Ways to approach wills and insurance

(August 2007) A life insurance policy is the one financial product that your client is probably not keen to see paid out anytime soon. But like a will, life insurance is an estate planning tool that will bring certainty to a client’s legacy.

Corry Collins, a CFP and chartered life underwriter at Halifax-based Living Benefits Atlantic, says the death benefit alone is especially helpful for beneficiaries. “My first death benefit was paid out to a fellow who was 33 years old and died of leukemia,” he says. “He and his wife didn’t have any kids, but the death benefit gave his wife some breathing space to get her life back in order.”

Client relationships with family and friends means life insurance can be as much of a moral obligation as a financial one. This is precisely why you need to understand a client’s estate goals before selling a policy.

Mark Halpern, founder of Toronto-based illnessprotection.com, starts by asking clients about their financial affairs, their debts, lines of credit and assets. This allows a client to see the critical role he plays in securing protection for the family. Halpern notes that small business owners especially tend to overlook the vital role they play in the family’s survival. He asks some questions to trigger thoughts that may help clients realize how insurance can help protect their family.

“Mr. Business Owner, you happen to be the hub of a very important wheel,” he tells them, before going on to ask questions about each of the relationships or “spokes” in that wheel. “For example,” he says, “who pays your wife’s paycheque when you’re not around?”

Halpern says there is a series of liabilities that clients don’t realize they create when they die. For example, lines of credit and loans from a bank are approved based on a person’s credit history, and dependents aren’t always eligible for approval once the client passes away.

It’s even worse with mortgages if the deceased person was depended upon to pay off the debt, adds Alphonso Franco, president of Victoria, B.C.-based Trenton Financial. The dependents are still on the hook to pay off the mortgage, and if they can’t, they will face foreclosure. In these circumstances, the death benefit can provide a lump sum to ensure that the family’s standard of living can be maintained.

But life insurance is not just an emergency exit plan. For older clients, it can be a sophisticated wealth preservation tool. Finding ways to reduce the amount of money that the federal and provincial government will take from your client’s estate upon death is one core benefit of estate planning. Without a proper plan, your client is essentially giving money away to the government.

The total value of most estates usually pushes a deceased person’s income into the highest tax bracket in his or her last year of paying taxes — assets and capital gains are taxed at the highest rates.

To put this into context, an estate will need to pay nearly $50,000 in capital gains tax to the government on a portfolio with $200,000 in gains, regardless of what the deceased’s income was while alive.

In addition, to the income taxes, the estate will have to pay a probate fee, which can be as high as 1.5% in Ontario. That seems small, but on an estate worth over $1 million, the tax amounts to more than $15,000, which could instead be left to a loved one or charity rather than the provincial coffers.

“I ask my clients, ‘Do you want half of the estate to go to your family or to the CRA?’ I’ve yet to find someone who would prefer that [the government] take their estate,” Collins says. “Premiums on the life insurance are always going to be less than the taxes.”

Life insurance can be used to reduce the government’s cut because it is tax free and probate free. If it has an investment component, such as a universal life policy, the investment also grows tax free. More important, the death benefit is not subject to income tax or probate fees.

Collins says his older clients use policies to effectively pay all of the taxes due, so none of the assets need to be sold.

Seniors can also utilize tax-sheltered insurance policy benefits to maximize the value they pass on. If they have investments they won’t use, they can potentially create a death benefit larger than the initial investment. “Many seniors use life insurance to preserve an estate. If they have a large chunk of money, they could leverage that into a larger life policy and leave behind a much larger estate to the beneficiaries,” explains Franco.

For a younger person, Collins says, “one of the big features they want to have is convertibility, which means they can change their policy from a term to permanent policy, and they can do so without any evidence of insurability. As a person’s life cycle changes, their need for insurance also changes. They buy the insurance for one purpose, but very often they hold on to the insurance for completely different purposes.”

Filed by Mark Noble Advisor.ca, mark.noble@advisor.rogers.com

(08/17/07)

Mark Noble