Most high-net-worth (HNW) Canadians plan to pass their estate to the next generation, but many remain unaware of the role that life insurance plays in safeguarding the value of their estate and mitigating the tax implications of a wealth transfer.
A study by IG Wealth Management has revealed insurance knowledge gaps among wealthy Canadians and opportunities for insurance agents and financial advisers to seize.
“Often, there’s a perception high net worth individuals don’t need life insurance, yet over half do have a life insurance policy,” said Alana Riley (pictured), head of mortgage, insurance, and banking at IG Wealth Management. “That’s good news, but there’s room for improvement.”
The life insurance study, conducted by Pollara Strategic Insights in August, collected insights from 500 high-net-worth adult Canadians that have at least $1 million in investible assets and are at least the shared decision makers of these investments.
It found that while just over half (54%) of high-net-worth individuals in Canada have life insurance coverage, less than a fifth (17%) know the benefits and tax advantages of such policies on their estate.
More generally, only a third (33%) have a good understanding of the tax implications of passing on their estate to their beneficiaries.
“It tells us is that there’s still almost 83% who don’t understand the full benefits and advantages of a life insurance policy and what it can do for their estate planning. It’s a big opportunity for great advice to be provided to that segment,” said Riley.
A life insurance policy can help offset the associated costs of a wealth transfer, including probate fees and taxation, to ensure that the next generation receives the inheritance amount as intended.
Riley noted that assets being passed down could face a significant tax burden and could result in the beneficiaries being unable to afford to keep them.
"Take, for example, a family cottage passed down to the next generation. The inheritors could face significant tax implications and may not be able to afford to keep the cottage,” she pointed out.
“But a life insurance policy, which isn’t taxable, can help cover these tax expenses and ensure the cottage stays within the family.”
The good news is that a majority (78%) of HNW Canadians already work with a financial advisor. However, few have discussions on life insurance.
There are several factors hindering these conversations, according to Riley.
“At the end of the day talking about insurance and estate planning is not exciting for anyone. No one likes to talk or think about their own death, and certainly for loved ones, these are very difficult conversations,” she told Insurance Business.
“The other part is not having a great advisor who can highlight what insurance can do for their overall plan from the estate preservation, estate equalisation, and estate maximisation perspectives. I think those are really the three key areas that we see so often that Canadians need to get advice around.”
Canadian life insurance sales saw remarkable growth during the pandemic. New annualized premium jumped 25% in 2021, according to LIMRA’s retail Canadian life insurance sales survey, while growth slowed to 1% in 2022.
Riley said that while knowledge and awareness of the need for life insurance has grown since COVID-19, it takes agents and advisers to help their clients “get over the finish line” and ensure a plan is in place.
“The whole point of life insurance is preparing for the unexpected. It’s part of the difficult conversations that advisors need to have with clients and their families,” she added.
“[The survey] certainly highlights that we have a lot more work to do as an industry. Ultimately, it’s our role is to help Canadians sleep soundly at night because they have a plan in place for their families and their loved ones.”
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