Secure Your Family’s Future with the Power of Legacy Insurance Plans

The so-called great wealth transfer has begun. As "baby boomers" (those born between 1946 and 1964) approach retirement and consider the legacy they will leave behind for their children, more and more high-net-worth individuals (HNWIs) are entering the complex world of inter-generational wealth transfer. In fact, wealthy baby boomers are expected to pass on over US$75 trillion of collective wealth to future generations over the next decade¹.

According to Lombard Odier², more than half (56.4%) of APAC HNWIs believe it is essential to protect their family and ensure that they are well taken care. However, only a fifth of APAC HNWIs (20.3%) are satisfied that ‘they have structured their assets to achieve their financial goals’. In this environment, legacy insurance plans emerge as a dynamic, multi-faceted wealth management tool, ensuring that legacies are nurtured and sustained for generations to come.

This article seeks to demystify legacy insurance plans, highlighting their role in facilitating efficient wealth transfer for HNWIs. Discover how you can provide for your loved ones, while protecting your legacy assets and continuing to grow your wealth.

What is legacy insurance plan?

Legacy insurance occupies a unique place in estate planning – one which is not replicable by other assets. Legacy insurance plan may be used to: 

• Guarantee immediate cash value is available for your loved ones through your estate
• Provide liquidity to your estate without probate
• Ensure your insurance payout are protected from your estate's creditors
• Facilitate insurance payout distribution 

Legacy insurance plan refers to insurance solutions that are designed to preserve and efficiently pass on wealth. These are typically whole life insurance policies which pay a death benefit to beneficiaries. Some insurance policies may include a savings portion, which enables the policyowner to accumulate cash value during policy term. They may also be universal life insurance policies, which are similar, but allow the policyowner some choice in relation to premium payments and the cash value. 

Policyowners pay premiums for legacy insurance plans. Premiums can be paid at different frequencies depending on the type of plan. A portion of each premium payment is used to fund the insurance fees for protection coverage, while the balance goes towards the investments of the policy to potentially grow your returns.

Another reason why these types of solutions are often referred to as legacy insurance is because of the cash value, which is not a product feature of a term life policy. The cash value is designed to provide a living benefit to the policyowner. This makes legacy insurance uniquely positioned for wealth accumulation strategy; with the added bonus of liquidity that are not typically available in investment vehicles or assets such as real estate. Legacy insurance plans also offer flexibility in relation to the use of the cash value: depending on the policy, cash value can be withdrawn, accumulation with insurer, allocated to pay for premium payments and more. 

Different types of legacy insurance plans

There are many different types of legacy insurance plans available. Here are some examples:

• Whole life – Provides a death benefit to beneficiaries upon the death of the life insured. Premiums are fixed for the duration of the policy. Participating whole life policies have cash values which will build up after a minimum period and this differs from product to product. Non-participating whole life policies have guaranteed cash values. 
• Universal life – A life insurance with cash value that grows over time, based on an interest rate set by the insurer which will not be lower than a guaranteed minimum interest rate. It also gives policyowners flexibility to adjust their premium amounts and terms within certain limits. 
• Indexed universal life – Similar to universal life, but where the cash value is allocated into an account with interest tied to an equity index. As the index moves up or down, so does the rate of return on the cash value component. In some cases, there may be a minimum guaranteed rate of return or a cap on returns.
• Variable universal life – Similar to universal life, but where the cash value component can be split into subaccounts and invested in stocks, bonds and mutual funds. The cash value are not guaranteed and premium payments may be increased if the cash value is not sufficient to fund the insurance.

As with every decision to be made, there are two sides of a coin. Some limitations to keep in mind while considering these insurance plans are:

• Universal life and indexed universal life plans are available only in USD, while whole life is available in both USD and SGD. This may be a consideration point for HNWIs who are not comfortable with foreign exchange risk.
• Premium terms for whole life plans are fixed, while those of universal and indexed universal life plans often offers flexibility. This means that a whole life policy may lapse if a premium payment is missed, whereas coverage for indexed universal life plans can continue if the underlying policy value is sufficient to cover the charges. 

How legacy insurance plans can benefit HNWIs

Reducing financial complications for heirs is a cornerstone of legacy planning. Legacy insurance plans are designed to minimise the potential financial burden to inheritors, and pre-emptively mitigate disputes that often emerge amongst heirs during the inheritance payout process. Essentially, legacy insurance plans ensure that the intentions of life insured are honoured (provided a nomination has been submitted). This approach can help to preserve familial relationships but also protects legacy wealth as it transitions across generations.

Here are some examples of how legacy insurance plans can benefit HNWIs at different stages of life:

Established employed singles

In 2023, 67% of HNWIs said they were prioritising wealth preservation as a critical objective, shifting their wealth goals from growth to guarding³. For established, employed singles, legacy insurance plans provide the security of asset protection alongside cash value for lifestyle wants, such as vacations, luxury purchases and more.

By utilising Manulife’s Signature Indexed Universal Life Select (II), for example, singles can preserve their accumulated wealth while having the advantage of potentially high returns¹ through the index account offering an additional means to diversifying your wealth accumulation portfolio. The Automatic Premium Spread option – spreading out your premium into the Index Account, regardless of market fluctuation – provides even greater protection¹ against market volatility through dollar-cost averaging.

In general, an Indexed Universal Life (IUL) plan can also balance upside potential gains with downside risk protection. While the policy value is tied to the performance of an underlying index e.g S&P 500, the floor rate feature of the insurance plan prevents your crediting interest from becoming negative, ensuring that your policy value will not suffer the same percentage losses as the index account. Unlike traditional life insurance, IUL also allows penalty-free partial withdrawals², where policyowners can withdraw a percentage of their policy value each year without compromising on the death benefits.

Manulife’s Signature Income Series also provides flexible payouts option, meaning singles can choose to receive monthly income payments³ to supplement their lifestyle, cover medical expenses or even accumulate with us for higher returns⁴.

Established employed families

The peace of mind gained through the knowledge that your family will be taken care of when you pass away is just one aspect of legacy plans that makes them an attractive proposition for HNWIs with children. Another key feature offered by legacy plans is the regular income to the life insured through the life of the policy. For example, parents can use the flexible payouts option available through Manulife’s Signature Income Series to provide their children with a regular monthly income³. They can also choose to assign their child as the new policyowner rather than providing them with a death benefit.

Should your passing occur while your family is still young, the death benefit paid to your beneficiaries (i.e.: your spouse or children) can be used to pay off outstanding debts, secure the family home, pay for the child’s education – all the things you would have taken care of.

Matured business owners with families

Imagine you have spent decades building your business. As your business has grown, so has your family – your three children are now adults, with two keen to take on the family business into the future. It is important to you to provide equally for your children but the idea of selling your business is devastating.

A legacy insurance plan provides a strong alternative than selling the business. In this scenario, you could diversify your portfolio with a universal life insurance policy such as Manulife Heirloom (VII), which preserves your desired amount of legacy, by offering the benefits of high insurance coverage and cash value accumulation. Upon your passing, the business can be divided equally between the two children who want to continue running it, while death payout from the insurance plan can be gifted to your third child. The balance of your other assets can be divided among all three children, to provide a balanced legacy for all.  

Family office

Family offices are a growth area in Singapore. In fact, almost a quarter of family offices in Asia are less than two years old and the growth in family offices has led to the creation of over 1,400 jobs for Singaporeans⁴. But as many new business owners are discovering, the make-up of a family office can lead to a number of risks when it comes to the legacy of the business. One of these is keyman risk, i.e.: the reliance of the business upon one or two key personnel, without whom the business would cease to be profitable, or even operational.

Keyman risk can be mitigated by taking a life insurance policy on the key person, with the family office named as the beneficiary. The type of insurance suitable is ultimately dependent on the needs of the business, however legacy insurance plan is worthy of consideration because it provides a death benefit to the business in the event of the key person’s death, while simultaneously enabling the business to access to policy value. In addition, many legacy insurance plans (such as Signature Indexed Universal Life Select (II) are transferrable to another life insured, meaning that if the key person retires or is replaced by another, the policy can be maintained and used to cover the incoming key person.

Choosing the right legacy insurance plan for your needs

With so many features and options, it can be difficult for HNWIs to determine which legacy insurance plan would best suit their needs.

Here are some simple steps to begin determining which solution is right for you:

1. Collate a list of all your assets and liabilities. This should include all bank accounts, credit cards, and loans, as well as physical assets such as real estate and vehicles. Determine which of these existing assets and liabilities are currently accounted for in your estate. Do you have sufficient liquid assets to pay off all debts? Do you intend on selling any physical assets in the near future? How much of your investment capital is protected against market volatility? Has your risk appetite changed? Is your portfolio diversified enough?
2. Determine who you wish to benefit from your legacy. Consider the needs of your spouse, children, parents, other relations, as well as business partners and the broader community (for example, you may wish to donate a portion of your estate to charity). Can your estate be easily divided between these parties? Will everyone receive an equal share?
3. Consider your retirement plans. The length of time you intend to continue working and the lifestyle you wish to maintain while retired will impact your wealth distribution plan. If most of your wealth is tied up in real estate, you may not have sufficient cash flow in retirement to manage unexpected expenses such as medical bills.
4. Talk to your loved ones. One of the most important parts of determining which legacy plan is right for you is to have an open and honest conversation with those people who are set to inherit your wealth. What do your children want to do with the family business? Have you considered the needs of your grandchildren?

Working with a financial consultant

HNWIs face a unique set of challenges and opportunities. In this dynamic environment, securing one's financial legacy has never been more paramount. Insurance is a crucial pillar in wealth and legacy management, and when tailored to address the specific needs of HNWIs, these plans are not mere safety nets, but comprehensive strategies designed to grow, preserve and efficiently pass on wealth.

When determining which legacy insurance plan is the most appropriate for your needs, it is advisable to seek the expertise of a financial consultant. Financial consultants can help you determine your financial goals and recommend the most suitable insurance plan to secure your legacy, based on your unique financial circumstances. What’s more, through regular annual reviews, your financial consultant can ensure your portfolio continues to align with your goals.

If you’re ready to take control of your financial legacy, contact one of our financial consultants today.

Footnotes:

1. https://www.finsia.com/news-hub/infinance/the-great-wealth-transfer-all-times 
2. https://asia.lombardodier.com/contents/corporate-news/corporate/2023/november/apac-hnwis-face-challenges-when.html
3. https://www.capgemini.com/insights/research-library/world-wealth-report/
4. https://www.forbes.com/sites/francoisbotha/2023/07/09/the-gloves-are-off-hong-kong-vs-singapore-and-the-fight-to-lure-family-offices/?sh=7b871894226f

Footnote:
1. Crediting rate for Index Account is calculated based on the point-to-point performance of the underlying indices, excluding dividends, subject to floor and cap rates by Manulife, multiplied by the Performance Multiplier of 115% (applicable to Performance Index Sub-account only), plus guaranteed loyalty bonus (if any).

2. Penalty free withdrawal is available from the 11th policy years onwards. The limit is equals to the lower of:

(a) 5% of the policy value as at the policy anniversary immediately before the policy year less any withdrawals made in the current policy year; and
(b) the value in the Fixed Account at time of withdrawal.

3. Signature Income Series provide monthly income either from the 37th policy month or the 49th policy month, until the life insured reaches age 120 or until the termination of the policy, whichever is earlier. Once the policy is incepted, the monthly income amount and the policy month when the monthly income is first paid out cannot be changed.

4. The monthly income can be accumulated with Manulife at the prevailing interest rate. The interest rate is subject to change by Manulife with 30 days’ advance notice to the policy owner.

5. Allowed two years after the date we issue the policy to you. We will decide whether to accept the new life insured and it will depend on whether we can insure this new life insured and on other terms and conditions we may decide. The policy charges will be based on the new life insured’s age, gender, country of residence, underwriting class and any other ratings. For more details, please refer to the policy contract.

Important Notes

Signature Indexed Universal Life Select (II), Signature Income Series, Heirloom (VII) are underwritten by Manulife (Singapore) Pte. Ltd. (Reg. No. 198002116D). This advertisement has not been reviewed by the Monetary Authority of Singapore. Buying a life insurance policy is a long-term commitment. There may be high costs involved if you terminate the policy early, and your policy’s surrender value (if any) may be zero or less than the total premiums paid.

This article is for your information only and does not consider your specific investment objectives, financial situation or needs. It is not a contract of insurance and is not intended as an offer or recommendation to purchase the plan. You can find the full terms and conditions, details, and exclusions for the mentioned insurance product in the policy contract.

These policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact us or visit the LIA or SDIC websites (www.lia.org.sg or www.sdic.org.sg).

We recommend that you seek advice from a Manulife Financial Consultant or our Appointed Distributors before making a commitment to purchase a policy.

Information is correct as at 22 Aug 2024.