Many financial advisors assist their clients in making decisions about life insurance to align with their overall financial goals. While advisors often have resources for life insurance products for their clients, they typically lack the capabilities to provide sophisticated in-depth analysis that truly reveals the risk mitigation potential or vulnerabilities in those life insurance policies.

Indeed, life insurance plays a crucial role in risk management for high-net-worth individuals. As such, financial advisors should consider the impact of life insurance on risk mitigation as part of their overall wealth management approach. A powerful tool for risk mitigation, life insurance can provide a tax-efficient method for wealth transfer. What’s more, HNW clients often have complex asset portfolios that may include illiquid investments. Life insurance offers immediate liquidity upon the policyholder's death, allowing heirs to access funds without having to sell assets at inopportune times. This liquidity can be crucial for covering estate taxes, debt repayment, or other expenses, preserving the overall value of the estate. 

For HNW clients who own businesses, life insurance can also be instrumental in ensuring smooth business transitions. Certain types of permanent life insurance policies offer cash value components that can serve as additional investment vehicles that provide tax-deferred growth potential and allow policyholders to borrow against the cash value for unexpected expenses or retirement income.

Life insurance represents one of the primary risk mitigation components when building a financial plan. And yet, research shows that 80% of in-force policies are problematic. Without a policy analysis, these policies can incur maximum costs with minimal risk management benefits for the client.

How Life Insurance Becomes a Potent Risk Management Tool

Leveraging life insurance for risk management requires a level of expertise that many financial advisors may not readily have on hand. This gap in capabilities can result in missed opportunities for financial advisors, particularly when it comes to attracting and retaining HNW clients who want and need a more sophisticated wealth management approach. Let’s examine a hypothetical client scenario to see how this potential opportunity plays out.

Ray, age 47, has net worth of $32M that includes a consulting business estimated at $22M and an investment portfolio valued at $10M. A prudent and fiscally responsible HNW individual, Ray holds multiple life insurance policies but has limited understanding of the structure and purpose for each. What’s more, he’s concerned about the significant annual costs and wants to better understand how these policies are structured to mitigate risks. 

Specifically, Ray is interested in analyzing his four current life insurance policies to determine which meets his risk mitigation objectives and how he should best address those risks with maximum cost efficiency by using life insurance. In his quest for answers, Ray is referred to Nancy, a financial advisor with some experience in life insurance and a resource for life insurance products at the BD/RIA where she works. 

Since Nancy assumes Ray is not looking to purchase new life insurance policies and doesn’t have the capabilities to conduct the type of analysis Ray is looking for, she isn’t sure how to acquire and serve Ray as a client. What can Nancy do to gain Ray’s trust and confidence in her risk management capabilities, and thus his business?

Partnering with Risk Management Experts to Build Advisory Capabilities

Clearly, Ray is looking for a financial advisor who can help him understand and optimize his life insurance policies and address his risk-management goals. By demonstrating these capabilities, Nancy gains a significant competitive advantage in the right to win Ray as a client. But Nancy, like many financial advisors, does not have experience with the intricacies of life insurance policy design and how to ensure policies are structured to meet clients’ specific risk-management objectives.

To bolster her risk management capabilities to better meet Ray’s needs, Nancy collaborates with a partner who offers in-depth risk management and life insurance expertise and resources. This partner works with Nancy to take a multi-phased approach to Ray’s needs, starting with risk management mapping. 

Phase 1: Risk Management Mapping

Nancy meets with her partner’s life insurance expert to present Ray’s four existing policies along with his goals for each policy. The partner team makes sure they understand Ray’s goals for his assets as well as his risk management and longevity funding priorities. Combining analytical tools and expertise, the team evaluates each policy based on illustrations provided by the insurance companies, reviews contractual language, then identifies the risks involved. Nancy and her partnering team present Ray with the assessment of each policy and make recommendations to ensure his insurance policy portfolio is structured to align with the risk management component of Ray’s financial planning.

Phase 2: Economic Analysis — Contractual Constraints, Control, Integration, and Flexibility

Nancy and her partnering team now move on to the next phase of their engagement with Ray: economic analysis. With a focus on the three C’s (cost/purchasing power, capital/earning capacity, and continuation/increased probability for success), Nancy’s partner uses a powerful technology platform to conduct a comprehensive analysis and reverse engineering for Ray’s current policies.

This differs from the traditional approach, in which the advisor works with the life insurance company that provides illustrations, premium and death benefits analysis, and ratings — all of which lack informational depth, resulting in limited disclosures. Nancy’s partner carefully reviews each policy, assesses timelines, and completes in-depth research to evaluate the sustainability. They additionally provide all disclosures under various scenarios. 

Nancy’s partner additionally conducts a comprehensive review of life insurance policies employing a five-step process representing the “Life insurance fiduciary ethos and best practices” doctrine/paper. During the process, the team:

• Conducts an analysis to make sure they clearly understand the client’s goals and objectives, to integrate financial and non-financial issues.

• Develops a strategy to identify risk exposures.

• Formalizes the strategy that best resolves each area of risk.

• Defines and discloses the supporting basis for recommendations and implements them.

• Monitors the policies and delivers summary comments upon policy delivery.

Risk Identification: Life Insurance Fiduciary Ethos 

When it comes to managing and mitigating risk, Ray has multiple options available to him. He can ignore the risk; assume the risk and self-insure; share the risk with partial insurance; or transfer the risk for full mitigation. In developing a strategy for Ray, Nancy and her team must also take into account the possible and potential risks that Ray faces now and in the future in relation to his goals. These include:

Reduction of Assets

• Estate Taxes

• Loss of Employment

• Disability

• Medical Expenses

• Reduction in Business Value

• Income Taxes

Loss of Assets

• Death

• Fire

• Taxes (asset related, such as residence or property lost in default of property taxes)

• Discontinuance of Business

• Litigation

• Bankruptcy

Interest Rate Fluctuation

Illiquid Assets

Family Relationships

• Educational Funding

• Special Needs

• Legacy / Wealth Transfer

Business Relationships

• Business Continuation

• Estate & Asset Liquidity

• Key Employees

• General Employees

Health

• Underwriting Rating

• Unable to Manage Everyday Life

• Functions

Retirement

Social Security and Medicare

Analysis and Recommendations to Mitigate Income and Business Impact

Embracing her partner’s approach to fiduciary analysis for risk management and life insurance, Nancy feels confident in providing the expertise and analysis that Ray is looking for. Nancy explains to Ray that she and her partner will analyze his current policies and premiums, which include:

• Company A — $36,000 AP (Annual Premium)

• Company B — $24,000 AP

• Company C — $49,000 AP

• Company D — $52,000 AP

• Total annual life insurance premiums: $161,000/year

• Total death benefits: $14,000,0000

Nancy recommends that Ray meet with her partnering team and herself to better understand the benefits of risk management. After discussing with the team, Ray understands that his life insurance policies are not integrated and do not address the two principal risks he’s looking to mitigate: loss of income were he to become incapacitated, and impact to his equity in the consulting business were he to pass away. 

Following multiple interviews and dialogues, Ray realizes that he has misidentified his income and business risks while also over-estimating his longevity risks. Based on their discovery and a comprehensive policy review, Nancy and her partnering team issue their recommendations:

• The Company A life insurance policy is not aligned with the risks perceived and is too expensive. 

• The Company B policy is subject to lapse due to escalating premiums needed to address higher costs of insurance than the original projection illustrations provided by the life insurance company at issuance. 

• The Company C life insurance policy seems fine. 

• The Company D policy is too expensive and has rising premiums which will not be reasonable relative to the death benefits. It is recommended to let this policy lapse.

In addition to the above, the team recommends that Ray consider purchasing business continuity insurance.

Having considered these recommendations and found them to be sound, Ray asks Nancy and her team to move forward with implementation. The partnering team assists in implementing the strategies to resolve the identified risk issues, employing the same consistent level of care, due diligence, and fiduciary standard the team applied to their analysis.

How Risk Management Becomes a $10M Portfolio Management Opportunity

Because Nancy has an established partnership with a team who adds risk management and life insurance expertise to her practice, she is able to confidently meet Ray’s request for a comprehensive life insurance policy analysis. Nancy and her partnering team succeed in helping Ray adopt a more integrated risk management approach to evaluating his life insurance policies, and issue recommendations on policies to keep and what new policy(ies) he needs to reach his goals. Pleased with the outcome and impressed by the partnership, Ray is now considering moving his $10,000,000 investment management portfolio to Nancy’s practice.

Financial advisors who partner with experts have a clear advantage when it comes to helping HNW clients leverage life insurance to reach their risk mitigation and wealth management goals.

As part of our advanced risk management advisory services, we consider clients’ current and anticipated risks. Through a multi-phased approach, we define each type of risk and their consequences and evaluate the choices to accept or mitigate these risks. We provide recommendations as to how best to address each risk with the most cost-efficient solution. 

Partnering with Sandro Wealth, financial advisors gain the capabilities, expertise, and confidence to:

• Better understand the risks involved in their clients’ life insurance policies and why the traditional approach to analyzing these risks is insufficient.

• Educate clients about the risks of life insurance policies that impact financial planning and the advantages of taking a risk management approach.

• Offer clients a more advanced, technology-driven, and comprehensive approach to evaluating and mitigating the true risks associated with the client’s current policies.

• Identify and assist with implementing strategies that resolve the client’s concerns about loss of income and business impact.

Bring Your Advisory Clients Comprehensive Risk Management Strategies 

Contact Sandro Wealth Management to discuss integrating sophisticated risk management expertise into your practice.