solutions can have for the wealthy.
  • A lot of clients believe an old myth about life insurance: the wealthier you are, the less you need insurance. This myth appears logical on its surface. But dig down a little deeper, and you’ll find a different story. That’s what we’ve done in our latest whiteboard video: Protecting your wealth with insurance.
  • Across our Insurance and Wealth business, our Advanced Planning team delivers professional expertise and insights through our team of chartered professional accountants and lawyers. Directors of Advanced Planning are part of your Sun Life Financial team, committed to supporting you and enhancing the value you bring to your clients. If you want to learn more about our Insurance and Wealth Advanced Planning initiatives and resources, talk with your Sun Life Sales Director.

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1 Premium offset is an administrative feature (not a contractual right under the policy) that may allow a client to use dividends and accumulated value within the policy to help pay future premiums if certain conditions are met. The premium offset date is not guaranteed. It may occur sooner or later, or not at all, depending on future dividend scale changes. If and when the policy goes on premium offset, at some point the client may have to resume out-of-pocket premium payments.

Rocco Taglioni, Senior Vice-President, Head of Distribution, Individual Insurance and Wealth, is responsible for the overall leadership of Sun Life Financial’s distribution organizations across its Retail business in Canada. His role encompasses the leadership of the distribution company, as President Sun Life Financial Distributors Inc., as well as the Insurance and Wealth wholesaling sales organizations. Through the various leadership teams he oversees the development, direction, and execution of the Distribution strategies centered on wealth management, protection, retirement, and estate and financial planning.

Since joining Sun Life in 2004, Rocco has held various executive leadership roles, including Vice-President Business Development, Group Benefits; Head of Individual Wealth Management; Senior-Vice-President, Client Solutions; and most recently Senior Vice-President, Distribution and Marketing, Individual Insurance and Wealth. Throughout his tenure at Sun Life, Rocco has led various business strategies centered on building, transforming, and evolving organizations and teams to drive higher levels of performance and success.

Rocco has 36 years of experience in strategic leadership in the insurance and investment industries. He has served on and is a member of a number of boards. Rocco is currently President and Chair, Sun Life Financial Distributors (Canada) Inc. and is a member of the Sun Life Financial Investment Services (Canada) Inc. board. He is a member of various industry associations, including Advocis, GAMA Canada, the Canadian Pension and Benefits Institute, and the Association of Canadian Pension Management.

Rocco holds a Bachelor of Arts in Economics from York University.