Insurance, insurance, insurance! When investments are in place and everyone is focused on managing the portfolio with a joint sense of purpose, there are still a few planning details that need to be finalized to secure a family’s wealth. One of these is insurance.
Although money may sometimes seem to be the only consideration of wealth management, it is security that counts as one of the most important building blocks of human motivation in Maslow’s Hierarchy of Needs.
Every individual needs a comforting sense of safety – prioritized significantly ahead of the acquisition of wealth in Maslow’s famous study – so what is the best way to satisfy this profound psychological need for security?
One approach is to ensure that a family has sufficient insurance is in place to cover almost any eventuality.
Insurance to cover the needs of everyone
When the interests of an extended family’s are at stake, the level of complexity rises accordingly. Peace of mind is a prerequisite for a contented family situation and effective protection means introducing suitable insurance.
However, there are plenty of pitfalls to avoid and practical knowledge is invaluable when selecting the best policies available.
Advice from experts in a Family Office can help, where a holistic approach to addressing issues is matched by extensive experience in managing insurance policy protection.
Policy considerations surrounding life insurance
Driven by the need for a sense of security, Life Insurance has taken-off in recent years across Asia, with affluent family members and entrepreneurs taking up polices to address wealth protection, business continuity planning, debt risk mitigation and tax & inheritance protection of investment and estate assets.
Life Insurance is tied closely with family wealth management because of the need to consider asset distribution to benefit the next generation and it plays an important role in protecting family wealth against Inheritance Tax (Estate Tax).
The low level of Inheritance Tax across Asia – such as Hong Kong and Singapore, where it is rated at zero percent – means that measures to minimize its impact are not always prioritized.
However, it is a mistake to believe that a family-based in one of these city hubs is free from the burden of Inheritance Tax. With many families having members pursuing a cross-border lifestyle for education, work or retirement reasons, location once again becomes a significant consideration when calculating tax implications for the family as a whole.
In many countries around the world, the standard rate for Inheritance Tax for the wealthy is 50 percent. However, even in Europe and the US, with appropriate insurance protection in place, as much as half of an individual’s wealth and assets can be distributed tax-free to dependents. This effectively brings Inheritance Tax down from 50 to 25 percent. For this reason, Life Insurance is crucial for High Net Worth Individuals (HNWIs).
Insurance, family trust and inheritance tax
Combining Life Insurance with Family Trust planning plays a significant role in minimizing Inheritance Tax.
When setting up a Life Insurance policy, it is important to note that the payout forms part of a legal estate and may be subject to Inheritance Tax. However, by writing a Life Insurance policy in Trust, the beneficiaries will be paid directly rather than through the estate, and will not be taken into account when Inheritance Tax is calculated. Capital Gains Tax and Income Tax obligations are also minimized.
Effective estate planning allows an individual to have full control of asset distribution, allowing wealth to be passed on quickly and easily, often avoiding the lengthy and expensive process of probate and ensuring that family members can receive their share of wealth more efficiently.
Home and asset insurance
Home and Asset Insurance tend to be more complicated for HNWIs and their families simply because of their ownership of numerous properties and possessions in different territories.
To ensure that adequate insurance is taken out, a detailed inventory is an important first step to ensuring an accurate valuation of all relevant risks including damage, theft and employee liability.
Valuations should be regularly updated – at least every couple of years – as private collections such as fine art, wines, antiques, precious stones, precious metals, rare books and other memorabilia can appreciate rapidly in value and are frequently under-priced, with the consequent risk that any insurance payout may be unsatisfactory.
If more than one home is owned, the prudent approach is to take out a separate policy for each, as laws and regulations vary significantly between countries.
Beyond Home Insurance, it may be worth considering specific policies for high-value items, working with a specialist insurer to ensure a valuation of the correct market value.
Private health and travel insurance
Private Health Insurance is an obvious imperative for an extended family to counter the rapidly escalating cost of medical costs and to provide peace of mind during all life stages.
Polices should include adequate cover for critical illnesses, hospitalization, surgery and cancer treatment, along with ongoing care and proficient nursing support.
Unknown pre-existing conditions can be covered under the terms of a well-designed policy on a progressive basis varying from 25 percent in the second year unto full coverage by the fourth year.
Children insured under a family plan can take out their own individual cover upon reaching adulthood without medical underwriting, so pre-existing medical conditions will not be excluded (subject to other general exclusions) since this scenario is treated as a continuation of cover.
With frequent travel commitments – and the many healthcare options available – HNWIs need to carefully consider how a private healthcare policy works across different countries. For example, is a policy flexible enough to cover a checkup in Hong Kong if a newly diagnosed condition is to be treated in a preferred location such as New York or London?
Policies should provide a good balance between private and public healthcare: there is little point arranging private treatment if a condition can be handled just as well (and more cost-effectively) in the public sector.
Worldwide coverage is a clear requirement for most HNWIs and their families and this is where good customer service comes into its own. In case of an emergency overseas, there is an absolute need for immediate professional support and urgent access to high-quality medical care, including doctors, nurses and specialists who speak the patient’s language. Such policies should cover operations in the overseas location and evacuation home where necessary.
Health care overseas can be extended by taking out Travel insurance policies to cover emergency assistance services that extend to security assistance in case of evacuation from natural disasters, terrorism, civil unrest, and disease outbreaks, security advice before travel to unstable locations, and – of course – assistance with stolen or lost baggage, passports and cash.
Other types of insurance
A broad range of additional insurance policies are also available today including indemnity insurance, legal expenses cover, employers’ liability cover (also known as workers’ compensation cover) and directors and officers liability cover.
Meeting comprehensive insurance needs
Insurance is frequently an undervalued part of a family wealth management strategy, irrespective of the profound need among all humans for a strong sense for security. While most people have some sort of insurance in place, many individuals are uncertain about the effectiveness of the policies they hold and tend to have specific concerns about the expertise, professionalism, and claims-handling capability of their insurance agent.
Partnering with an experienced insurance broker to arrange the kind of complex insurance scenarios outlined above can best be managed with the support of an expert insurance consultant.
One option to address these issues is to partner with a Family Office, which can provide an added level of customer assurance based on its unrivaled understanding of a family’s specific insurance needs.