Insights

Legacy Planning: Wealth Transfer to the Next Generation

07 Aug 2024 | 12 mins-read

The global economic impacts of the last 18 months have taken a toll on investor confidence. According to the 2023 World Wealth Report by Capgemini, 67% of global high-net-worth individuals (HNWIs) said wealth preservation was a critical objective for the coming year, shifting their wealth goals from growth to protection¹.

This change in attitude followed a prolonged drop in investments, with several global stock indices struggling through a bear market. As a result, the total wealth of HNWIs declined steeply in 2022, and the global number of HNWI also decreased sharply¹.

It is not surprising that inflation is front-of-mind for HNWIs. The increased cost of living dilutes consumers’ purchasing power and erodes earnings and savings. The longer the period of high inflation, the greater the likelihood of economic instability².

Amidst this backdrop, insurance legacy plans emerge not just as a mere option, but as a cornerstone of financial resilience. Offering more than traditional insurance, these plans are tailored for investment, asset protection, and legacy planning, catering specifically to the nuanced demands of HNWIs.

This article delves deep into the structure and benefits of these insurance legacy plans, their role in ensuring equitable insurance distribution among heirs, and how they can be customised to meet individual financial goals.

The role of legacy insurance in wealth accumulation

When many of us think of insurance plans, we conjure images of a cheque being handed to a grieving family. Insurance is viewed as a protection tool, something that is “set and forget”. Less commonly held is the view that insurance plays a vital role in wealth accumulation – but this can certainly be the case for legacy insurance plans.

Here are some of the features that make legacy insurance plans an attractive wealth accumulation tool:

Liquidity

Investors value liquid assets, because they make it easier to respond quickly to market trends and capture opportunities. However, holding too much liquidity within a portfolio can be a risk, especially when inflation levels are high. This is why legacy insurance plans are particularly useful for maintaining liquid assets. Universal life insurance plans provide protection and potential cash value growth, while allowing some flexibility for policyowners to withdraw part of the cash value in later years. As such, the Policyowner can access some cash value from their policy for their immediate financial needs (such as paying for medical expenses) while maintaining a legacy benefit to pass on to their children.

Flexibility

The flexible nature of legacy insurance plans means policyowners can change their strategy throughout their life. For example, when a policyowner first takes out a universal life insurance plan, they may be focused on possible high returns, using the investment mechanisms on offer to accumulate their cash value component with the insurer and boost their overall holdings. Towards retirement, the policyowner may use that cash value component to maintain their lifestyle, while still retaining a legacy benefit to leave for their children.

Leveraging lump sums

For HNWIs with significant cash or bond holdings, a universal life (UL) insurance plan may provide greater benefits to the next generation than simply gifting the assets directly. For example, consider an individual with assets worth $6million. She spent half on her retirement, leaving the remaining $3 million to her daughter. Without the use of legacy planning solutions, her legacy funds for future generations get diluted over time. With a UL insurance plan however, the individuals across all generations can use a portion of the assets to fund a legacy for future generations, while ensuring a comfortable retirement.

Without wealth preservation solutions
Julie's funds get diluted by the generations.

With Manulife Signature Series
Legacy planning solutions avert potential diminishing wealth over the generations.

Julie and her descendants continue to pay a one-time US$2M premium to secure a US$6M legacy for future generations. This planning allows Julie and her descendants to enjoy greater retirement funds of US$4M while preserving the intended wealth across generations.

Strategies and benefits of using legacy insurance plans for wealth preservation

As we touched on earlier, a solid financial plan should not only accumulate wealth, but also protect future generations. Preserving wealth across generations is an art form that requires foresight, planning, and the right financial tools. Here are some of the ways legacy insurance plans can play a pivotal role in ensuring your legacy endures.

Discharging liabilities

The term "asset rich, cash poor" refers to individuals who have significant wealth but limited access to liquid assets. In other words, the wealth is tied up in assets like real estate and investment vehicles or leveraged for future gains. If a person passed away without sufficient liquid assets to cover their debts (or even their funeral costs), this can put significant pressure on their loved ones. A legacy insurance plan, on the other hand, creates a safety net for the family without having to deal with the legal and tax burdens of selling off estate-based assets.

Preservation

A legacy insurance plan safeguards wealth against the erosion of inflation and market volatility. While the policyowner still has access to cash values, they can rest assured in the knowledge the death benefit is preserved and, provided the nomination is complete, the death benefit payout will be distributed according to their wishes.

Estate equalisation

When significant wealth is tied-up in business (as is the case for many HNWIs³), it may appear that the only way to enact an equitable distribution of the estate is to sell off the business. Legacy insurance plans can negate this scenario, by equalising the estate.

For example, imagine you have two children and a family office. When it comes time to retire, your eldest child announces he is interested in taking over the running of the business, but your youngest has intentions to move overseas and pursue a different career path. A legacy insurance plan taken out for the same value as the business whereby the sole beneficiary is the second child, means both heirs receive an equal share of the estate, without the need to sell the business.

Enhance your nest retirement egg

Another challenge for HNWIs is maintaining their lifestyle during retirement. Even with substantial retirement savings, the continual drawdown of income from investments can lead to the swift erosion of a retiree’s hard-earned nest egg. However, a legacy insurance plan can offer the security of a preserved legacy for the next generation (in the form of the death benefit) alongside the added boost of regular income generated through other retirement plans.

Incorporating legacy insurance for diversification

Diversifying your portfolio is key to managing risk and legacy insurance plans offer security that many investors crave. In fact, legacy insurance plans can serve as a way to diversify your portfolio against market risk.

Take investing in an ETF (Exchange-Traded Fund) for example. ETFs offer exposure to a diversified portfolio of assets, allowing investors to participate in market returns. Over the long term, equities have historically provided higher returns compared to traditional insurance policies. However, ETFs are subject to market volatility. Changes in market conditions, economic factors, geopolitical events, and investor sentiment can all affect the value of the ETFs.

For example, an investor has US$2 million in cash and US$8million in stocks, bonds and mutual funds. He take out a UL insurance policy with coverage of US$8 million. During policy term, the policyowner suffered a loss US$4 million in his investments. Should he pass on during this time, the guaranteed death benefit of his UL will ensure that the beneficiaries receive a payout of US$13 million. That is a significant difference from the US$6 million had the assets been transferred in their original form.

By incorporating both products into the wealth management mix, the investor offset the riskier aspects of his investments against the guaranteed value of the insurance legacy plan.

Tailored advice from financial representatives

The journey of estate planning for high-net-worth individuals in Singapore is significantly enhanced by the strategic use of insurance legacy plans. These plans are pivotal components in orchestrating a seamless wealth transfer process.

The key to success in this endeavour is proactive planning and embracing customised insurance solutions tailored to your unique financial landscape. For this reason, HNWIs should actively engage with financial representatives. The expertise offered by financial representatives can be invaluable in navigating the intricacies of insurance legacy plans to eventually recommending the right plan suited to your needs. By doing so, you can unlock the full potential of these plans, ensuring your financial future is secured, optimised, and poised for enduring success.

As we navigate through uncertain economic times, the relevance of insurance legacy plans is increasingly coming to the fore, offering a blend of wealth management, asset protection, and legacy planning solutions.

Sources