How life insurance can be harnessed in new ways
It can be a strategic tool not just for the end of life, but for the start of a legacy, especially for the more well-off
LIFE insurance comes with tangible benefits. More than half (55 per cent) of respondents in a 2021 Statista survey said they purchase life insurance because they have dependants who rely on them financially.
They buy life insurance for protection against income loss, allowing for continuity to meet their dependants’ needs – for daily living, for education, or to pay off debts or mortgages.
Others do so for business continuity, to supplement retirement income and for general peace of mind.
The insurance market in Singapore is projected to grow 6.4 per cent between this year and 2028, reaching US$58.8 billion in 2028. Any deviation from this projected growth is likely to be to the upside, as more become financially aware and educated to utilise and maximise the benefits of life insurance.
Strategic use of life insurance by high-net-worth individuals
Life insurance can be a strategic tool not just for the end of life, but for the start of a legacy. For the high-net-worth (HNW) or ultra-high-net-worth (UHNW) individual, life insurance provides benefits beyond income protection, the support of dependants or the repayment of debts.
We also see more individuals and families taking to a globe-trotting lifestyle, with careers and business opportunities that extend beyond their home countries. With this, there is an increase in assets or investments held across different countries. There is also an increased possibility of multiple residences across different jurisdictions. All this adds complexity to legacy, wealth and tax planning needs.
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Life insurance can therefore play a strategic role in the following ways.
1. To allocate businesses and assets as desired. At times, it may be challenging to allocate properties (or ownership of businesses), as each asset may not be equal. Beneficiaries who do not inherit the real estate (or business) may be gifted the payout from life insurance, so that they are given what was intended for them.
2. To maximise wealth
- Life insurance may be used as an asset in an investment portfolio, and/or viewed as an investment, with commensurate risk-return expectations, for diversification in an investment portfolio to hedge against market risk.
- Life insurance may be used as a source of retirement income to add to the wealth of an individual.
- Life insurance may be used as an asset for leverage, as needed by the individual or family.
3. To secure financial legacy. Life insurance may be used in succession and legacy planning, together with wills, trusts and other structures, to include beneficiaries across generations, and to ensure a lasting legacy.
4. To secure legacy with greater philanthropic impact. Life insurance may be used to structure philanthropic giving.
5. To be used in a tax plan and ease tax burdens. In countries that levy estate tax, the benefits from life insurance may be used to pay such taxes or to cover immediate expenses. The insurance provides liquidity or eases tax burdens in case other assets are illiquid. Such planning is increasingly becoming more mainstream as investors seek more opportunities in different countries for diversification and investment opportunities.
Not all types of life insurance are created equal
There are two main types of life insurance: permanent life insurance and term life insurance.
Permanent life insurance covers the period of one’s whole life and may include, among others, the following:
- Whole life insurance, which comes with a fixed death benefit, and fixed premiums.
- Universal life insurance, which is similar to whole life insurance, but with premiums that are not fixed.
- Indexed universal life insurance (IUL), which lets the policyholder decide how much cash value to assign to an equity-indexed account and to a fixed-rate account, if available. Like universal life, IULs allow for flexible premiums and possibly a flexible death benefit.
Permanent life insurance has a cash-value component, and is therefore considered an asset.
Funds from the policy may be withdrawn even while the insured person is still alive, and money, or investments, may grow in an account that is accessible for withdrawal.
Term life insurance, on the other hand, results in a payment to the beneficiaries in the event of the insured person’s death.
It is thus not considered an asset.
It is typically less expensive and valid only for a fixed number of years.
The choice of type of insurance, and the specific solutions that come with each type of insurance, depends on a person’s objectives.
These objectives are important to the strategic use of insurance in an individual’s comprehensive wealth or estate plan.
What to consider when choosing a life insurance provider
A single factor that stands out is the financial strength of the insurer, which is an indicator of its stability. A stable insurer will be in business decades down the road, when it is time to pay out the benefits under the policy.
Measures of this include the insurer’s credit rating, its asset liability capabilities, proactive and prudent risk-management approach, and being accountable for sustainability.
Other factors to consider are whether the insurer has a product with features that suit one’s needs; and whether the pricing offered is fair versus the value of offering.
When seeing an insurer, one must be comfortable with all considerations, bearing in mind one’s own circumstances, and obtain relevant independent advice.
In summary, life insurance has evolved from an income protection tool to help a family through adverse situations, to one that is used strategically by HNW and UHNW individuals in wealth planning as well as to enhance philanthropy, leaving a legacy that goes beyond the current generation.
The writer is chief partnership and marketing officer at Sun Life Singapore
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