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Including universal life insurance as part of your legacy-building plan
By Lee Woon Shiu, Head of Wealth Planning, Bank of Singapore
A LARGE portion of Asia’s economic success can be attributed to entrepreneurs, a majority of whom are very hands-on in managing their businesses. While this ensures a strong commitment to the business, it is just as important to plan for the continuity of the business when it is passed on to subsequent generations.
In a recent research report from The Economist Intelligence Unit1 which interviewed family-owned businesses in Southeast Asia, 67% of the respondents said they have made arrangements to ensure continuity after their current leaders step down. However, more than a fifth of the respondents said they do not have a succession plan in place.
A succession plan is necessary for the smooth transfer of wealth to heirs and the continued success of your business, especially if your children are involved in the business. As the patriarch you would need to consider who will benefit from the estate, the order in which they will benefit and the amount or percentage of the wealth your children should receive. As a parent, you would also want to ensure fair and meaningful distribution of your wealth.
Whether the bulk of your wealth lies in business assets, property or cash, your aim would be to provide for your future generation by leaving them as much wealth as possible and protect it from depletion as a result of rising costs as well as economic and business uncertainties.
Would you have sufficient wealth to distribute equitably to those family members who are not active participants in the business? Are there activities that may deplete your accumulated wealth in the future, such as potential creditors or lawsuits from disgruntled ex-spouses of your children? As the patriarch of the family, you would also want to ensure that there is sufficient liquidity to settle any outstanding debts incurred by the business and settle any taxes such as inheritance taxes on assets located overseas.
An attractive wealth management solution that can address such legacy planning concerns is a universal life insurance (ULI). ULI is a ‘jumbo’ size life insurance policy that provides a guaranteed death benefit payable at the demise of the life insured. This presents entrepreneurs the opportunity to accumulate cash value and address issues such as:
Ensuring business liquidity and key man insurance: This is applicable particularly for clients who are highly leveraged in their business and who may face a severe liquidity crunch in the event of the sudden demise of the key business owner. ULI solutions carefully customised in conjunction with a wealth planning structure such as a trust, will ensure that the family/business will have access to a large reservoir of cash reserves which can be tapped on to pay off debts and ensure the continuation of the business.
Wealth equalisation: This is useful for families whose core wealth resides in the business assets. Whereas the conventional thinking was to distribute the business shares equally to all beneficiaries, such distribution may in fact create friction among family members if not all family members are actively driving the business or where members may have drastic different visions for the future of
1 This report was commissioned by the Labuan International Business Finance Centre, Malaysia.
the business. A far better manner for distribution would be to distribute the controlling stake to the family scion having the primary responsibility of the business, while tapping on a ULI strategy to create huge cash reserves that would be distributed to ensure that members not receiving business shares are equitably treated. This would also be instrumental in enhancing family harmony in the long term.
Wealth creation: With the increasing cost of top quality education, housing and living in the global metropolis, we have seen clients increasingly driven to pursue solutions that would leave a more valuable legacy for their descendants. Clients who may have been adversely impacted during the financial crisis have also relied on ULI solutions as a means of re-creating the part of the pie that was ravaged during the last global financial crisis.
Tax planning needs: With inheritance / estate duty taxes hitting a high of 40% in the U.S and UK, clients are keen to source for more optimal tax compliant liquidity solutions to pay such huge tax liabilities that may be triggered upon their demise.
ULI policies are usually denominated in USD and the minimum premium for a policy is at least US$1 million. The minimum premium will depend on the profile of the insured and the desired sum insured. The sum assured can go as much as US$100 million.
Most private banks offer premium financial for ULI policies and in most cases, clients may choose to only fund around 30% of their premium to incept a policy. The remaining 70% premium will be financed by the bank. It is a little bit like buying a house when you offer mortgage financing to the client. At Bank of Singapore we work with insurance brokers to offer strategic ULI solutions to clients and to ensure that the client’s policies are reviewed on an annual basis to keep a close track on the policy’s performance.
ADDITONAL INFO: Case study on how ULI can use used for wealth equalisation for possible inclusion as a side bar or done up as part of an illustration:
(Do note that this example including the numbers use in this case study are purely hypothetical)
Mr Tan is a successful entrepreneur who founded a manufacturing company in 1990. The value of his company is US$3 million. Mr Tan has three children, a son who is actively involved in running his father’s business and two daughters, who are pursuing different careers as a veterinarian and as a jewellery designer.
Mr Tan will let his son be the sole successor of his business as his daughters will pursue their own careers rather than run his company. Mr Tan still wants his daughters to have an equitable share of this estate upon his demise.
So Mr Tan decides to use US$2 million to purchase a ULI with a life insurance cover of US$6 million Mr Tan also sets up a family trust where the trustees will take responsibility for making a claim for the insurance proceeds upon his demise, and distribute the insurance proceeds evenly among his two daughters according to the precise mechanism and timeline set by Mr Tan.
So now, Mr Tan’s son will be the heir to his business interest valued at US$3 million, while his two daughters will acquire at least US$3 million each at the time of his death.
With premium financing from a private bank, Mr Tan can choose to fund US$600,000 to incept the policy with US$6 million cover. Thereafter he services the interest repayment of the US$1.4 million loan, with repayment of principal required only upon the demise of the life insured.