Advisor Forum update: Don’t over-insure when you can over-fund

(November 19, 2003) Sometimes a client seems just right for an insurance sale, with what appears to be far too much invested in fixed income assets or cash just sitting in their savings account.

But Al Kinch of Desjardins Financial Security has been in the business for 33 years and advises against raiding a client’s GICs to construct an insurance based estate.

It may be tempting to reallocate a conservative, older client’s fixed income assets into insurance products en masse, but Kinch says this is “the worst thing you can want to do.” Instead, he advises you move them into the “tax efficient zone.”

“What you want to do is reposition just a part of their wealth, because that way you’re not looking greedy,” he told the audience at Advisor Forum in Toronto on Tuesday. “If that person has a need for life insurance coverage for estate preservation, all we’re looking at is repositioning a portion of their wealth.”

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Of course, the client can continue to pour their discretionary assets into GICs, Kinch says, and there’s nothing wrong with that.

But an insurance-savvy financial advisor can help build a tax efficient zone based on a universal life (UL) policy that will allow the client to continue to accumulate wealth, reduce their current tax load and leave a tax-free, probate-free inheritance behind.

If the estate is left in GICs, for example, the interest is not only taxable, but there would also be estate taxes on the principal. The UL policy can transfer the cash to the heirs in a more efficient manner.

He recommends using insurance as a diversification play, using the client’s discretionary assets to pay the premiums, with a death benefit on the policy to negate the impact of estate taxes and other costs incurred at death.

He points out that a little up-front over-funding can give the client access to an investment bonus, by building up an accumulating fund of excess payments.

“What you can do is get almost the equivalent amount as with a GIC, inside a UL,” Kinch says. “If I wanted access to my accum. fund, I could take that to the bank and leverage it for a tax-free income. I’d still have access to that money without the tax liability.”

Banks will offer loans against 90% of a policy’s cash surrender value. “When we show this to individuals, all of a sudden they ask ‘why would I want to put money into GICs?'”

Kinch says year-end tax planning season is an ideal time to bring up these strategies, because it is a tax efficient method of estate preservation. While clients’ thoughts may be on immediate tax minimization, the use of RSPs easily conjures up thoughts of retirement and old age.

“As you talk to people about saving for their retirement, keep in mind all the arguments you’re hearing today about health-care costs coming down the line,” he says. “It’s not just enough to save for retirement, just for income purposes, but what about those health-care costs that we’re seeing more and more of?

“If we are doing the proper job for our clients, we’re not just saving them money anymore, but we’re saving it probably for one of the best reasons they’ve ever had.”

Kinch says most universal life policies can carry a familiar benefit for future health care costs.

“With the accumulating funds, if this person was diagnosed with a critical illness, had a disability that met the definition or had loss of independence, they could tap into the accum. funds on a tax free basis.”

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Got a tip on tax efficient estate planning? What do you think about this insurance strategy? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

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For details on the last Advisor Forum of 2003 in Halifax, please visit the Advisor Forum Web site by clicking here.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca

(11/19/03)

Steven Lamb