Find Stability in Uncertain Times with Legacy Insurance Plans
07 Aug 2024 | 12 mins-read
In a world increasingly defined by unpredictability, high-net-worth individuals (HNWIs) are navigating a financial landscape littered with challenges. The global market's recent volatility has underscored the need for robust, stable financial strategies.
In 2022, global wealth declined for the first time since the 2008 global financial crisis. Measured in current nominal USD, total net private wealth fell by USD 11.3 trillion1. This resulted in a fall in the global number of people identified as HNWIs, dropping by 3.3%2.
This article delves into the impact of market volatility upon HNWIs, how legacy insurance plans can provide stability to a financial portfolio, and the role of robust financial planning in the preservation and transfer of wealth.
Impact of market volatility on personal wealth
Before examining how legacy insurance plans can provide a counterweight to risk within a financial portfolio, it is worth understanding the concept of market volatility.
Market volatility is a term generally used to refer to periods of dramatic price changes (either up or down). The bigger or more frequent the price swings, the more volatile the market is said to be.
While intense periods of market volatility can sometimes indicate that the market is headed for a crash, this is not always the case. Market volatility is a normal part of investing and, as history shows us, should not be the deciding factor on whether or not to exit your investment.
Historic market crashes
While it may seem that today's markets are particularly volatile, in reality there have been many periods over the last 25 years during which investors have ridden the rollercoaster of market ups and downs.
S&P 500 stock market index since 1927
Source: Macrotrends3
Past performance is not necessarily indicative of the future performance.
While this data refers to the U.S. stock exchange, it is representative of the global market response to the major financial events of the past 25 years.
In the early 2000s, investors were rocked by the "bursting of the dot.com bubble". The bursting bubble resulted in mass panic selling of tech stocks, which led to mass bankruptcies and significant market losses. By 2002, investor losses were estimated at around USD $5 trillion4. On the eve of the new millennium, venture capital firms were ploughing significant dollars into internet-based businesses, which led to the rapid overinflation of stock prices.
The most recent crash was due to COVID-19. As the pandemic began its spread in March 2000, and government officials around the world shutdown economic activity, panic triggered by the uncertainty led to a stock market crash that included the three worst point drops in U.S. history. Within weeks, investors lost an estimate of 30% of their retirement savings5.
What volatility means for investors
The impact of stock market crashes and overall market volatility on an individual’s portfolio will vary greatly, depending upon the individual’s position within the wealth cycle. For those nearing retirement, a significant market downturn can be catastrophic, wiping out retirements savings quickly. For others at the start of their wealth accumulation journey, the impact of an early crash can be relatively minor, offset by the fact they will be able to recoup losses over a period of time.
The key takeaways are:
- Market volatility will always exist
- Crashes are not easy to predict
- Taking a long-term view is important
3 ways incorporating legacy insurance plans can help you risk manage your portfolio
The good news is that there are ways to ride these market ups and downs, so that your insurance portfolio remains on an upward trajectory. Below, we’ll explore three ways to do this by utilising bundled or legacy insurance plans.
1. Diversification
HNWIs understand the value of a diversified portfolio, particularly the role it plays in safeguarding against potential losses during bear markets. Using legacy insurance plans to create a balanced portfolio not only reduces market risk, it also provides a safeguard for your loved ones.
For example, consider an investor with a $10m portfolio, with $8m invested in shares and $2m in cash. In the event of market downturn, the value of the investor’s shares could fall dramatically. But, if the investor takes out a coverage of $8m universal life insurance policy with a $1m premium (reducing their cash holdings to $1m), the investor can now balance the riskier investments with a legacy of $8m^ (death benefit).
2. Flexibility and liquidity
In a bear market, even the most cautious investor can be forced to sell if they do not have sufficient liquidity in their portfolio. Selling in a market downturn not only locks in the loss, it also represents an opportunity missed for future gains when the market recovers and stocks rise.
The flexibility of legacy insurance plans makes them an attractive solution for investors who are looking to protect against market volatility while having access to cash value. A universal life insurance plan provides liquidity through the cash value, allowing the policyowner to withdraw cash value without affecting the death benefit.
What's more, the flexible premium payment feature means you can reduce your premium payment at a time when you require more cash-on-hand, then top-up when markets return.
3. Bundling capabilities to meet risk appetite
Your risk appetite can set the tone for your investment strategy. However, risk appetite changes over time, due to a variety of factors. For example, investors in the early stage of portfolio may adopt greater risk because they have longer period of time to regain any potential losses. Market volatility can also drive change in risk appetites, with some investors adopting a more conservative approach when markets are down.
Bundling a legacy insurance plan with a saving insurance plan providing regular income, can balance the risks to a portfolio by introducing diversity. This is particularly useful for individuals planning for retirement.
Adopting a comparatively conservative approach with a saving insurance plan providing regular income plan to fund your retirement lifestyle means more stability, while bundling it with a riskier approach for potentially high returns in a legacy plan will help to amass more legacy wealth for your loved ones.
For example, James, age 50, is married with a son, Alex. He has retirement and legacy funds of US$5M. He wants to enjoy higher retirement funds and also to increase the legacy amount for Alex. James uses US$2m to purchase a retirement policy, which provides a yearly retirement stream up to US$3m. He uses a further US$1m to purchase an Universal Life Indexed insurance policy with a US$6m death benefit. The advantage of potentially high returns through the index account means the legacy James leaves for Alex could increase to US$8m.
How to build a resilient financial plan
A resilient financial plan – one that is built to withstand the ups and downs of the market – will take into consideration a number of factors.
Risk appetite
If you have been through a market crash previously, a second major downturn may trigger feelings of fear and cause investors to act rashly. This is understandable, but not necessarily in the best interests of your long-term financial plan. Determining your risk appetite upfront, and structuring your portfolio to match your psychological approach to risk can prove helpful in times of volatility.
Investment type
Investments are not limited to vehicles that provide access to stocks and shares. Real estate is often included within HNWI's portfolios. Of course, the fluctuating value of real estate in prime locations can significantly impact the overall wealth strategy. A resilient plan will ensure risk is spread across the portfolio, rather than relying on a single asset to drive returns. Like stocks, real estate investment is a long-term proposition, and where possible it is advisable to wait out depressed markets.
Underlying currency of investment vehicle
As we saw from the earlier chart, some financial markets are more resilient than others. Spreading your portfolio across different underlying currencies can help offset regional volatility. However, you should be aware that past performance is not necessarily indicative of the future performance.
Manage your liquidity
Whether we like it or not, life can throw us curveballs. Having sufficient access to liquid assets within your portfolio ensures that you don't draw down unnecessarily on investments, particularly if they are priced lower than you originally purchased them for.
Financial expertise at your fingertips
To be a successful investor, it helps to take a longer-term perspective on market volatility and resist the urge to react to short-term swings. If you find stocks' ups and downs difficult to weather, you may benefit from working with a dedicated financial consultant who knows you personally and can provide personalised advice based on your financial goals and timelines.
These professionals bring a wealth of experience and insights, offering personalised planning and execution that resonate with the market. We recommend that you seek advice from our Financial Consultant before making a commitment to purchase a policy. By partnering with the right financial consultant, HNWIs can navigate the complexities of building a resilient financial plan that is robust, adaptable, and tailored to their unique life story.
Sources
1. https://www.ubs.com/global/en/family-office-uhnw/reports/global-wealth-report-2023.html
2. https://www.capgemini.com/insights/research-library/world-wealth-report/
3. https://www.macrotrends.net/2324/sp-500-historical-chart-data
4. https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/dotcom-bubble/
^Actual legacy amount varies from Product to Product as well as profile of life insured.
T&Cs apply. Please refer to respective product summaries for details.
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