What do wealthy people worry about? Probably not the price of butter or if they can afford a vacation next year. They do worry though.
David Lenok wrote a piece in Wealth Advisor last week. What Scares Wealthy Clients Most? He refers to a Wealth-X survey of 400 advisors who deal with clients with more than $10 million to invest. Succession/inheritance, followed by wealth taxes and the global economy lead the list. Health, personal security, online security and privacy were there too.
Not truly surprising. Death and taxes have been a popular scary theme for centuries. The two certainties per Ben Franklin. The others relate to predictability which is a dominant theme for all and especially those of lesser means.
There is a still older saying that two wrongs do not make a right. That one is suspect. Once you recognize that everyone dies, it is possible to arrange your affairs so that your eventual death extinguishes tax that would be otherwise due. Death OR taxes.
It is not difficult to accomplish and it comes in a ready made package. It is a life insurance policy. I know the conventional wisdom is that whole life insurance policies are a dumb investment. When people tell me that, I ask a few questions:
- Compared to what? It is a contradiction to dislike permanent insurance and to own term life insurance and bonds instead. Better to roll them together.
- How do you want to measure? If it is internal rate of return to death, then we must ask when are you planning to die? If very far in the future, the after tax rate will tend to look like the pretax rate on your bond portfolio. If it is soon, like a car accident next year, it will be very large. As in thousands of percent.
- How much involvement do you want? Investment portfolios, businesses and rental properties all require ongoing time, expense and management skill. Life insurance is a super-passive investment.
- How much volatility can you live with when it comes to liquidity in your estate? Other assets require a market willing and able to buy to turn your assets back into cash. Life insurance requires a certificate of death.
You get the idea. Life insurance is not like other assets and it is very hard to compare. Depending on your investment ideology, you can make a good case for almost anything when the assets are not comparable.
The key idea is that most people will not die broke. Take some of the assets that will end up in your estate anyway and magnify them with life insurance. There is a significant tax advantage and with participating insurance, the underlying asset will be a very strong fixed income portfolio, with a little equity position. There is also the advantage that this kind of insurance wins as life expectancy increases.
By providing liquidity, you may be able to invest other money more aggressively. Life insurance is about what it allows you to do because you have it.
Most wealthy people own life insurance.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
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