Everyone Can Benefit From Owning Life Insurance.

I believe things about life insurance and other financial tools in the context of client value. These beliefs form the basis for both how and what I do:

  1. Clients like someone to show them a problem or opportunity that they have but had not previously seen.
  2. Whether the problem is known or newly discovered, clients like creative and effective approaches to deal with those problems and opportunities.
  3. Clients appreciate help implementing the solutions.
  4. Clients want control or at least influence and they get it with more complete information, flexibility, regular monitoring.

For some established clients, many of whom can demonstrate they have no need for such insurance, life insurance becomes an unexpected and useful tool.

Let’s be clear.  No one likes life insurance.  As one client said, “It is like betting against the home team.”  At the same time he bought a substantial policy because it was an ideal solution to his situation.

There are several situations where life insurance works better than the alternatives.

Participating life insurance is much like a very conservative bond fund with further gains if the insured dies too soon, if life expectancy generally improves, if costs go down, if others quit their plan.  It is a tax effective way to hold fixed income instruments with a tiny management cost.   That means that a client can take a portion of their similar investments and own the policy instead.  The remainder of the investments can be dedicated to other purposes without risking a shortfall of liquidity in the estate.

Term to 100 life insurance is most easily thought of as a conditional option on money.  There is an annual fee to maintain the option.  The condition is the money becomes payable when the insured person dies.  As with other assets, an option is the easiest and often the cheapest way to control an asset that is not required in the present.

Life insurance is a tax efficient way to evacuate money from a holding company to the deceased’s estate.  This is a little more complicated, but suffice it say that for people who have large amounts of liquid capital trapped in a taxable holding company, the saving of 30% or so of the distribution tax cost can be attractive.

Some forms of life insurance look like mutual funds with a tax wrapper.  There are ways to structure them so the tax saving is worth more than the cost of the insurance.  The government effectively pays for the insurance part.

Insurance of any kind serves two purposes.  It protects assets that already exist, (like creating liquidity to pay taxes and thus avoid liquidation of business assets), it creates assets where none existed before. (Like young family needs or additional estate amounts to provide for heirs not involved with the business)

Properly applied, life insurance will enhance the value of an estate and it will provide additional liquidity in situations where that is needed.  There are no cheaper ways to achieve either.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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One Response to Everyone Can Benefit From Owning Life Insurance.

  1. John Page says:

    I love par insurance!

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