How life insurance can solve problems unique to HNW clients

Persuading high-net-worth individuals to buy life insurance is not a task for the faint of heart. Many think they don't need it because they have enough assets to cover their financial obligations.

But they can benefit from life insurance -- for reasons that are often different from those of their middle-class counterparts. Two financial professionals recently shared reasons the wealthy should use life insurance and a few approaches agents can use to sell it successfully.

According to W.J. Rossi, a 23-year Million Dollar Round Table member and a partner at Koss Olinger, life insurance is not always a “need” for high-net-worth clients. Many consider it leverage when they are looking to enhance their estate.  If they have a taxable estate, buying life insurance in an irrevocable life insurance trust is typically less expensive than paying the estate tax, he said.

For example, Rossi said, if a high-net-worth matriarch and patriarch die and their estate would owe $10 million in taxes, paying $5 million into a life insurance policy allows them to pay the tax at 50 cents on the dollar.

“This recommendation gets their attention; it is the leveraging of $5 million into $10 million, which many high-net-worth clients may consider a worthwhile investment,” he said.

Another estate planning consideration, Rossi said, is for clients with closely held businesses who need liquidity to pay the estate tax or who own large tracts of illiquid land.

“In these situations,” he said, “it may be better to have a life insurance policy to cover estate taxes rather than trying to sell those assets."

Buy-sell agreements

Additionally, high-net-worth families may want insurance to fund a buy-sell agreement between two partners of a closely held business, Rossi said. And for high-net-worth couples who divorce, the person receiving alimony is well served to get a life insurance policy on the former spouse to protect that income stream.

Another common option, Rossi said, is when one child runs a family business and inherits it.  “Life insurance proceeds can equalize the inheritance for the other child.  We see all these uses of life insurance in financial planning with high-net-worth families,” he said.

Robert Cullen, a 15-year MDRT member and financial advisor at Farmers Insurance, echoed similar sentiments. He said that although every client’s situation is unique, high-net-worth families share common threads.

Life insurance can efficiently transfer wealth to the next generation, provide liquidity for estate taxes and other obligations, and reduce pressure to sell illiquid assets such as real estate or a family business. Also, when properly structured, it can provide a tax-advantaged source of supplemental income through the treatment afforded life insurance under the tax code, he added.

Selling life insurance to the wealthy

What approach do these financial professionals use when offering life insurance to their high-net-worth clients?

“Educating high-net-worth consumers on the options they have while also collaborating with their accountant and attorney on the best options based on their goals and priorities is an important part of our planning process,” Rossi said. “Some strategies become complicated, and clients may want a straightforward approach.

"This type of client values aligning their needs and wants with what is available. At times, with some education, they would just rather pay the tax and not deal with the complexity of planning. What is most important is that the client understands their options. High-net-worth clients appreciate a more consultative approach than a sales approach.”

Cullen’s approach starts with getting to know the client -- their family, their assets, what they’ve built and what they ultimately want their money to accomplish.

“From there,” he said, “I focus on education. Many high-net-worth clients are surprised by the ways life insurance can be used beyond simply providing a death benefit. My job is to help them understand those strategies, work alongside their other professional advisors when appropriate, and determine whether life insurance has a role in their overall financial and estate plan.”

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Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at amseka@INNfeedback.com.