What Is It? How to Start the Conversation, and Tools to Help
In the fall of 2022, I penned a series of articles that focused on insurance sales opportunities at various stages in the business cycle. In the next few articles, I’ll tackle each of the 3 major sales opportunities that were presented in the mature phase of the business cycle and share some questions that can assist in starting the conversation to disturb and motivate the client to action. These 3 strategies are responsible for some of the largest premium sales in our industry: (1) Estate Preservation (tax liability funding), (2) Estate Maximization (Corporate Estate Bond), and (3) Retirement funding (Corporate Insured Retirement Program). It’s here that we find the transition from “needing” to “wanting” insurance begins to take hold.
Estate Preservation: (tax liability funding) Solving Liquidity Problems:
Before, we jump into the conversation starters, let me recap this strategy. One of the main purposes, why people purchase life insurance, plays out here. The need/want for “estate preservation” is for those individuals who have been successful in amassing a great deal of wealth throughout their lifetime (wealth in relative terms, that is). Their concerns now transition from protecting their number one asset, which was “their ability to earn an income” (human capital) to protecting their financial capital (in the form of business assets, and/or investment portfolios). They aim to minimize the impact that taxes will have on their ability to transfer their wealth in-tact, to the next generation.
The increasing value of a business will mean a growing tax liability. At death, 66.67% of the increase in the value of the property will be taxed. Any taxable gain that is not sheltered by the capital gains exemption and/or the qualify for a rollover will be subject to taxes. The question then becomes, how do you want to pay for this?
If funds or other assets are not available to pay for this tax liability, the shares or partnership interest may have to be sold, or business assets may need to be liquidated, possibly for a price below fair market value. Although these options do exist, they’re often not the most cost-effective/efficient use of your hard-earned money. Life insurance may be purchased to provide the necessary funds at the right time to pay for the tax liability. Permanent life insurance is particularly valuable especially when the beneficiaries wish to retain the asset, or the market conditions are not favourable to sell the property at fair market value. In fact, for every net estate dollar needed to pay the tax bill, a business owner’s corporate investment/assets will need to be worth more than a dollar. Life Insurance delivers the same outcome for only pennies on the dollar. The individual can own the life insurance policy, or it can be owned by the corporation or partnership and flow out to the individual’s estate after death.
Recap: client profile:
Who is it for?
Older individuals (or couples) with significant taxable assets such as a family cottage, non-registered mutual funds, stocks, real estate or RRSPs/RRIFs, Holdco’s, and Opcos.
Their Goal?
They would like to minimize the impact of taxes and preserve the value of the assets that they pass on to their heirs.
Starting the conversation:
How confident are you that your estate will pass to your family in the most tax-efficient method possible?
Do you want 100% of your wealth preserved for your family, or your favourite charity, or only 100% of what is left over after the government takes its share?
Are you aware of the impact that taxes (capital gains) will have on your ability to transfer your business intact to the next generation?
Are you looking for ways to minimize the impact that taxes have on your ability to transfer your wealth/business intact to your kids?
How important is it for you to ensure your family’s assets and wealth are transferred to the next generation in the most tax-efficient manner?
Do you know the amount of taxes that will be owed when your estate is transferred to your family and what is the net value of your estate at that time?
Have you completed (or are you nearing completion of) the asset accumulation phase of your life?
If you intend to continue to use the property for as long as possible and pass it along after you’re gone, would you like to explore the options available to pay for taxes?
In the event of your death, what would you wish to happen to your financial interest in the corporation?
Do you have significant assets that would be taxed at death (i.e. the family cottage)?
Do you want to minimize personal income on your estate?
Has anyone explained the tax impact of passing on the property depending on when or how it’s done?
Do you want to preserve the value of these assets for your heirs?
Are you looking for the most cost-effective way of preserving the value of your estate?
Do you qualify for life insurance?
Are you aware of the impact that capital gains taxes have on your estate? A lack of proper planning could mean that your family cottage/business won’t stay in your family. Your estate may need to sell it to pay for the tax. How do you feel about that?
Which cheque would you rather write? The 4 common funding options:
Most carriers provide tools to support the argument that permanent life insurance may be the most cost-effective alternative available to address tax liability. The alternatives to... (1) permanent life insurance is: (2) liquidating assets (lump sum), (3) investing/saving toward your goal, or (4) estate to borrow funds.
Here’s an example of an incorporated business owner who’s amassed a sizable real estate portfolio within their corporate structure (male aged 64 and his spouse aged 63) considering various options to create liquidity to address their tax liability at death. We used the following script to disturb and motivate the client.
“You’ve been very successful in amassing a significant real estate portfolio throughout your lifetime. One of the challenges you’ll experience is transferring those assets, intact to your kids. The increasing value of your real estate properties will mean a growing tax liability. At death, 66.7% of the increase in the value of the property will be taxed. Unlike your principal residence, which is exempt from taxes, your real estate properties (i.e. rental properties) could trigger a significant capital gains tax when transferred to your kids. The question for you is, how do you want to pay for this?"
The “Value of Insurance” tool (see chart below) helps us to demonstrate how permanent life insurance may be the most cost-effective solution of the 4 options available. It does this by using the “pennies on the dollar: metric (in present value terms), as well as the ‘absolute dollars, cost comparison”. With a corporate-owned permanent life insurance, it only takes $0.40 of corporate dollars (premiums/deposits) to create $1.00 net to the estate, in comparison, an investment/savings solution (at 3% growth rate) requires more than double the amount ($0.99 corporate dollars to create the same $1.00 net to the estate). Said differently, assuming the same premium/deposit deployed to the life insurance is directed to a corporate investment solution, the investment will need to earn an annual pre-tax yield of 12.55% to generate the same net to the estate amount at age 90 created by the permanent life insurance solution.
Inevitably, there is a cost to solving this tax liability problem. Once again, the main question needs to be asked, “what cheque would you rather write?” Having the tools available to quantify the options can go a long way in assisting the client and their professional advisors (i.e. accountants) to make an informed decision. But before you can get there, you’ll need to ask the right questions to disturb and motivate the client to take action.
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