Like many business owners, "H" didn't think he needed life insurance, and was wary of anyone who suggested differently. Then he realized it could relieve his heirs of a big tax liability after his death.
My story begins, like many such stories, with a referral. In this case the referral came from a son of a prospective client whom I will call “H.”
The son asked if I would meet with his father, a successful entrepreneur, to discuss his estate planning and life insurance. He said he was impressed that I don’t sell insurance, but explain insurance in context, then leave it to the client to buy insurance if he chooses. The last thing he told me was that “Dad is very insurance-averse.”
When I met H, the first thing he told me was that if I was going to try to sell him a bunch of insurance, “we should part company now.” I responded that I just wanted to get to know him, to understand how he got to his current successful situation, and to determine why he was insurance-averse, although not quite in those terms.
H explained his background and businesses and his ambitions regarding his family in relation to the businesses. H’s family consists of a wife and two sons. His businesses employ professional management. They are growing organically and through acquisitions. H told me the current estimated value of his main business, his desires for the businesses after his death and provisions included in his will for his wife and sons. He told me that based on his parents’ longevity, he expects to live into his 90s.
Pulling out my financial calculator, I asked “What is your business growth rate?” H offered a number. I informed him of the estimated value of his business at his age 90, based on his current business value and its growth rate. I explained that for Canadian tax purposes an individual is deemed to have disposed of his capital property at fair market value immediately before death. I estimated tax for H in his year of death. I then said “Add British Columbia probate fees, and assuming no remedial planning were done, then here are the tax plus probate costs. What would you like your family to sell to pay these tax and probate liabilities”?
Admittedly, if his holdings were bequeathed to his wife, or to his wife in trust, the tax could be deferred until her death. But given his growth assumptions, the number would not get any smaller.
After a few moments for him to consider what I just showed him, I explained that life insurance would cover the tax costs related to disposition of his business. I said, “H, you are not insurance-averse; you love insurance. When you do not have life insurance, you are self-insuring. That is where you are right now. Therefore you must like self-insuring.”
H acknowledged his tax predicament, including the fact that his estate will not be readily liquid to fund the tax at that time.
With a few calculations, I compared the discounted present value of the tax and probate liabilities at age 90 with the discounted present value of the estimated cost of insurance for H. Clearly, offloading the tax and probate costs onto the insurance industry was much more cost-effective than self-insuring.
H responded that he appreciated my candor. He said that when I showed him the effects that his resistance to insurance may have on his immediate family, his businesses and others in the unplanned death context it was revealing. He now views life insurance differently.
Derek Dalsin is an associate with Sorrell Financial in Vancouver.