There are many who mistakenly believe that High Net Worth Individuals (HNWIs) don't need life insurance because their high levels of wealth mean that they are able to effectively 'self-insure'. In this article, Brandon Caneer, Head of Proposition Development & Advanced Marketing, Transamerica Life (Bermuda) Ltd, shares why HNW life insurance needs are greater than ever.
The last few decades saw a rapid increase in the number of High Net Worth individuals (HNWIs) and Ultra High Net Worth individuals (UHNWIs).
In 2019, the HNW population rose by nearly 9% to 19.6 million HNWIs, according to the Capgemini World Wealth Report 2020. Moreover, an estimated US$15.4 trillion of wealth is expected to pass down through the generations by 2030. How HNWIs manage their wealth, and these intergenerational transfers will have a big impact on the way their legacies are preserved and carried forward.
With the current uncertainty the world is facing, the financial needs of HNW individuals have not gone away. In fact, the demand for life insurance solutions that can help HNWIs to protect their wealth and maximise their financial legacies is greater than ever.
HNWIs face a myriad of challenges in today’s volatile economy
The lockdown has resulted in HNWIs spending more time with their families which has heightened their awareness for the various aspects of their lives that need more protection.
Today, HNWIs who do not have life insurance are looking into it, while those who have life insurance are reviewing their plans to ensure they meet their current needs.
The pandemic has created 3 noteworthy challenges for HNWIs:
- Business – HNWIs are often business owners, and nearly all industries have been affected by the pandemic.
- Travel – Many HNWIs lead international lives with family members and assets around the world. In recent months, it has been difficult to move around, and there could even be tax implications if one had to stay put in certain countries longer than expected.
- Investment – The volatility of financial markets coupled with low interest rates present difficulties for investment yields.
Debunking the myth that HNWIs don’t need life insurance
There are many who mistakenly believe that HNWIs don’t need life insurance because their high levels of wealth mean that they are able to effectively ‘self-insure’. Whilst we know that life insurance is important for mainstream consumers, it can be just as vital for HNWIs.
HNWIs do have high levels of wealth, but it is often tied up in illiquid assets – like a business or real estate. Why does that matter? If a HNWI were to pass away unexpectedly, their heirs and business may need sizable amounts of cash and cash flow to cover immediate and longer-term needs.
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But cash may not be readily available without having to liquidate assets. Their heirs may not want to do this, especially if those asset prices are depressed – or have special meaning to the family.
Life insurance, therefore, is an ideal tool for providing liquidity in exactly the right amount at exactly the right time – helping HNWIs to protect and efficiently pass their wealth to the next generation.
This can be used to cover:
- Immediate obligations: e.g., estate taxes, medical costs, outstanding liabilities or the cost of replacing the HNWI, especially if he/she was a key person in the business.
- Ongoing costs of living: e.g., lifestyle maintenance for the family heirs.
- Future obligations: e.g., education funding for children or philanthropic desires.
In addition to protection, HNWIs use life insurance for savings and investment diversification, attracted to its generally stable returns, which are not directly correlated with other asset classes.
Life insurance, the foundation of a sound and holistic wealth management plan
There are 4 key protection requirements where life insurance can play an instrumental role for HNWIs:
In the event of an unexpected death, life insurance provides a safety net with instant liquidity through a defined amount of money that will be passed to their beneficiaries at the time it is needed, without delay. As noted above, this means there is no need to rush to let go of illiquid assets by selling family homes or businesses, which could be disruptive and may not provide good financial returns.
2. Business protection needs
HNW life insurance is often an essential part of a businessperson’s estate plan. It can be used to provide protection to insure a variety of business needs, such as the cost of replacing a key person, funding a business partnership buyout agreement or paying off business debts.
A successful retirement requires a sound financial plan. The best retirement plans are those that take a longer-term view and provide transitioning years, when one reduces work time and assumes other activities in the place of work. Being protected in the knowledge that one’s income will continue, assets are protected from major market fluctuations, and family and business responsibilities are covered, can bring a feeling of well-being and tranquillity to HNWIs in retirement.
4. Giving back to society
The use of life insurance in philanthropy has become increasingly more common to produce a favorable long-term return with less risk vs. a portfolio without life insurance. Moreover, a life insurance death benefit can be an economical way to fund a philanthropic donation in a sizeable amount.
Opportunities to serve HNWIs
While no one has a crystal ball to predict the future, the need for HNW life insurance has never been greater. The needs of every HNWI are unique – from their family circumstances, their businesses, to their life goals and values.
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These needs give rise to real opportunities for financial advisers, wealth managers and life insurance providers to step up and help HNW clients achieve their goals.
It is vital for advisers to have a comprehensive understanding of the options that are available as well as in-depth conversations with their clients to identify their needs and ultimately help tailor the right solutions for them.
Head of Proposition Development & Advanced Marketing, Transamerica Life (Bermuda) Ltd
Brandon is responsible for leading the organisation in the management of all products - product development, enhancements and product redesign - across TLB’s Hong Kong, Singapore and Bermuda offices. His role also oversees the development of new Advanced Marketing concepts, content, tools and training assets to support sales effectiveness and to differentiate TLB in the High Net Worth (HNW) market.
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