Using life insurance to preserve and create wealth

Even though well-resourced people may be skeptical of the insurance industry, they recognize the power that a tailored policy holds in the most important circumstances. When it comes to a topic like succession, EY and AIA discovered that 72% of HNWIs believe insurance plays a significant role in creating and preserving wealth, explaining that: “Life insurance instils tranquility in turbulent times by providing liquidity to maintain current lifestyles.”

One common factor with wealthy business owners is that they are keen to constantly assess their level of coverage and ensure it is still suitable. EY found that 44% of global HNWIs regularly revaluate their businesses, meaning tailored and responsive insurance solutions and knowledgeable providers are incredibly important.

In some markets, well-resourced individuals are already keenly aware of the benefits insurance policies bring. It is thought that up to 75% of HNWIs across the Asia-Pacific region are using, or are planning to use, life insurance in their succession planning. They understand that strategic life insurance policies in their personal and professional legacy planning efforts can protect their families’ lifestyles.

Life Insurance

Family Offices

Family offices are growing in number and wealth with every passing year. But as they become both more numerous and wealthier, it is not just their good fortune that is growing. High Net Worth Individuals (HNWIs) and their family offices are struggling to find succession and inheritance planning solutions that allow them, and their successors, to live their self-determined lives. The right insurance policies will help HNW+ families mitigate risks and build and enjoy generational wealth in a way that suits them.

Key takeaways

  • Life insurance is an invaluable risk management tool for business owners and successful executives.
  • It’s the only risk management tool that shifts risk entirely to another party.
  • There is a range of products to suit intermediaries’ clients.

It’s clear to see that 2022 will go down as a year when risk shifted from being at the back of people’s minds to being something to worry about. As central bankers scramble to keep up with spiralling inflation, urgently raising rates and equities enter bear market territory, there’s no shortage of financial risk. And, that’s before one considers the tragedy of war in Ukraine.

There are three ways to address risk:
1. One can try to avoid it
2. One can mitigate it
3. One can shift it to another party.

High net worth individuals (HNWIs) do not arrive at their station in life by ignoring risk and its management. With help from their professional advisors, they manage risk every day by staying away from inappropriate investments (avoiding risks) while diversifying their portfolios and using legal and accounting principles to limit exposures (mitigating risks). Of course, the above methods do not address the third aspect of risk management and do not begin to tackle the greatest risk of all: mortality.

What surprises us consistently is that sophisticated and risk-savvy HNWIs are often apathetic about life insurance – they almost instinctively reject the entire concept. However, the trick is to introduce the concept in the right context. Then HNWIs are easily convinced of the benefits of life insurance. They even become strong proponents.

In the context of financial risk management, one cannot ignore the risk of mortality. Should the founder of a successful business pass on, the business will inevitable be disrupted. Similarly, the death of a high-powered professional or executive will end his or her income. Returning to the three ways of addressing risk, unlike staying away from a bad stock or business idea, mortality is a risk that cannot be avoided at all and is hard to mitigate.

Mitigating, avoiding and shifting risk

One could argue that HNWIs’ well-diversified investment portfolios mitigate the financial risk of mortality. After all, HNWIs typically have portfolios of real estate, stocks and bonds, ongoing business concerns, and even cryptocurrency/NFTs. Diversifying one’s investment is an excellent way of mitigating financial risks. Not investing in certain asset classes is an excellent way of avoiding a risk. However, none of these actions fully addresses the financial risks associated with mortality.

Life insurance allows the policyholder to address risk in the most difficult and effective way of all – to shift risk to another party.

Life insurance is much better suited to managing the risk of mortality and complementing HNWIs’ existing risk management and investment strategies. Buying life insurance allows one to face the risk of mortality head on; it is non-cyclical and does not have the same vulnerabilities and limitations as most of the market-driven investments. Death benefits are paid in cash, require no real management or investment expertise and, depending on the relevant jurisdiction, often receive favourable tax treatment. Most important of all, life insurance allows the policyholder/insured person to address risk in the most difficult and effective way of all – shift risk to another party, in this case the insurer. The HNWI’s family, business or dependents no longer have to bear the risk of mortality.

Products for intermediaries’ clients

There is a wide range of life insurance products with bespoke premium payment methods and builds. For example, there are universal life (UL) and indexed universal life (IUL) insurance, with high death benefits and premiums that can be financed by the international private banks. There is private placement life insurance (PPLI) that will take an investment portfolio as the premium and “wrap” insurance on that portfolio, giving the HNWI flexibility in tax and ownership planning, as well as various income and savings plans that can provide cross-generational planning for the HNWIs.

Conclusion

Risk is an interesting concept. Financial risk management for HNWI, the trials and tribulations of managing mortality risk can be turned into a galvanizing opportunity for reinforcing one’s long-term planning strategy, better diversifying and insulating one’s investment portfolio and judiciously shifting the adverse effects of mortality risk to another party. All this can be accomplished by a strategically arranged, and properly placed, life insurance contract.