Transcript | Insurance: Trust the process

Sarah Widmeyer: Welcome to Conversations on Wealth, hosted by Richardson Wealth, a podcast dedicated to helping Canadians with your total financial picture.

Our approach is unique. We examine wealth through a multi-dimensional lens in order to offer you integrated strategies to grow and preserve the legacy you have built. 

I’m Sarah Widmeyer, Director of Wealth Strategies at Richardson Wealth. 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 Wealth. Thanks for joining me today. Okay, Jeff. So, what's the island? Well, the I word is a word

Jeff Fray: Thanks very much, Sarah. It's a pleasure to be here today.

Sarah Widmeyer: Okay, Jeff. So, what's "the I word"?

Jeff FrayWell, 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 could insure anything you want. You could insure your pet. In the wealth management business, what we're referring to specifically is generally life insurance, disability insurance, critical illness insurance, but the primary one is life insurance, and how it can complement a well thought out and planned wealth plan for a client. And most of us aren't aware of that. 
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 what a client really needs.
But in the high net worth market it's almost always about what the client wants. And those don't come about by answering a questionnaire or filling out 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: I'm going to just jump in, I find that really interesting because insurance, 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. But there's also the thought that it's an expense, and it's a bill I gotta pay. And so buy the most that I can get for the least amount of money. 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... It's more about using it as a tool. For creating wealth, for transferring assets, and it's a different way of thinking about insurance. And I think that that's an important distinction.

Jeff FrayThat'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. An aunt or uncle or somebody in the business caught you when you're 25 just out of  school. "You need to buy 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 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. We're 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, how wealthy they are or not. But when you drop the I word at any point in a conversation, it closes minds. And they've already got a preconceived notion: 1. 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. 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 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, 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: So tell me about that, because I think one of the 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 FrayWell, let's carve off one particular instance here. Let's say you're the owner of a closely held private company and that company's been 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? in Canada we don't call it an estate tax, its capital gains, deferred gains, those all come into 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, that is a big tax burden at the end. So you have to use cash from somewhere. Other assets, cash you've got. For instance, 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 $10 million 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 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: So the math - I had someone explain it to me one time that it's -  buying insurance is like buying 100 cents for pennies on the dollar.

Jeff Fray: That's exactly right.

Sarah Widmeyer: And it's an asset that flows outside of the estate. So it doesn't get held up in probate, 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 FrayAnd 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 have 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. 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 particular, 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 to a point of are the beneficiaries named properly. If the company owns the policy, a lot of mistakes are made where they name personal beneficiaries. 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 into the company and through a little notional thing call 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: So let me take you back a step now. So we've talked about business owners, we've talked about ultra high net worth with big tax issues. Depending on your life stage, so where you are in your life, I would imagine the different types of insurance are better suited for your situation than others. Can you give me a primer on "I've just graduated. I'm a doctor, and I've just started to build my practice. I've got huge amount of debt. But you know, things will look much better in 10 years." What kind of insurance should I be considering?

Jeff FrayWell, for professional, in particular, doctors, dentists, lawyers, disability protection against income is number one,

Sarah Widmeyer: So protecting my income. 

Jeff Fray: Absolutely, it's the biggest asset they have. Not much of a net worth, maybe they've got school debt, they 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, 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 they got some network 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 TFSAs and RSPs first and pay off all your non deductible debt. But if after that, you've got more than enough cash flow to finance the 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.

Sarah Widmeyer: 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 FrayYeah, well, again, if you have minimum net worth, and you're just starting to get established, disability insurance would be the first. Critical illness would definitely be part of the conversation because what disability insurance does is it ensures the cash flow the earnings that you make. So if you're making $350,000 a year, you can ensure a couple hundred 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 threatening disease: cancer, diabetes, heart problems, and so it pays when you 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. What we do is where you 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, then we take a look at critical illness, because it is a cost. And there is a balance to be struck here. So, you know, it's trust the process again, even with clients that don't have big net worth,. There's certain products and insurances you buy at certain times of 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, that Fray guy was a real smooth talker and I think he just sold me something I Don't or want.

Sarah Widmeyer: Well that Fray guy is a real smooth talker, but that's besides the point.
Okay, so I'm going to switch gears now for a minute. And I'd like to understand how life insurance can help in our pursuits of philanthropic aspirations, because I know that is being used increasingly more to do that. So tell me how that's done.

Jeff FrayWell, again, it's trust the process, trust the math, if you were charitably oriented, we're going to find 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 $1 to a charity, we could maybe magnify that gift by $4 to $7. So it's, again, trust the process, trust the math. So we go through a very steady process to determine, what do you want this gift to be bequeath upon death, do you want it from the estate? So we have those kind 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 and 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 $50,000 a year, for instance, you wanted to give to charity, we can turn that into a $5 million bequeath upon your death. And here's how that works. And again, Sarah, 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 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 math 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: So we're coming to the end of our time together. 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. 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: Well, keep an open mind and the process what I'm talking about what you're familiar with is a financial planning process. If I do a plan for you or our firm does, and we find out that there's no excess cash, the 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 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 and 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 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'll be curiously or happily surprised at how well that all works out for you.

Sarah Widmeyer: That's great. Thank you so much.
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 Wealth 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.

The opinions expressed are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Past performance may not be repeated. Richardson Wealth Limited is a member of Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.