Are you aware of the role that insurance can play in your wealth plan? In this episode of Conversations on Wealth, Sarah Widmeyer, Director, Wealth Strategies, and Jeff Fray, Vice President of Insurance at Richardson Wealth, discuss how Insurance can be used as a tool for creating wealth, transferring assets and developing cost effective, tax-efficient solutions to support business owners, professionals throughout their career, and philanthropic initiatives.
Sarah Widmeyer 0:15
Welcome to Conversations on Wealth, hosted by Richardson, GMP, a podcast dedicated to helping Canadians navigate the complexities of wealth with a multi dimensional approach to planning and wealth management. I’m Sarah Widmeyer, Director of Wealth strategies at Richardson GMP. And this week, we’re discussing how insurance or what my guest today refers to, as the “I” word can act as a flexible tool to help build wealth and protect your assets. I’d like to welcome Jeff Fray, Vice President of Insurance at Richardson GMP. Thanks for joining me today.
Jeff Fray 0:52
Thanks very much Sarah. Pleasure to be here.
Sarah Widmeyer 0:54
Okay, Jeff. So what’s the “I” word?
Jeff Fray 0:58
Well, the “I” word is a word most of us don’t ever want to discuss or talk about. And of course, that word is insurance. What we’re going to talk about today, specifically, because there’s very many kinds of insurance, car insurance, boat insurance, you can share anything you want to insure your pet. In the wealth management business, what we’re referring to specifically is generally life insurance, ugh, disability insurance, critical illness, illness insurance, but the primary one is life insurance, and how itcan complement a well thought out and planned wealth plan for a client. And most of us aren’t aware of that.
Sarah Widmeyer 1:38
Jeff Fray 1:38
Um, so generally speaking, you don’t ever want to use the what I call the “I” word because it shuts down conversations. And as you well know in the wealth management business, the conversation is the foundational piece to building a client relationship. And what I like to say is find out when a client really needs, but in the high net worth market, it’s almost about always about what the client wants. And those don’t come about by answering a questionnaire or filling out a button a bunch of numbers on a form. It’s about having an in depth discussion with a client about what makes them tick and what is it they want to accomplish.
Sarah Widmeyer 2:16
I-I, you know, I Sorry, I’m gonna just jump in, I find that really interesting because, um, you know, insurance, it. Life insurance can be such a dirty word for so many people. And I don’t know, if it’s the connection to death, you don’t want to contemplate and think about your demise. Um, but there’s also the thought that it’s an expense, and it’s a bill I got to pay, and so buy the most that I can get for the least amount of money, um, you’re talking about a slightly different spin, you’re talking about not “If something happens to me, do I have enough that my mortgage is taken care of, and my kids aren’t homeless, and they can go to school and blah, blah, blah,” is more about um, using it as a tool for creating wealth, for transferring assets, and it’s a, it’s a different way of thinking about insurance. And I think that that’s an important distinction.
Jeff Fray 3:12
It’s, that’s huge, you’ve covered (it) in a nutshell. People do not want to be sold. And that’s the problem. Most insurance gets sold, you know, an aunt or uncle or somebody in the business gotcha when you were 25, just out of school
Sarah Widmeyer 3:27
Jeff Fray 3:27
You need to buy a whole life insurance for 60 bucks a month, you didn’t know why you just knew that “I probably should, I heard about it.” That’s not the market we’re in. That’s not to say that if we find a need for some type of the type of insurance for the client, we won’t address it. But our market and what we do and spend most of our time as it pertains to life insurance at a wealth management firm like ours, is how it can complement what they’ve already accomplished. So we’re very big on trust the process, which is the conversation, and walking through the needs and wants of a client, that’s first and foremost. And that’s why I don’t like to use the “I” word early on in a relationship with a client. It’s not being disingenuous or not holding anything back. But we don’t want to lead the discussion with the client immediately. I don’t care how sophisticated they are or how wealthy they are or not, but when you drop the “I” word at any point of conversation, it closes minds, and they’ve already got a preconceived notion, one “oh damn, I’m going to be sold”, or “I hate life insurance” or whatever before we even know if it’s applicable or appropriate to their specific situation. So we’re very big on trust the process. Um, we have a lot of in house talent that does really good financial plans, legal advice, accounting advice, cross border. And our investment advisors are really attuned to how to how to work with high net worth individuals. So I’m very big on trust in the process. And once we’ve gone through the process and we’ve discovered that all the needs are taken care of, because most wealthy people’s needs have been taken care of, they’re not worried about paying off a mortgage per se, or I don’t have enough net worth to finish educating my children. They’re more about, I want this, these assets invested and managed in a cost effective and tax efficient way. And sometimes insurance may be appropriate.
Sarah Widmeyer 5:21
So, so tell me about that. Because I think one of the um, facts that most listeners would be very surprised about is that some of Canada’s most wealthy families are big buyers of insurance. And it goes against again, what we would think insurance is used for just covering off liabilities, expenses, making sure that the family is okay. So why would some of Canada’s most wealthy families buy life insurance?
Jeff Fray 5:52
Well, let’s carve off one particular instance here. Let’s say you’re the owner of a closely held private company. And that company has been in the business or in the family for a couple three generations, their primary motivation is to make sure that that ownership passes to the next generation. Well, how do you do that in the most cost effective manner, when there’s a huge estate tax due per se in Canada, now we don’t call estate tax, it’s capital gains, deferred gains, those all come in to a, a taxable position at the death of the last spouse if we’re talking to a couple. So trust the process, if we discovered you had a $10 million tax liability on a closely held share position in your private company, ugh, that is a big tax burden at the end. So you have to use cash from somewhere. Other assets, cash you’ve got, ugh, for instance, you know, most people don’t realize that family cottages are sold, the number one reason they’re sold, is because of the tax liability of the death of the last of the spouses. So how do you pay that? So this is where I say trust the process, we found out you have a large tax liability. Now it’s about trust the math, what’s the most cost effective, tax efficient way to pay that 10million in tax. And what we like to do at our firm is do the calculation. And if we can find an investment, a mutual fund, a stock, a bond, a different property doing a dual will, we take a look at all that. And if it still doesn’t take care of that $10 million tax liability in a cost effective tax efficient manner, we will take at, a look at a life insurance solution. And what we do is we just break down the math, does it make sense to send that money to an insurance company with a guarantee that 10 million will pay when the tax is due. And we just do the math. And if the math works against any other potential solution, if it is the most cost effective tax efficient solution, then it behooves us to recommend it to you.
Sarah Widmeyer 7:52
So, so the math, um, I had someone explained it to me one time that it it’s buying insurance, is like buying 100 cents for pennies on the dollar. That’s exactly right. And it’s an asset that flows outside of the estate, so it doesn’t get held up in, you know, probate, it doesn’t get held up, you don’t have to liquidate something in order to generate the cash to pay for the bill. It’s something that is dealt with pretty quickly and efficiently by insurance companies, and becomes additional cash upon death, to pay bills and get things done very quickly and efficiently. And again, it’s that concept of buying those dollars for pennies, as opposed to 100 cents.
Jeff Fray 8:37
And that’s a language that most business people understand. And that’s exactly how we position it. Trust the math. And to your point about not being tied up in probate or any other complication. You got to name a beneficiary on these insurance contracts. That’s part of the magic of an insurance policy. But again, it comes down to the math, Sarah. If it makes the most sense for the client, then we’re going to recommend it. Yeah. And that’s how we get there. So trust the process to start, figure out the wants and needs and then trust the math at the end because insurance isn’t, life insurance particularly is not always the solution, I would say in about 25% of our client interactions where we have these deep discussions about what they want and where they want to be, they’ve either positioned or the assets are structured in such a way that there is no large tax liability, or they’ve had some great advice somewhere else and have got some insurance in their portfolio. Then it comes a point of are the beneficiaries named properly. You know, if the company owns the policy, a lot of mistakes are made with a name personal beneficiary. You can’t do that with an insurance company or a policy that’s owned by a company it should be the company’s the beneficiary, and then have the proper structure set up so that insurance policy pays tax free to the company and through a little notional thing called a capital dividend account can pay tax free out to surviving shareholders to ultimately pay that $10 million tax liability on a closely held share position. So we look at life insurance as a complementary piece to your portfolio. It’s not always the solution. But more often than not, clients are very surprised that this is actually a consideration when we are looked upon as an investor and manager of money. But when you strip away all that, it comes down to simply what is the most cost effective tax efficient means of addressing a tax liability? And not always, but more often than most would assume, life insurance is that solution.
Sarah Widmeyer 10:36
So let me take you back a step now. Um, so we’ve talked about business owners who’ve talked about ultra high net worth with big tax issues, uh, depending on your life stage, so where you are in your life, I would imagine that different types of insurance are better um, suited for your situation than others. Can you, can you give me a primer on um, you know, “I’ve just graduated, uh, I’m a doctor, and I’ve just started to build my practice, I’ve got huge amount of debt, um but you know, things will look much better in 10 years.” What kind of insurance should I be considering?
Jeff Fray 11:19
For a professional, in particular, doctors, dentists, lawyers, disability protection against income is number one, because that’s protecting my income, might be the biggest asset they have. That’s exactly right. Not much of a net worth, maybe they’ve got school debt, to have no serious net worth, well, how you protect that income flow is with a disability insurance contract. So that’s what we’d be talking to those people in particular with, if they had a large debt, or maybe they’ve got a mortgage, you know, we could talk about some term insurance, very cost effective, and covers off the near term risk. Once that client gets past those stages, meaning, you know, they’ve got some net worth built up, they’ve paid off all their student loans, any non deductible interest debt, even a mortgage, and at that point, they start building a net worth, then that avails themselves to other types of insurance that will take care of the long term. But life insurance, a couple kinds of insurance can actually be used as an additional tax shelter besides a TFSA besides an RSP. And I don’t say instead of it would be the last tax shelter, I’d look at, do your TFSA and RRSPs, first and pay off all your non deductible debt. But if after that, you’ve got more than enough cash flow finance lifestyle you want, then you should be looking at some tax sheltering of excess cash in a couple of these insurance contracts that are out there. So that would be primarily the market under age 40. Okay, all right. So once sarcoids-
Sarah Widmeyer 12:51
Well, so, so then, so that’s disability insurance. But I’ve also heard a lot about critical insurance or critical illness insurance. What’s the difference between disability insurance and critical illness insurance? And what would be suitable for who and when?
Jeff Fray 13:06
Yeah, well, again, it again, if you have minimal net worth, and you’re just starting to get established, disability insurance would be the first, ugh, critical illness would definitely be part of the conversation, because what disability insurance does is it ensures the cashflow of the earnings that you make, right, so if you’re making $350,000 a year, you can insure a couple 100 grand of that to make sure that the wheels don’t fall off your business, your practice, whatever. Critical illness insurance is a very specific insurance that came about about 25 years ago. And it covers off the risks of getting a life threateningdisease, right? Cancer, diabetes, ugh heart problems. And so it pays when you uh, unfortunately, encounter one of these debilitating diseases, and there’s a schedule of anywhere from 15 to about 24 for most companies. Generally, it pays out a lump sum after diagnosis 30 days after. So, you know, what we do is we prioritize what the most risk is for the client first, and if it’s income protection, then we’re talking about disability. If after addressing that risk, lifestyle needs are made. And uh, then we take a look at critical illness because it is a cost. And there is a balance to be struck here.
Sarah Widmeyer 14:18
Jeff Fray 14:19
So you know, it’s trust the process again, even with clients that don’t have big net worth, you got it. There’s certain products and insurances you buy at certain times in your life to address needs, but it’s all very personal. You know, what you may need is going to be a lot different than someone 20 years older than you and someone 20 years younger. That’s why you need to deal with a life insurance professional because their job isn’t to sell you. Their job is to protect and mitigate risk. That’s a need and to ultimately find out what you want. And those are the two parameters that we like to work from because then seldom do you walk away having said “Hmm, that Fray guy was a real smooth talker and I think he just sold me something I don’t need or want.
Sarah Widmeyer 15:00
Well that Fray guy is a real smooth talker, that’s besides of point. Okay, so I’m going to switch gears now for a minute. And um, I’d like to understand how life insurance can help in our pursuits of philanthropic aspirations, because I know that it’s being used increasingly more
Jeff Fray 15:20
Sarah Widmeyer 15:20
to do that. So tell me how that’s done?
Jeff Fray 15:22
Well, again, it’s trust the process, trust the math. If you were charitably oriented, we’re going to find out it out in our conversation with you and what motivates you and what you want to do. And it happens to be one of the fastest growth areas of the life insurance market because it can multiply the effectiveness of a gift by that I mean, if you were giving a dollar to a charity, we could maybe magnify that gift by four to seven dollars.
Sarah Widmeyer 15:46
Jeff Fray 15:46
So it’s, again, trust the process, trust the math. So we go through a very, you know, steady process to determine “Well, do you want this gift to be bequeath upon death? Do you want it from the estate? So we have those kinds of questions, as most clients want to be able to give charitable foundations money now, but with a nice bequeath at the end. Okay, well, let’s talk about that. So if it was determined that you want to leave a $5 million gift to the Heart, Heart and Stroke Foundation, because it’s an issue with your family, we just do a shop and say, look, here’s what we can do that, you know, 50,000 a year, for instance, you wanted to give to charity, we can turn that into a $5 million dollar bequeath upon your death. And here’s how that works. And again, Sarah, it’s, it’s, it’s not sold, it’s what do you want to do, and trust the math. And if the math works, then maybe you take part of what you’ve got your mark for char, charitable cause or foundations, and we use a life insurance contract to do that. And there’s various ways to set it up, you can set it up, so you get a tax deduction on that every year, you can set it up so that the state gets a tax deduction at death, if that’s what you want to do. So it’s the fun part of the business, if you will, even though we’re talking about our demise, we’re all going to get there. But from a charitable standpoint, and the mass standpoint, you can get very creative and have some fun in the process by doing the right thing for something you really care about.
Sarah Widmeyer 17:27
So we’re coming to the end of our time together. And I’m wondering if there’s any other messages or closing thoughts that you’d like to share? I certainly heard trust the process, trust the math. Um, insurance is a tool that can be used at different points in your life to achieve different things depending on your situation. Anything else you’d like to add?
Jeff Fray 17:52
Well keep an open mind. And the process what I’m talking about what you’re familiar with, is a financial planning process. Um, if I do a plan for you, or our firm does, and we find out that there’s no excess cash, then me showing you disability critical or life insurance is of no use to you, you have some other issues that need to be addressed. So the key is, is to deal with professionals that do the process. Because if you do the process, you can’t go wrong, because I’m going to find out what matters to you. And we’re going to tell you where you are in your financial progression through life. And we’re going to find out what the risks are and address them. And then we’re going to find out what you want what motivates you long term. And we may have some creative ideas to help complement that because that’s what it is. In the high net worth market, they don’t need life insurance. What they want is to give to charity, to pay tax on a cost effective, tax efficient manner. And you don’t need a salesperson for that. You need professionals that know their stuff. So all I can say to clients is “Don’t close your mind to the opportunity, but to protect yourself, deal with a firm that trusts the process, and trusts the math, and you will be curiously or happily surprised at how well that all works out for you.
Sarah Widmeyer 19:16
That’s great. Thank you so much. Thank you Sarah. If you’d like to learn more about the role that insurance can play in a larger wealth strategy, you can visit our website for articles and videos on the topic or speak to a Richardson GMP advisor. Remember to subscribe to conversations on wealth wherever you get your podcasts and follow us on LinkedIn for a broad range of information on wealth strategies. Join us again next time.