It is no secret that the private wealth industry favors professionals over their wealthy clients. This structural phenomenon translates into a sizeable percentage of the wealthy being poorly served. However, the scales are slowly moving in favor of the wealthy as more and more embrace the best practices of high-performing single-family offices. At the same time, an expanding cohort of leading private wealth industry professionals is helping to empower the wealthy to make better-informed and better-aligned financial decisions.
One area where a large percentage of the wealthy are failing to optimize their financial lives is when they are purchasing life insurance to cover estate or inheritance taxes. According to Frank Seneco, president of the advanced life insurance planning boutique Seneco Global Advisors, “Life insurance can, and often is, a very effective way to pay estate taxes. The problem is that there are often times when the life insurance policies, especially for larger amounts, are not structured to maximize value. Another serious complication is not skillfully integrating life insurance with a wealthy client’s estate plan. Consequently, one of the biggest issues we see is that many wealthy clients purchase too much life insurance for their needs. At the same time, they’re commonly buying the wrong policies, which, interestingly, pay the highest commissions.”
Again, life insurance regularly has a role in paying estate or inheritance taxes. What is critical is for the policies to be supportive of the desired client outcomes, and this is often not the case.
According to Homer Smith, founder of Konvergent Wealth Partners, and co-author of Making Smart Decisions: How Ultra-Wealth Families Get Superior Wealth Planning Results “A pronounced reason for the wealthy being oversold, often wrong, life insurance policies is the limitations of the private wealth industry professionals they are working with coupled with, the allure of undeniably large commissions. A superior approach is to empower the wealthy to make smart decisions. In this case, it’s about showing each wealthy family the various solutions, including the permutations, so that they can make well-informed decisions. For example, a billionaire family we worked with could cover their estate taxes in seven different primary ways, plus all sorts of combinations of strategies. After we ensured they understood their options, including their advantages and disadvantages, they decided on a plan that did not include life insurance.”
One of the best ways for wealthy families who are uncertain of the strategies, including life insurance, being proposed to them to pay estate or inheritance taxes is to get a second opinion. To get the best outcomes, the wealthy family gets a second opinion concerning the viability and mechanics of the recommended life insurance policies and how the life insurance fits into their estate plan.
When wealthy families already have life insurance, second opinions can be beneficial. “There are many times we find wealthy families have purchased excessive amounts of improperly structured life insurance,” says Smith. “Many times, we’re able to help them modify their estate plans, including their life insurance, to get them superior results much more cost-effectively.”
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.
