There’s a common misconception that as wealth increases, the need for insurance decreases.
Why?
The wealthy often believe they can self-insure. But while the wealthy may have sufficient wealth to meet their basic living needs, the surprising fact is that the benefits they can derive from insurance is greater than ever.
What’s more surprising is that these key benefits are often missed in conversations between advisors and their wealthy Clients.
As we continue to enjoy extended longevity, we see a corresponding increase in the need to help fund extended retirement living and long term care, so it’s important that insurance and tax policies provide Canadians appropriate protection. And, contrary to what you might think, the role of life insurance actually grows in importance as individual wealth grows.
It’s time to put to rest the misconceptions that prevent people from getting the financial protection they need – and want.
Make no mistake, individual wealth is indeed growing. Billions of dollars are being passed annually to the boomer generation from their parents, and billions have been created by professionals and business owners.2 There’s a lot at stake. It’s an important time to get the facts straight about the role insurance can play in enhancing and preserving wealth, whether earned or inherited, so let’s look at five things clients might not be hearing from their advisor.
1. Affluent people really want insurance
As people’s wealth increases, they often enter a higher tax bracket and have excess capital. If they own a business, they’re typically looking for solutions to help manage the assets that have accumulated in it. The more wealth people have, the more accustomed they become to a higher standard of living – and the more they have to lose. Life insurance is a safeguard to protect the affluent investor’s lifestyle no matter what the future holds.
Permanent life insurance can benefit investors by:
2. Group life insurance doesn’t usually provide enough coverage
You may not recognize how much insurance you actually need. It’s true that many people already have insurance, either through work or individually. But what they often don’t recognize is how much insurance they actually need. The growing trend of relying on minimal levels of group coverage leaves many Canadians underinsured. The bottom line? The amount of insurance you need to protect your wealth may be much higher than you think and likely far beyond what your group plan offers.
3. Insurance is a well-performing, low-risk investment
We don’t traditionally think of insurance as an investment, but it has gained wide recognition as an alternative asset class. Why? Permanent life insurance often produces superior rates of after-tax return than more traditional, conservative investments like GICs or government bonds. Permanent insurance can enhance a non-registered investment portfolio by providing tax-sheltered investment growth.
4. Canadian life insurance companies are a safe place to put a Client’s money Payout rates for life insurance claims are extraordinarily high. There’s very little grey area when it comes to life insurance payouts, and there is little risk that the insurance company won’t be there when it’s time for the policy to be paid out.
5. Clients don’t need to work with that old stereotypical insurance agent
The good news is there are insurance professionals and holistic financial advisors who specialize in working with affluent investors to protect their assets and maximize their estates. You can choose to work with an insurance advisor who will become part of your financial team. Working alongside your other investment advisors and/or tax and accounting professionals, insurance advisors can apply their specialized, sophisticated knowledge about tax and estate planning that can help you preserve and enhance your wealth.
Related resources:
5 things advisors often don’t tell wealthy Clients (article)
There are grains of truth to many myths, but others simply don’t stand the test of time. For example, years ago parents would tell their kids to dress warmly so they wouldn’t catch a cold. But medical professionals busted that myth when they discovered that cold air doesn’t make you sick.
There’s a persistent myth about life insurance too: “the wealthier you are, the less you need it.” Like many other generally accepted “truths”, this one appears logical on the surface. But dig a little deeper and you’ll find a different story.
The more you have, the more you have to lose.
There are two key areas where life insurance can benefit wealthy individuals:
Human capital
Financial capital
While the need to protect human capital typically declines as individuals approach the end of their income-earning years, it may still have an important role to play for wealthy individuals with some earning years left and a lifestyle they want to maintain.
While life insurance offers “human capital” protection, it’s the “financial capital” benefits that affluent individuals miss out on by buying into the myth that life insurance isn’t for them.
As an individual’s wealth grows, their need for estate, business and lifestyle planning increases. Life insurance can play a valuable role in each of these areas - not just protecting wealth but also growing it.
For individuals who have enough savings to finance their retirement income needs and are looking to minimize tax and maximize their estate’s value, a permanent insurance policy can provide significant benefits:
The wealthy might not think they need insurance but that doesn’t mean they don’t want it.
Life insurance as an asset class
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The concepts below are available in the Sun Life Illustrations software. You can also access a simplified Excel version through a Sun Life sales representative:
