Sophisticated financial advisors typically seek to address each of their clients’ unique wealth and succession planning challenges in a customized way. However, the wealth planning industry has often employed a “one size fits all” approach, with insurance products and structures being overlooked as a tool to address complex wealth planning matters. One reason may be that advisors are frequently unaware that the component attributes of insurance can be disaggregated and applied on an individual basis to address specific issues, such as a client’s desire for retirement income or wish to make future charitable donations.
Advisors understand that no two clients are exactly the same: some want a guarantee, some want access to alternative investments, and others want to minimize the risk of outliving their money. By disaggregating the different attributes of insurance—specifically its favorable tax treatment, the benefits of risk pooling and the access to unique investments it can afford—and applying only the relevant attributes to a particular client’s needs, advisors can provide more tailored and higher quality services, and improve client outcomes. This is especially important at the moment given increased market volatility and a corresponding desire among clients for certainty of their wealth planning outcomes.
Current tax deferral and the potential for tax fee transfer of policy value at death are generally the most widely recognized benefits of investing via insurance structures. Investments made within an insurance policy can grow and their value can ultimately be transferred on a tax efficient basis. These attributes of insurance can enhance clients’ charitable planning objectives, for example through a bequest of insurance proceeds to a charitable organization.
An equally important attribute of insurance products is risk pooling. By combining the unknown mortality and longevity risk of a specific individual with the mortality and longevity risk of a larger group having a known risk dispersion, insurance achieves a reduction in the average cost of insurance for each individual. The benefits of risk pooling can also apply to the investment component of insurance products, as where a large number of individuals participating in an investment strategy pool their capital to invest in bonds for downside protection and an equity strip for potential upside return capture.
Finally, the ability to allocate to alternative investments via insurance structures is attractive to many investors in today’s markets, given the potential for portfolio diversification, the absence of correlation to equity markets, and the resulting possibility of downside protection. Moreover, accessing an alternative investment fund via a pooled insurance product offering can effectively lower the substantial minimum capital requirements that would ordinarily apply if such investment were made directly. Investing through insurance structures can also reduce an investor’s administrative burdens otherwise be associated with direct investments.
As the need for customized wealth planning solutions increases, advisors should consider the disaggregation of insurance products and their component attributes, and the application of those attributes to address specific planning challenges. Whatever your clients’ objectives, insurance products and structures and can often assist in achieving them more efficiently and effectively.
John Fischer is Executive Vice President & Head of Distribution at Lombard International
