Frances, you have worked for many years with high net worth individuals. What has been your experience with them in relation to, first of all, wealth planning generally?
In Asia, wealth planning seems to start late. In Europe and the US, tax planning is often the driver for people to look at estate planning generally. But before the automatic exchange of information came in, tax was not a major consideration for many Asian clients, who tended to postpone estate planning until they saw a real need, perhaps when they had a new addition to the family: children or grandchildren, or a new in-law.
So wealth planning is often looked at more from an asset distribution perspective and postponed as not being urgent. Often, it is left until too late. In actual fact, wealth planning comprises a lot more than this. It should involve wealth protection against tax risks, business risks, divorce and personal liability risks, as well as planning for wealth succession, business transfer, liquidity planning and perhaps also philanthropy.
In the past, Trusts and Insurance have both been used in wealth planning. Insurance, in particular, is best looked at early in life as it is much cheaper to insure your life when you are young and healthy. In setting up a trust or insurance for asset protection, one should also be mindful of the risk of fraudulent conveyance.
So, as part of the overall picture of wealth planning, do you see insurance becoming more important today?
Insurance has always been considered for contingent liquidity planning and sometimes used for equalising asset distribution. Here, one is looking at the death pay-out value of insurance.
Looking at the lifetime cash-in value of some insurance policies, it can also be a very attractive alternative asset class in one’s wealth portfolio. When Covid-19 first struck, the value of many asset classes fell. However, insurance policies such as Universal Life and Whole Life retained their cash-in value. This is because underlying these policies are very large holdings of diversified high-grade long-term debt instruments. These insurance policies are therefore a good portfolio diversifier.
Besides being used as a contingency plan and an alternative asset class, now insurance policies are also being used as asset holding structures. Here, I am referring to Private Placement Life insurance. These PPLI structures can be very useful for tax planning, such as when clients are touching high tax jurisdictions such as the US, the UK, Australia, or France, for instance.
So insurance can be used for contingent liquidity planning, looked at as an alternative asset class or as an asset holding structure, and different types of insurance policies are built to serve these needs.
So clients have many different considerations, many different problems that need a solution. Often that solution will be a liquidity solution, which will be insurance in some form. But there's a whole array of different insurance products, which can prove to be a complicated environment. How does the client know that they're getting good advice and how can they find good advice in the market today?
There’s a whole array of insurance products, simply for life insurance, the broad categories are term life, universal life, whole life, variable universal life and private placement life. On top of that, for each product, there are different carriers which offer different terms.
“I always say, there is no perfect solution or product, but a most suitable solution.”
Each of these products have different cash-in value, death pay-out, premium terms and underlying assets arrangements. The most suitable solution really depends on the client’s needs and profile.
It is difficult for an individual to figure out the differences between the products on their own, so finding a good advisor is key. But how do you decide whether a person is a good adviser? I think the first test is whether this person takes time to understand your needs. A good adviser should not be focusing on one ‘product’. After hearing your needs, a good advisor would also seek to understand your profile, your investment inclination and aptitude, family and future business, and residency plans. In doing so, together you may find that there are factors to consider which have not occurred to you before. Finally, a good advisor should be able to offer you options and explain to you the features of the policy, how it serves your needs and what the trade-offs are.
With high net worth clients over the last 20 years, there's been a huge amount of universal life insurance sold across Asia, not just in Singapore. Is that a good thing, with clients getting good advice, or are they just being sold a product because of the attractive commissions?
Well this question echoes some negative perception of the industry. It reminds me of a conversation I recently had over dinner with a woman I’d just met. Upon knowing my profession, she promptly shared her father’s recent bad experience with ULI when he was facing a lapsing policy.
Allow me to answer in two parts:
Is commission a wrong way to remunerate? In places like the UK clients pay an advisory fee, and insurance and investment products don’t have commissions attached. However, in Asia we are still in a commission world because clients seem reluctant to pay for advice, be it to their banker or their financial advisor. An agent of a specific insurance company can be paid a salary from the company to sell the company’s product. The fees to an advisor guiding the client through an array of options will have to come from the client, if not via advisory fees, then it will be via commission.
On the subject of whether ULI was sold because of its high commission, I believe that the ULI isn’t the problem , or any other insurance product for that matter. The question we should be asking is if it’s the most suitable product for the client, and if they really understand the insurance plan.
The ULI policy is an investment plan with life coverage. It offers cash-in value projected to grow with time and a high death pay-out. One of the key things to understand is that the policy is funded with an estimate of what it should cost to insure the client’s life up to age 100 or 120. This estimate is based on assumptions about future interest rates. Unfortunately, in recent years, interest rates have been very low so many of these projections are now unrealistic and, as a result, some of these policies have lapsed. However, it is not like the cash value will suddenly drop nor the policy will suddenly face lapsing risk. As the policy’s performance gradually deviates from the projection, various actions can be taken to restructure a solution that meets the client’s need, if addressed early.
Would you recommend a regular review of the policy to make sure it's tracking to the original assumptions?
Yes, an annual review of your insurance policies is strongly recommended, especially ULI and Variable Universal Life policies. ULI policies taken out some years ago will have been based on very different interest rate assumptions and will need to be relooked at periodically.
So a good broker would presumably stay in touch with the client as part of the after sale service?
Yes, they should. Individuals and institutions should be committed to stay in touch with clients over time. Brokers usually do this, but perhaps not all of them. With various different sales channels available, such as Bancassurance, it is a question for the industry to consider as a whole, especially as individuals sometimes move shop.
If the starting point is the client’s needs, rather than the product, how would someone decide if they need Life Insurance at all?
I will suggest you start by thinking about your wealth planning needs. In 1291Group, we have an acronym which can help prompt you: PATEC. This stands for Privacy, Asset protection, Tax planning, Estate planning and Contingency liquidity.
Consider these examples:
PPLI seems to be quite new in Asia.
It is true that PPLI isn’t as well established in Asia as it is in the US and Europe. It’s estimated that some 60% of the savings of French residents are held in “Assurance Vie” structures – the French tax compliant version of PPLI.
PPLI actually has been around in Asia for a while but in a very limited form. One subset of the PPLI concept is sometimes known as a ‘101 policy’ (The ‘100’ being your investment portfolio and the ‘1’ being 1% of life cover.) This policy mainly serves as an asset holding structure. Several insurance companies have offered this in Asia and still do, mainly for British and Australian expatriates.
PPLI is a very useful asset holding structure because it is highly portable, works in both Civil Law and Common Law countries. It also offers various legitimate tax benefits, such as deferred tax and avoidance of estate duty in some jurisdiction to name a few. A policy with named beneficiaries will also avoid probate and, when properly structured, avoid forced heirship conflicts.
Around 2016 we saw the setting up of advisory firms in Hong Kong and Singapore with PPLI subject expertise, as well as more insurance companies focusing in this area.
Another product, which is on the other end of the PPLI spectrum is Variable Universal Life, which has started to gain Asian market awareness. The mathematics of a VUL is similar to a ULI, where returns from the investments are all used towards maximizing a death pay-out that covers till age 100. The investments, as per a PPLI policy however, is managed by the client or a client-appointed investment manager.
However, between a 101 PPLI and VUL, there is much room for a PPLI to be customised to meet the client’s profile and various wealth planning needs and asset types. The awareness of a PPLI’s significant benefits is growing fast.
What final words of advice would you leave readers with today? If someone is now thinking that maybe it's time to look at some life insurance options to protect their family for instance, where should they start?
A life insurance policy is more than just protection for the family. It’s also an alternative asset class and offers several significant benefits as an asset holding structure. On the protection aspect, do it sooner rather than later as it gets more expensive with every year as you age. There are various types of insurance out to meet various cash flow and investment profiles. Finally, work with a trusted advisor, someone who asks questions and listens, and one who gives you options. Remember, there's no perfect product, there’s just the most suitable solution for you.
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