New York, January 27, 2022: Respada, an invitation-only niche platform providing private market opportunities to the ultra-affluent, hosted the exclusive ‘Respada Insurance and Asset Protection Summit’ on 27 January. Renowned experts such as Perry Lerner, Chairman, and CEO of Crown Global, Hazel Etherington, President of Transamerica Life (Bermuda) Ltd., and Rick Harig, CFP, Financial Planner and Legacy Strategist were part of the panel. The distinguished panelists discussed the optimization of tax liability and risk mitigation through insurance, to help protect affluent families and individuals from risk exposures. This summit formed the second part of Respada’s Asset Protection thought leadership series, the first being the ‘Integrated Asset Protection Summit’ that was held on 29 July 2021.
Bringing over 30 years of expertise in the insurance industry to the panel, Etherington kickstarted the discussion by underlining the importance of medical and health insurance. “The biggest asset anyone has is themselves, and we know mortality is an ultimate end game for everybody, so protecting ourselves is the priority,” she said. Etherington added that insurance offers different solutions and opportunities to meet different needs, one of which is asset and wealth protection for upcoming generations.
The biggest asset anyone has is themselves, and we know mortality is an ultimate end game for everybody, so protecting ourselves is the priority.
Joining the conversation, Lerner shared the genesis of Crown Global. Having spent the majority of his career as an international tax planning advisor to high-net-worth families, Lerner started a family office with one of his clients. “As part of that exercise we realized that although many of our assets were good income-producing assets, they were extremely inefficient from a tax point of view,” Lerner shared. The key to the problem, Lerner felt, was “by holding a significant part of the family’s wealth in the life insurance or annuity contracts.” This led to the inception of Crown Global which works with ultra-high-net-worth families around the globe with large income-producing portfolios.
Continuing the conversation on the benefits of insurance in tax planning, asset protection, and risk mitigation for affluent families, Harig noted, “When I was on the chair of TIGER 21, I found it surprising that the family office founders in our group in Chicago were unfamiliar with insurance as a tool for legacy planning”. He expressed how he has often heard from wealthy families that there is no insurance capacity that is enough to make a difference in their lives. However, Harig challenged this notion by presenting a structure that has improved insurance capacity to a great extent. Further, Harig observed that “the ability to improve insurance capacity also improved flexibility for making annual deposits.” He also emphasized that “there are few tools today that provide asset protection and tax-free growth the way that private placement life insurance does.” Moreover, “clients are often unaware that structures are now available to fund death-benefit-only plans at a very high level with tax-free earnings inside the policy,” Harig added.
Moving on, Etherington analysed why ultra-affluent families are some of the most underinsured and addressed the mistakes they make while considering life insurance. “One common mistake is the view that I will not die anytime soon so I don’t need life insurance. Yet, COVID has increased the awareness that we cannot always anticipate such sudden events,” she stated. Etherington also mentioned how affluent families think that they have enough liquidity and funds which make life insurance unnecessary. However, Etherington believes that “life insurance redistributes the extra gap in inheritances of family members and creates equalization of estates. Moreover, putting out named beneficiaries in life insurance guarantees the certainty of payment to the defined beneficiaries outside of probates”.
Panelists then proceeded to discuss the role of General Variable Annuity allotments or GVAs in helping family offices and affluent investors from abroad to invest in the US. Lerner explained that Private Placement Life Insurance (PPLI) is an aspect of life insurance that involves variable policies in which the client can select investments and they tend to have a higher yield than commercial policies. On the other hand, Lerner described “annuities as an insurance policy wrapped around an investment that pays off at the time of death or can be tapped earlier as an annuity”. While comparing the two, Lerner mentioned that there is no cap on the amount invested as an annuity whereas a life insurance policy has an insurance capacity. Having said that, Lerner cautioned that while life insurance payments are income-tax-free, annuities are taxed as ordinary income rates when received, with an exception for non-residents of the US whose income earned from an annuity is tax-free. In light of the above points, Lerner advised, “For foreign investors investing in the US, there is a special attraction for annuities because of the tax-free treatment from beginning to end. Hence, non-residents prefer annuities while residents prefer PPLI”.
Speaking about the importance of collaboration in estate planning, Etherington mentions how multiple parties are involved in the process, such as experts who manage the high-net-worth individuals and independent international brokers whose advice you need during product selection. That being said, Etherington pointed out, “People do not start considering wealth transfer or have conversations about planning until they reach their 50s. The challenge with life insurance is that by then you may have some underlying medical conditions that complicate underwriting. This may increase the premium of the life insurance solution or even limit it.” To avoid that, Etherington suggested that individuals should initiate basic term insurance to have some form of coverage in place when they are in their 20s. She also encouraged high-net-worth individuals to be payers for juveniles and students to get them on the platform.
As part of audience interaction, Tim Trela, Partner Member at Respada, asked the panelists if there is any change in the popularity or efficacy of fiscal policies in this changing rate scenario. Lerner answered, “Premium finance generally applies where you have guaranteed contracts so that the collateral is predictable. Variable policies are difficult for premium finance because the lender cannot easily project what the value of the policy would be because cash value will vary from year to year.” That being said, Lerner added, “In the last few years there are many opportunities to get 10-year fixed finance for policy loans which is a good thing because it would not be affected by the increase in interest rates.”