Finding opportunities and empowering clients

Refining and adjusting insurance needs and estate plans.

With files from Vern Lunz, insurance Specialist, Manulife Securities Inc. 

Regular touchpoints are an important part of the advisor-client relationship, and often these meetings uncover unique opportunities. Consider the following case study involving term insurance. When a client feels that it’s time to make some coverage changes, the insights of an advisor can be a big help in guiding the decision-making process. Offering clients options that they may not have considered, and helping them understand the consequences of the choices available to them, is an excellent way to build long-term relationships.

The background

Long-time married clients Bob, age 63, and Sue, age 59, are very good about doing regular check-ins with their advisor to review insurance coverage needs and their overall estate plan. In this latest touchpoint, they want to discuss their existing term insurance coverage. Specifically, they wonder whether to continue the coverage and what’s involved in cancelling the policy. While this could be viewed as a negative development, this meeting offers an excellent opportunity to explore new value-add scenarios for this couple. 

Let’s dive in …

• Bob and Sue have been clients for many years, and hold joint term life and critical illness (CI) insurance policies.
• The term policies just renewed with higher premiums.
• Bob retired last year, and Sue is scheduled to retire in three years. 
• The couple has two adult children, live a modest lifestyle and carry no debt. 
• Financially, they are in a strong position, with a net worth of more than $3 million, more than $2 million of which is in liquid investments. 
• The couple feels secure that they have enough money to enjoy a comfortable retirement. However, they have a “preserving assets” mindset. They want to ensure they are paying as little tax as possible and that they aren’t spending money on things they don’t need. 
• Reviewing their expenses has prompted their questions about the need for term insurance. 

With preserving assets top of mind, is it a good idea for Bob and Sue to cancel their term policies and redirect these funds elsewhere? There are several options to explore.

Scenario One – Leave the plan as is

One possibility is to keep the term and CI policies intact and show Bob and Sue how that decision doesn’t impact their cash flow. A long-term view of their asset growth rates is also helpful. Assuming a conservative growth rate, along with a normal life expectancy, the couple can easily afford to keep their insurance coverage in place or purchase new individual term coverage at a better rate to replace existing policies. With a bit of guidance, Bob and Sue realize they will still have more than enough cash flow to meet all their objectives.

• Assuming normal life expectancies, the couple’s net worth will increase to just over $8.1 million in future. However, additional taxes of about $800,000 will need to be paid upon their deaths, leaving a net estate of $7.3 million.
• At age 100, the couple will have a net worth of $10.7 million, with taxes of $900,000, for a net estate of $9.8 million. 

The projection factors in an increase of their expenses by an annual inflation rate of 2 per cent. The term insurance will not be a factor if they live beyond age 80, as the coverage will have expired by then.

Scenario Two – Cancel the term and critical illness policies

While it’s not recommended that a client cancel insurance policies, showing the impact of making such a decision can be a useful exercise. In this case, Bob and Sue are shown what happens if term and CI insurance are not in place. 

• Term coverage is cancelled, and either Bob or Sue passes away unexpectedly. Below are the net estate numbers based on a normal life expectancy for the surviving spouse:
1. If Bob dies next year, the net estate will equal $5.1 million.
2. If Sue dies next year, the net estate will equal $4.7 million. (Sue’s death has a greater impact on the estate value because she plans to work for another three years.)

• CI coverage is cancelled, and the couple is exposed to the financial impact of Bob or Sue becoming seriously ill. Assuming a one-time financial hit of $250,000 if either of them became ill, the estimated net estate value would be $5.3 million.

If Bob and Sue choose to cancel their term and CI policies, there would be an impact on the couple’s overall estate, with net estimates lower than Scenario One. However, the couple would still have enough cash flow to satisfy all their objectives, even in the event of a premature death or an expensive critical illness. 

Scenario Three – Redirect assets to a tax-exempt, joint last-to-die insurance policy

Another option is to show Bob and Sue what their estate might look like if their joint policies were redirected to a tax-sheltered alternative. A joint last-to-die policy might be a good option if individual coverage isn’t required, because this type of policy tends to be less expensive. The cash value and death benefit continue to grow on a tax-free basis and are paid out exactly when estate taxes are due. 

If circumstances were to change due to illness or another significant life event, the funds could be withdrawn from the policy. In the case of a disability benefit, the funds could be accessed tax-free. 

• Bob and Sue can contribute $100,000 annually without affecting their day-to-day cash flow requirements for lifestyle expenses. 
• Their tax burden is reduced by about 45 per cent of the original taxes payable – to about $440,000.
• The projected net estate value at their normal life expectancies jumps to almost $8.6 million – nearly a 20 per cent increase in funds available for their family. 

Scenario Four – Donate to charity

Another interesting option for Bob and Sue to consider is naming a charity as a beneficiary of their estate and donating about $900,000. By making this donation, their estate would receive a tax credit that would eliminate all remaining tax owed by the estate. 

• Assuming normal life expectancy, their family would receive more than $7.6 million, more than they would inherit if no action is taken (Scenario One).
• The charity would get $900,000.
• The tax liability would be reduced to zero.

This win-win-win scenario is possible with the implementation of the joint last-to-die policy outlined in Scenario Three. By increasing their estate, this policy allows Bob and Sue to give some of the estate away as a tax solution without reducing what they wish to leave family members. 

Empowering clients with options

With options to consider, Bob and Sue feel confident in their future planning and the potential for tax savings. A few changes could mean they pay less tax and leave their family more funds. The idea of leaving money to charity is also a very positive idea that the couple hadn’t considered. 

Preparing scenarios helps give your clients the information they need to make educated decisions and demonstrates the value that an advisor can offer. Ultimately, clients will make the choice that is best for their situation, but with a deeper level of trust knowing that their advisor has given them enough information to look at the situation from all angles. 

For more information, tools and resources, visit the Insurance section of Advisor Portal. 

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