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Why Wealthy Clients Need ‘Advanced’ Insurance Strategies

January 7, 2016

Far too often wealth managers neglect the critical role insurance plays in helping high-net-worth clients accomplish their life goals. Insurance? Isn’t that a passive, straightforward element of any plan? Well, not exactly.

Remember affluent investors have more assets, more liabilities, and much more complex needs for estate planning than likely ever before in U.S. history. All these needs can have a proactive insurance component that adds value to the plan and makes an advisor more valuable to the client.

For example, insurance can serve as the scaffolding that holds the plan together. Clients may present a planning challenge that may benefit from an insurance solution. When this happens, insurance can be considered almost another asset class when viewed creatively.

Core Planning vs. Advanced Planning

Insurance strategies typically will start with the so-called “core” policies, which include property and casualty, health, and basic term life-insurance. But insurance should go well beyond this basic foundation, involving sophisticated product design and institutional implementation. Insurance can be used for tax-advantaged investing, multi-generational wealth transfer, leveraged financing as well as private placement.

Before delving into aspects of “insurance architecture” as we call it, let’s examine the differences between “core” and “advanced” planning. First, core planning establishes the basic building blocks for a family or business. Standalone core planning is fine for many retail clients. For high-net-worth clients, advanced planning establishes or reinforces the core, then customizes additional insurance strategies to meet the unique needs of the individual, family or business.

For instance, one strategy might be private placement life insurance. It’s a variable universal life insurance policy that provides cash value appreciation based on a segregated investment account and a life insurance benefit. This type of insurance can help a hedge fund investor capture tax-free returns.

Another application might be premium financial indexed universal life insurance, or PFIUL. This is a strategy that combines hedged exposure to the S&P 500 index within an insurance policy, with leverage to drive significant tax-free internal rate of return and multi-generational wealth transfer.

PFIUL is a sophisticated strategy that could benefit ultra-high-net-worth families or individuals with $75 million or more in net worth but could be adjusted for a $20-million-net-worth client. Highly compensated employees earning $1 million to $2 million annually and up might benefit from this strategy. Some candidates could be RIA managers, lawyers, hedge fund managers or senior executives in professional services. Three main components contribute to this strategy: legal, insurance, and financing.

Every situation is different and can have a unique creative solution. As an example, we recently developed an advanced plan for a 28-year-old professional athlete signing his first deal after a rookie contract. He also had several lucrative endorsement agreements. His goal was to enhance tax-deductible planning and create a long-term, tax efficient income stream.

We have highly recommended income-focused premium financing and a restricted property trust, or RPT. The primary objective of an RPT is to provide tax favored long-term cash accumulation and income distribution in a conservative vehicle. Each annual contribution is fully deductible by the employer and only partially taxable to the participant.

Ultimately, advisors must recognize that insurance can be used creatively and effectively to protect and enhance wealth, while addressing a wide range of advanced planning challenges.

Advisors who want to transition into advanced planning for wealthy clients can build their team to demonstrate broader capabilities. They will find that demonstrating expertise in advanced insurance strategies is just the ticket advisors need to transition from a mass affluent to a high-net-worth client base.

Such strategies are becoming a trend for advisors who want to have an independent practice while broadening the scope of services their clients require. By knowing and implementing these insurance strategies, advisors can greatly strengthen the value of their practice and long-term client relationships.