Your clients trust you to manage their wealth, and while your primary focus is on their investments, there are other circumstances that may impact their financial well-being--their insurance needs, for instance. But there is a lot more to the insurance needs of the very wealthy than just anticipating lawsuits, losses and other liabilities. Not only does the proper insurance help them to keep what they have, but it can also be a means to generate more money, provide needed liquidity, and assist in the intergenerational transfer of assets.
Insurance may not be your forte--and it need not be. After all, as wealth managers you undoubtedly rely on experts in other areas to help you do the best job possible for your clients, and insurance should not be an exception. Some insurance tactics may help you help clients to protect their assets and even to grow them.
Liable to Pay Off
Don Soss, chief underwriting officer for personal insurance at Fireman's Fund, tells of a product his company developed for the ultra-high-net-worth (UHNW): group excess liability insurance. Fireman's Fund offers both admitted (filed with the state) and nonadmitted (unfiled, unregulated) policies. "Sometimes you have to go to that [nonadmitted] market for the UHNW to customize a product to satisfy their needs," Soss explains. "On the admitted side the product is filed with the state and has a filed rate, but if you have a unique situation, then you have to go to nonadmitted."
Soss adds that often, admitted policies will grow out of a need originally satisfied by a nonadmitted policy. While Fireman's Fund prefers to sell admitted policies, Soss says it may develop a nonadmitted product for a client and subsequently find that the need for it is so great that it pursues admission. "That's kind of common," he says. "We test things that are not available to get a feel from the losses and customer need, and then file it."
Currently becoming standard after growing out of a nonadmitted policy, group excess liability insurance offers coverage to all members of a group--be it an employer, a family or an association. There is one master policy, but each group member receives an individual certificate while still benefitting from group pricing. "An employer may offer [such a policy] as part of the benefits package," says Soss, "or they might pay for it. There's set pricing and no underwriting."
Private Placement Life Insurance
Sam Aspinwall, a CFP and senior case manager for Wealth Solutions at Raymond James & Associates, explains how PPLI can--literally--pay off for UHNW clients. Originated within the institutional money manager community, private placement life is used to improve a portfolio's overall tax efficiency, serving more as an investment vehicle than as the insurance policy that it is. In the institutional sector, the goal was to avoid taxes while allowing assets inside managed accounts to compound faster and therefore increase assets under management. In a portfolio that includes investment managers with high-turnover, or high-profile hedge funds, says Aspinwall, or for a trust--particularly an exempt asset trust, with a manager looking to maximize the assets of the trust--PPLI can be extremely helpful. PPLI has gone far beyond its institutional origins, Aspinwall adds, since attorneys, CPAs and broker/dealers are now using it. It is not the forte of the retail life insurance channel, since there is no surrender and no commission on the product: It's a low-cost insurance product wrapped around an investment portfolio.
What makes PPLI different, says Aspinwall, is just that--institutional pricing and costs that are typically far lower than commercial variable universal life. PPLI takes an existing investment platform and puts it in an insurance wrapper so it has the same investment execution but makes that execution tax-free. With proper structuring, says Aspinwall, it also allows cash flow "down the road for borrowing, and the beneficiary has the ability to receive a tax break." A retail VUL policy typically has a much higher death benefit, he adds, and typically also requires premium payments over a much longer time frame. Instead, PPLI offers the absolute minimum death benefit allowed by IRS code, and the premiums are much larger over a much shorter time frame. Of course it has to meet the definition of life insurance in IRS Code 7702, because it is life insurance, but it is positioned more as an income tax-management tool for an investment management execution strategy that is already in place.
PPLI requires a minimum of five investments, with no single investment representing more than 65 percent of the account's value. If the policy does not comply, Aspinwall adds, the tax benefits of life insurance will be lost. The advantage, however, is that those tax benefits allow cash benefits to accrue faster than they would in a taxable arena inside the owner's general estate or in a trust; compounding is faster. The death benefit, says Aspinwall, "is convenient, but...that's not why they buy it."
Another advantage of PPLI is that the cash value within the subaccounts is fully protected from the insurance company's creditors--a vast difference from the terms of a whole life policy whose benefits are subject to creditors if the insurance company becomes insolvent. And one more reason for wealth managers to look into PPLI for their clients is that the vehicle can offer creditor protection, depending on their state of residence. Of course this can be very attractive to clients, adding as it does another layer of protection for their assets.
While PPLI is used in estate planning for family limited partnerships and dynasty and offshore protection trusts, it is seen generally as an income-tax management tool inside the estate of an investor. Says Aspinwall, "The upside in cash value is significant. It's usually a few years until it breaks even because there are upfront costs, but 10, 15, 20 years out, the return on cash value significantly outperforms the after-tax rate on a portfolio--especially the more they use tax-inefficient managers."
Compensating for Age and Assets
An additional challenge for the UHNW--particularly older clients and those with extremely high assets--is running up against limits to their ability to transfer wealth through gifting. Barry Glassman, senior vice president of Cassaday & Co., an independent investment advisory and financial planning firm in McLean, Va., explains that under current law, an older married couple with say, two children, will only be able to gift a total of $48,000 to those children annually. If the couple has a very large estate to pass on or has already used up their lifetime gifting exclusion, what remains will be a large amount of money subject to estate tax--unless it is moved to the next generation in another way. This, too, can be dealt with through insurance, Glassman says. One method is through funding an ILIT, or irrevocable life insurance trust, by loaning money to the trust to fund premiums on a policy that will provide money` for wealth transfer at death.
David Wexler, of Wexler, Greenberg and Eig LLC, an insurance brokerage and consulting firm in Bethesda, Md., further explains the process. An insurance trust can be financed three ways: via gifts, loans, or sale of property. If a client is unable to fund it another way--often people who are in their 60s or 70s fit this profile--the client can lend money to the ILIT to fund an annuity policy, payable in a year, and hold back the first year's premium from the loan, using it to buy the policy. Each year the yield from the annuity produces an arbitrage amount that can be used to finance an insurance policy. Because the revocable financing comes from loans--not gifts--it is not subject to the generation-skipping tax (GST). Whatever is loaned to the trust will be pulled back into the estate, but, adds Wexler, "there will always be more insurance than there is loan," because premiums are being paid every year with the proceeds of the annuity.
Safe House
Of course, making money is not the only objective of insurance. Wealthy clients often have unique needs that make their coverage somewhat more intricate.
Al Messina, managing director at Silvercrest Asset Management Group LLC, in New York, knows his UHNW clients well and understands both their needs and their inclinations. Messina says that one of their tendencies is to self-insure against catastrophes, both because they can afford it and also because the returns on insurance premiums can be higher if the money is invested than if the insured were to make a claim. That said, however, he tells of an UHNW client who formerly self-insured his homes--one on the ocean in St. Croix and another on the ocean in South Carolina. In 1989, Hurricane Hugo hit "not only in one place but the other," and there was enormous damage to both homes. Now, he says, the client has his homes insured--"maybe protecting himself from a double whammy again." It was one of the more interesting examples, he says, of how his clients look at insurance and how they react to it.
Houses can be a major area of concern for the UHNW, despite the fact that they may think of such coverage as fairly simple--albeit for larger dollar amounts. But the difference isn't just in magnitude. Take the case of one UHNW client with some 50 acres of land in Virginia who just finished building the "ultimate dream home" there. According to Soss at Fireman's Fund, the house is "the ultimate fire-resistive" house, with state-of-the-art security. However, it shares those 50 wooded acres with other homes owned by the same client; in all there are 16 of them, from an old primary multi-million-dollar residence to "a $200,000 log cabin that a fire truck can't get to--all at the same address," says Soss. The exposure is so varied, he says, that it's very difficult to insure on one policy. Fireman's Fund is exploring different ways of providing coverage that include, among other possibilities, splitting off the main home onto a separate policy and keeping the others together on another. Exotic situations like this, says Soss, are the kinds of things that his company deals with every day.
As another example, he cites the case of a multibillionaire client who had homes throughout the U.S., and wanted one policy to cover them all. "We formulated that for this individual," says Soss, "and then found there were more like him." He notes that this client had the sophistication to understand that a nonadmitted policy is not a bad thing, even though there are no state guarantees.
The multibillionaire got his coverage, and Fireman's Fund received a new admitted policy out of the experience. "The one we admitted is a blanket property policy and is a good product for individuals or families with multiple homes. We can put up to 50 homes or more on one policy," says Soss, adding that coverage can be negotiated based on what the client wants or needs so that every home covered by the policy will have the same terms and conditions. He points out that one issue particular to the UHNW is dealing with a multiplicity of state regulations and different contractual terms. Multistate possessions draw in multiple jurisdictions and regulations. "From an administrative standpoint, it's a nightmare," he says, but with one policy and similar terms, things can be simplified--while still accommodating such desires as a smaller deductible for a smaller home among the properties covered.
Marlene Y. Satter is a freelance business writer who can be reached at harpwriter@verizon.net.
