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Staying ahead of the future
THE BUSINESS TIMES' WEALTH ROUNDTABLE
Genevieve Cua, BT Wealth Editor, poses questions to wealth advisers on insurance for high net worth individuals
Deepak Khanna Head of Wealth Development, HSBC Bank (Singapore) Ltd. He is responsible for the HSBC Bank's wealth business, including the overall product and services roadmap. He is an active participant in various industry forums.
Low Ee Meng Isaac, Avallis Financial, Principal Partner and Head, Investment Advisory. Isaac has been in the financial advisory business for the last 31 years. His practice encompasses insurance, investment and legacy planning.
Christopher Tan, Providend Chief Executive. Chris has more than two decades of experience in wealth management and financial planning. He was on the management committee of the Securities Investors Association (Singapore) from 2009 to 2015.
Conversations about wealth typically centre on the investment of assets. But protection and risk management are areas of equal importance. Genevieve Cua speaks to our panel of wealth advisers on their significance.
Experts have found that high net worth individuals are under-insured. What do you see as the biggest gaps or risks among wealthy clients that may be bridged via insurance?
Deepak: The transfer of wealth from one generation to the next is one of the biggest gaps that high net worth individuals (HNWIs) face. Research has shown that many families, especially those in Asia, delay succession planning and conversations on it until it is too late. Family members are then unprepared for the decisions they must make when their loved ones either need critical care or pass away.
For Asians HNWIs, legacy planning is more important than ever. As everyone's circumstances and needs are different, there is no standardised solution. It is beneficial to start legacy conversations and plan early. Insurance solutions such as universal life plans can help HNWIs kick-start such conversations and help them articulate, create and implement a plan to efficiently transition their wealth to loved ones.
Legacy conversations can be sensitive and emotional as they involve extreme scenarios such as serious illness or even death, which may disrupt family harmony. Therefore, do consider seeking expert advice as they can facilitate such conversations by removing emotions from the equation.
Isaac: High net worth clients face many risks that can be mitigated by proper insurance planning.
The inability to meet liquidity needs at death constitutes a major risk. Business debts must be paid to ensure business continuity. Personal and family debts such as mortgages, housing loans, all require cash. Often the inability to repay can have serious repercussions for the family.
Many high net worth clients invest in foreign assets which may attract estate duty and inheritance tax upon death. Often, the failure to meet these cash needs creates anxiety for the beneficiaries. In times of financial crisis, the cash values in a life insurance policy have averted many potential disasters.
In the area of investment planning, life insurance, as a low-risk product, acts as a counterweight that provides a safe and certain return against the clients' other riskier investments. Risk diversification is further achieved via the judicious use of different currencies and jurisdiction planning.
Due to the large size of an estate, inequitable asset distribution at death is a major threat to family harmony. Estate distribution equalisation may be achieved to a large extent via the use of life insurance proceeds to ensure fair and equitable distribution among succeeding generations of beneficiaries.
Chris: Most of our wealthy clients do not need to buy insurance to replace their loss of income due to death, disability or a medical crisis as they have more than enough assets. However, even though they are already rich, most like the idea of buying large insurance policies to create an even larger estate for their family. So in this case, they buy life insurance not for protection but to increase the legacy that they can leave behind for their family.
But since many of these individuals are also business owners or individual professional services practitioners with partners or in a registered business, many may not have shareholders' agreement that incorporates a buy-sell clause that is funded by life insurance. Many business owners also signed personal guarantees and may not have considered using life insurances to discharge these guarantees upon their demise. These are some of the biggest risks that high net worth business owners may face.
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Asset protection is a key concern among clients, either for business or personal assets. What major strategies should clients seriously consider in this respect?
Deepak: There are a few practical steps that clients could take when putting together an asset protection plan. Firstly, they have to identify their priorities. One starting point could be to make a list of their personal or business loans, family commitments and own aspirations before prioritising them accordingly.
Secondly, they should assess their current financial situation by reviewing their current income, current and future financial obligations, and list out their aspirations and the type of lifestyle they would like to lead in the long-term. Lastly, they should plan for their beneficiaries. Estimate the amount that their family would need every month, list out the top risks that may impact their financial security and check if they have sufficient protection to safeguard against these risks. Do also factor in the knock-on effect on your beneficiaries if any unexpected life events were to happen to them.
When it comes to asset protection, the key rule of thumb is to ensure that you have sufficient coverage or protection that is commensurate with your future earnings. This is especially critical for business owners whose future earnings are linked to dividends or the valuation growth of their shareholdings in companies.
Often it is also difficult to draw a clear distinction between the business owner and the business itself. Therefore, any unforeseen circumstance such as death, sudden illness or prolonged incapacity of the business owner, will impact the business and its valuation.
A proper insurance plan can help neutralise or at least, mitigate such risks.
Isaac: Assets shrinkage can come in many unexpected ways. Businesses fail. In this age of disruption, no business is safe. Constant innovation is the key.
Families fight. Family feuds are almost never settled in a court of law. Lawsuits can easily bankrupt a family or a business especially if they drag on for years.
A divorce exacts a heavy toll on personal and family business assets.
Forced heirship requirements may also curtail the intention to preserve assets.
One useful strategy is to use trust planning as a key to preserving family wealth assets for future generations. Trusts can come in many forms to cater to specific requirements.
A private family trust, for example, ensures that family wealth is preserved so that future generations can continue to enjoy the fruits of the founding generation. In this case, family harmony is of utmost importance.
Quarrels and lawsuits among family members damage not only the family name but also pose a threat to wealth preservation. Hence, it is important to overlay the trust with a code of family governance to guide decision making. Among other things, this code can include dividend payouts to various generations of family members. It also spells out family values.
Chris: Besides ensuring that the guarantees that they have signed get discharged upon their demise, clients should also consider ring-fencing their personal asset from business creditors by setting up living trusts. In addition, HNWIs might have concerns about their young adult children not managing any sudden wealth properly or that should their children's marriages fail, the assets they have given to their children may fall into the hands of a third party. This is where trusts would be useful for these HNWIs.
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In terms of healthcare, one may think that HNWIs can afford to self-insure. Where does health or hospitalisation insurance fit in?
Deepak: While HNWIs can easily afford to selfinsure, having a health or hospitalisation plan will minimise their out-of-pocket expenses especially in an era of rising medical cost or prolonged illness or incapacity.
Given their lifestyle and complex needs, HNWIs may require a higher level of cover as well as global coverage.
Instead of buying separate covers for medical, hospitalisation, personal accident or early critical illness plans, HNWIs could consider buying into a global international medical insurance plan. Such a plan will provide access to a wider range of services including complex medical treatments, medical concierge services, and global emergency evacuation service, regardless of geographic locations.
Isaac: Singapore remains the country of choice when it comes to tertiary healthcare. The rich and powerful continue to flock to our shores for medical care. Apart from the expertise of the medical specialists and sub-specialisation, the infrastructure as well as para-medical support are critical for the management of the patient.
Hence, it comes as no surprise that healthcare cost has grown exponentially. These days, it is not uncommon for a hospitalisation plan to provide a S$1 million yearly limit and an unlimited lifetime limit. Cancer treatment has been known to exceed a million dollars and can bankrupt a family.
So, like anybody else, HNWIs prefer to pay a premium which is a fraction of the costs of medical care. Prudent financial planning would include coverage for the entire family.
Furthermore, clients may want the option to access medical care in the more advanced nations such as the US via global healthcare plans.
Hospitalisation planning has become an integral part of financial planning.
Chris: While it might be true that high net worth individuals can afford to self-insure, the cost of medical care can be so high that it eats up a substantial part of their net worth. It is also not the most efficient way to mitigate risk. Therefore, having a good medical expense insurance is a must. In fact, these individuals might even want to consider getting an international healthcare plan to allow them the option to seek treatment outside of Singapore.
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Succession and/or estate or legacy planning is another building block of a comprehensive financial plan. What role/s might insurance play in this?
Deepak: Insurance can help keep accord in legacy planning. Not all assets can be easily divided and distributed.
In many cases, property forms a key part of the legacy which may not be easily sold or shared. The use of life insurance offers the flexibility and liquidity to equalise inheritance, provide extra funds (via death benefit), increase the amount of total asset and also alleviate family conflicts.
While other assets have a tendency to shrink at the time of distribution of the inheritance - owing to tax payments, cost of transaction, ill-timed sale, or liquidity issues, etc, insurance which is bound to provide the necessary coverage, will provide much-needed liquidity and buy more time for beneficiaries to sell and distribute the assets that they have inherited.
Isaac: Many people are good at accumulation but few are good at preservation. By preservation, we mean legacy planning which seeks to grow the family fortune and effectively transfer this wealth across generations via the use of a family trust and family office.
Apart from financial and business assets, family wealth includes the human resources, business networks and intellectual capital. The family trust acts as a vehicle to ring-fence family wealth from external threats via various types of insurance policies.
For human capital, life insurance policies can protect many generations. In addition, a policy allows such options as changing of life insureds to ensure continuity of coverage.
In terms of transfer of wealth, anticipated endowment policies can pay out cash benefits across generations.
High net worth clients have a propensity to leverage or maximise the use of their assets. Investment assets that are held for their long-term growth potential may be used to fund insurance premiums for a whole life policy. This ensures that the future growth potential is retained by the policyholder.
Chris: Insurance can be effectively used as:
• Funding mechanism for business succession eg shareholders buy-sell funding;
• Paying off estate taxes for assets in jurisdiction with high death taxes;
• Equalisation of wealth distribution to heirs for large indivisible assets. For example, a large business is to be passed down to one heir who is capable and desires to run it. Insurance can create a nonbusiness estate of similar value for other heirs who are not interested to inherit the business.