Nearly 17 years ago, I obtained my insurance licence in British Columbia. There was a variety of courses and exams through both the Canadian Securities Institute and British Columbia Insurance Council.
Many may be surprised that when I am dealing with insurance I am acting as an insurance adviser through a different division of Scotia Wealth Management called Scotia Wealth Insurance Service Inc.
When working as a portfolio manager or senior wealth adviser, I wear a different hat and have separate business cards and separate files — this division of Scotia Capital Inc. is simply called ScotiaMcLeod.
In some cases, I have clients for whom I am solely acting as an insurance adviser. I also have clients where I am acting solely as a portfolio manager or senior wealth adviser. When I initially work with clients through ScotiaMcLeod (a division of Scotia Capital Inc.) who inquire about insurance, I must obtain their consent to share the information from this division with Scotia Wealth Insurance Service Inc., and vice-versa.
Not all wealth advisers and portfolio managers have their insurance licence — only those who have completed the prerequisites courses, passed the exams, and have completed the annual requirements to maintain their licence in good standing.
Professional checklist
We ask all new clients to complete a professional checklist. One section of this checklist specifically covers insurance. We will ask: “Do you have any life insurance?” If so, we also ask: “What type of insurance (term, whole-life, or universal-life)?” We will want to know the frequency of premium payments (monthly, annually) and how payments are made as this impacts cash flows. We will obtain details on the life (lives) insured and the beneficiary (beneficiaries).
In addition to life insurance, we will inquire about any living benefit type of insurance, including disability, critical illness, and long-term care insurance.
Investment insurance products
Insurance advisers are also licenced to discuss and sell investment insurance products, such as segregated funds, guaranteed insurance contracts (GICs), and annuities. In fact, if someone has an insurance licence only (that is, they are not dually licensed) they are only permitted to sell these types of insurance investments. They can not sell equities that trade on a stock exchange, mutual funds, etc.
Agent of record
In addition to obtaining details of the policies, we will request a copy of each policy and the latest statement to have for our insurance files. Typically, the agent’s name, firm’s name, mailing address, and phone number are on these documents. We will also discuss when the relationship started with the previous agent and whether they still have contact with the individual.
In many cases, the agent has retired, or they no longer have a relationship with them. We discuss changing the agent on record in these situations. To change the agent on record, for some insurance policies, we must have a contract with the insurance company where the existing policy is held. The benefits of being the agent on record is that we obtain copies of the policy statements, can request in-force illustration, and assist with investment choices (if applicable).
It is very important to periodically review one’s insurance plans to ensure they are arranged to your advantage. Such things as making sure beneficiary designations are up to date and ensuring the policies current design is optimized to help accomplish your goals.
Needs analysis
Gathering the above information is really the first stage when talking to clients about insurance. The second stage is doing an insurance needs analysis. For many of our clients they don’t have an insurance need. Others may have a need; however, they have never sat down and determined what that need is — this is the second stage.
In many cases, new clients don’t know if they are under insured, correctly insured, or over insured. To obtain better clarity in these situations we will always recommend us doing a comprehensive financial plan, part of which will include reviewing any existing policies and outlining insurance planning needs, if any.
Senior insurance consultant
When new clients provide us copies of older insurance policies that are currently in place, they often ask our opinion about the policy or policies. They may not know if the policy is worth keeping, or if a better option exists.
We will obtain details from the client for why the policy was originally taken out and whether that need still exists. We will also compare the coverage to the current needs analysis. Lastly, with the clients’ consent, we will forward details obtained and copies of the policies to oursenior insurance consultant to provide comments.
The senior insurance consultant’s primarily role within Scotia Wealth Insurance Service Inc. is to support wealth advisers and portfolio managers within ScotiaMcLeod. The senior insurance consultant does insurance 100 per cent of the time and together we work with making sure clients’ insurance needs are taken care of.
Insurance planning
Each one of our clients are at different stages in their lives; therefore, they have different needs and different circumstances. The focus is to provide customized solutions for each client. Despite each client having their own unique scenario, there are two general categories of insurance planning: risk management and wealth management.
When the topic of insurance planning comes up, most people won’t immediately experience a warm glowing feeling. Having worked with clients in this area for close to 20 years, that is exactly what the outcome of the conversation should ultimately be. The reason is that whether one is doing insurance planning for risk management or wealth management needs, the reason tends to be the same—they care deeply for their loved ones.
Risk management insurance planning
As we build our wealth in our earlier years, liabilities are generally high and capital reserves are low. A young family, a mortgage, all result in making our financial success of primary importance; however, there are factors beyond our control. A premature death, disability, and/or critical illnesses can potentially destroy one’s finances.
Risk management planning is straight forward in that we look at the potential financial fallout should an insurable risk occur and then ask the question: How much of this risk do we want to transfer to an insurer? Using insurance products, you can transfer some, part, or all, of certain risks.
There are two general steps to risk management planning:
1) Identify the risks that relate to a client’s situation and how much they are wanting to mitigate.
2) Designing product solutions. Here we put on our broker hats and since we deal with all the major insurances in the country; we can design the best solution at the best price. The types of products used are as follows: term life insurance, disability insurance (income protection), and critical illness insurance (health protection). A program can contain one or all these coverages depending on what we are trying to accomplish.
Wealth management insurance planning
Once one has acquired enough wealth so that the afore mentioned financial risks are not risks anymore, insurance planning takes on a whole new dimension. The suites of products used are completely different, as is the value proposition.
As we acquire more wealth in life, we still have problems — they are just nicer problems, such as taxes. For this reason, permanent wealth management insurance products are designed to be very tax efficient, which results in a totally different value proposition, as compared to risk management insurance products.
To illustrate this, we will look at a couple of different scenarios where permanent insurance provides tremendous value during a client’s lifetime, as well as upon their passing.
High net worth individual
The question often comes up as to when one should start to consider adding permanent insurance into their holdings. The answer is straight forward, after you have eliminated all non-deductible debt, maximized all your tax deferral opportunities (RRSP, TFSA, etc.), and have surplus capital and cashflow.
For the high net worth individual, the benefits of a well-designed permanent insurance strategy are twofold:
1) Capital can be put into these plans and grow tax-exempt (within certain limits).
2) Upon the insureds passing the death benefit is paid tax free.
Simply put, if you factor in a 53.5 per cent top marginal tax rate on investment returns and compare it to a tax-exempt vehicle (no income tax), we can potentially double or triple the amount of capital available over time, as compared to a traditional investment at five per cent or six per cent.
Depending on what our client’s situation is and what we are trying to accomplish, these advantages can be very powerful.
Successful incorporated business owner
For the successful incorporated business owner, the point at which they should consider permanent insurance planning is very similar to the high net worth individual, with one exception. They should have eliminated all non-deductible debt, maximized all their tax deferral opportunities (RRSP, TFSA, etc.), and have surplus capital and/or cashflow. For the successful business owner, the surplus cashflow is resulting in surplus capital in either their operating or holding company.
For the successful business owner, the benefits of a well-designed permanent insurance strategy are at least threefold or more:
1) Capital can be put into these plans and grow tax-exempt (within certain limits) in the corporation.
2) Upon the insured’s passing the death benefit is paid tax free.
3) Corporate tax treatment of a life insurance death benefit allows for much of the benefit to be withdrawn as a tax-free dividend.
Using ÎÚÑ»´«Ã½ corporate tax rates of 50.67 per cent on passive income and a 48.89 per cent non-qualifying dividend rate; over time the tax advantages of using insurance can result in two to three times more capital available for estate planning needs, again as compared to a traditional investment at 5 per cent or 6 per cent, all while reducing one’s annual tax bill.
Finally, since the permanent policy becomes a valuable capital asset on the corporation’s balance sheet, it can be leveraged to take advantage of investment opportunities, as well as satisfying potential income needs. This again, can result in very beneficial financial advantages over time.
Underwriting insurance products
For all life insurance products, once we have crafted the best insurance strategy, we now must find the very best product solution. Again, we must put on our insurance broker hat, go out into the marketplace, and find the best product and insurer to meet our client’s needs. This step in the insurance process is called underwriting.
When applying for an insurance product the insurer must ascertain the potential risk of taking on a client. They do this by going through a due diligence process involving questionnaires, lab tests, doctor’s reports, etc. Generally speaking, the insurer will cover all the costs for this. Even though this may sound daunting, it really only requires an hour or so of our client’s time and the rest happens behind the scenes.
Once the insurer has completed their underwriting process, there are several potential outcomes. The offer could be:
1) Standard: their best starting rate
2) Preferred: lower cost (only available on certain products)
3) Rated: higher cost (due to health history, lifestyle, etc.)
4) Declined: they can’t make an offer due to the client’s risk profile
When a client would like to discuss insurance planning, whether it is for risk management or wealth management, we are able to set up a meeting either in person or on Microsoft Teams to have an initial three-way discussion.
An important role our senior insurance consultant plays is making sure that we obtain the very best offer available in the marketplace for our clients. In short, the best possible product, at the best possible price.
Kevin Greenard CPA CA FMA CFP CIM is a senior wealth adviser and portfolio manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email [email protected], or visit .
