Insurance for high-net-worth individuals

Carin Smith
2015-12-04 11:11
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Johannesburg – The South African insurance industry has witnessed an increasing number of high-net worth individuals (HNWIs) seeking more personalised services and risk management procedures, according to Michael Petersen, CEO of Risk Benefit Solutions (RBS).

The New World Wealth Africa Report 2015 revealed that the number of dollar millionaires in South Africa approached 50 000 over the past year, and it is estimated that by 2017 this number would grow by 19% to reach approximately 55 000.

Therefore, the rise in HNWIs in the country, coupled with rising crime figures, has led to a growing need for specialised and tailored product offerings suited to the profile of this audience, in Petersen's view.

Proper planning enables HNWIs to find ways of protecting their wealth against life's unexpected events, and preserving it for future generations, cautions Stephen Mandigora, a Certified Financial Planner at Nedbank Financial Planning.

He pointed out that unexpected death, permanent disability and dread diseases are universal challenges. Their impact, therefore, requires a vigorous response to insurance planning as part of a wealth management strategy.

“Long-term – or life-based – insurance can be used as a foundation for protecting wealth from creditors and estate taxes, and for providing the liquidity and continuity for wealth to grow throughout life's unexpected events,” explains Mandigora.

“On the other hand, short-term – or general – insurance is used to protect wealth and assets against legal liability, business interruptions, theft, fire, floods, and many other unexpected events, both natural and unnatural.”

Individuals also need to consider carefully how their long-term insurance policies are structured.

According to Mandigora, a significant proportion of existing policies that fall in this category are inappropriately structured, resulting in unexpected tax liabilities and other unintended consequences in the event of a claim.

"This is due mainly to the fact that such policies have not been reviewed and adapted for changing personal and financial circumstances and aligned to the changing legislative landscape," he explains.

Mandigora provides some considerations for reviewing long-term and short-term personal insurance needs:

Pay off debts

From a tax-planning perspective, high-net-worth individuals (HNWIs) are still encouraged to finance business and investment asset acquisitions through debt. They may also have debts on their personal assets (luxury homes, cars, yacht) and should, therefore, consider life insurance to protect these assets from creditors in the event of their death or disablement.
 
Liquidity

When a HNWI dies prematurely or suffers a dread disease, his or her "expensive" and illiquid assets may not be easily converted into cash. This is true for a mansion, a holiday home or an equity share in a business.

A life insurance pay-out will provide the family with ready cash to cover their immediate income and capital needs - which includes lifestyle expenses, school fees and medical costs - until the estate is settled.

Tax liability funding

Death can result in a number of tax liabilities in a HNWI's estate. For example, any individually owned assets are deemed to be disposed of on death. This can trigger capital gains tax, estate duty and other charges that require ready cash to be settled.

This may result in the sale of assets at the wrong time, such as during poor market conditions, to fund these liabilities. Here too a life policy can be used to provide the cash to fund such liabilities.

Legacy planning

A life insurance pay-out can be considered as an asset for legacy planning to equalise assets for children in a case where an estate holds a lumpy asset that is not easy to divide among the beneficiaries.

Imagine a HNWI who wants to bequeath a prosperous business as a whole to one child and create a cash equivalent for another who has no interest in the business. The HNWI can take out a life policy that will pay out a lump sum to one child without leaving the other child to borrow (against the business) to fund the sibling's share of the inheritance.

Buy-sell agreement funding

A number of high net worth clients own businesses through partnerships or a variety of other ownership structures. A death, disability or dread-disease event affecting a HNWI can put the business under serious financial strain, resulting in a substantial loss of equity value for the family of the deceased, disabled or critically ill partner.

An appropriately structured buy-sell insurance policy will provide ready financial resources for the remaining business partners to buy out their deceased, disabled or critically ill partner in a timely manner. This is a win-win situation.

The family will receive the full value of the deceased, disabled or critically ill partner's share worth and the business partners will able to move on with the business without having to work through complicated financial arrangements with the family of the deceased, disabled or critically ill partner.

Special-asset insurance

Defending fortunes against the exposures inherent in luxury yachts, priceless art or luxury homes requires highly sophisticated insurance policies. There are certainly unique risk features to be considered, including special-asset valuations and specialised underwriting.

In this regard, insurance advisers at private wealth management firms have access to a number of specialist insurers who are able to assess and underwrite the insurance needs of HNWIs.

Life insurance asset

HNWIs may hold investment assets in offshore jurisdictions as part of overall wealth diversification strategy. For example, if an HNWI has a life insurance policy in the US, the policy can often be sold through a life settlement, which means the life insurance policy can be a real asset with its own intrinsic value.

In the US settlements are used extensively, but regulations in South Africa currently prohibit the use of life settlements.

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