Insurance plans for high-net worth individuals are often beyond what is available to the everyday man.
For many Malaysians, the importance of insurance is drilled into their minds early on in their lives or careers, and it is likely that most have a friend or relative that is an insurance agent. However, in terms of pure numbers, insurance penetration in the country is still low.
A survey commissioned by Zurich Malaysia last year showed that 38% of Malaysians remain uninsured; another survey conducted by the Health Ministry in 2020 found that only 22% of Malaysians had personal health insurance.
According to Dennis Chin, director at Harveston Wealth Management, life insurance needs usually start with self-protection such as medical cost and critical illnesses, which is then followed by financial security for family such as family income protection and credit protection.
And while it may be the norm to be uninsured, for high-net-worth individuals (HNWI), this is likely to border on sacrilege!
“For HNWI, the abovementioned is essential as well even though they have more financial resources to take care of the medical bills and family income need,” says Chin.
He adds that the typical insurance planning for such individuals goes beyond personal risk as there are often other assets and collateral that may be used as guarantors in business borrowings, for example if a key person in the business suddenly leaves.
“These borrowings will risk their personal assets being used for paying off in the event of sudden departure of the key person in the business or guarantor for the loan.”
Protection For HNWI
The main difference when it comes to insurance coverage for HNWI usually comes down to two things – the required sum assured and the type of risk.
If the person requires RM10 million in life coverage, insurance plans can come in the form of offshore universal life policies denominated in US dollars while also being more cost efficient. Such offshore policies are not accessible to lower/middle income individuals as the minimum sum assured is usually beyond reach, often starting at US$500,000 and above.
“This type of plan may offer different health and financial underwriting requirements which are offered differently by insurance companies locally,” says Chin.
He shares that “asset protection is also essential” for HNWI as they tend to own wide varieties and classes of assets. Typically, such assets would include real estate, jewellery, or art collections to name just three. Often, these may also make up the bulk of their net worth.
For example, a standard house insurance will not hack it when it comes to covering a bungalow that is constructed with exotic woods and expensive, custom-made furniture and fittings. Special coverage will be required for such a home in the event of fire or burglary explains Chin.
“Therefore, the scope of insurance needs for HNWI is much wider than lower- and middle-income individuals,” he adds.
Healthcare is another area in which HNWI are usually well-covered in. For those that travel regularly around the world, international medical coverage is key in order to counter the risk of being forced to seek medical services in a foreign country.
“This type of medical plan comes with high medical limit in US dollars and the premium is also payable in US dollars as well,” he shares.
“It also provides peace of mind while travelling globally as usually it comes with services on international consultation for medical services and evacuation back to their home country.”
For The Next Generation
HNWI with highly sought-after professional skills may also choose to take “future economic value” into consideration when setting up their life coverage. For example, in the event that a person is no longer able to work through total or permanent disability, or death, this will ensure that his or her projected earnings over a set number of years will be paid out to the family.
There are notable examples of celebrities doing this, such as footballer Cristiano Ronaldo getting insured for £90 million in 2009, while singer Taylor Swift reportedly insured her legs for US$40 million in 2015.
Chin explains that utilising insurance as a tool for wealth management is not a foreign concept to HNWI, with family trusts and family offices usually set up for wealth preservation for the benefit of the next generation and even beyond.
Insurance For Wealth Creation
Once the basic protection needs covering medical costs or critical illnesses are in place to ensure future financial security for HNWI, “a large sum assured is usually a tool in wealth management for wealth creation” Chin says.
Alvin Yap, managing director at A.D. Financial, adds, “For family offices, insurance is also treated as a tool for estate planning, risk diversification and even wealth creation.”
He gives an example on how a patriarch owning several offshore real properties may purchase life insurance with proceeds to cover any tax liabilities (e.g. inheritance tax, etc.) upon his demise, ensuring that the offshore real properties will be transferred to his family office smoothly after his passing.
Using another example, he says, “Let us assume a matriarch purchases life insurance and makes it a point that the family office will manage and invest the insurance proceeds which will be treated as an education fund for many generations to come. She bequeaths her personal wealth to her children and her family office manages the insurance proceeds (education fund) upon her demise.”
The mechanics of a family trust makes it useful for liquidity purposes as “insurance proceeds will be paid directly to the family trust”, providing an immediate source of cash flow to beneficiaries of the trust as opposed to individual nominees.
“This is because in the event the nominee does not survive as well, the insurance paid out will fall into estate which can only be used after obtaining grant of probate,” highlights Chin.
This can also help to prevent any squabbles among beneficiaries when the head of the family passes on. It is not uncommon to hear of huge lawsuits which entail siblings and other family members fighting in court to claim their piece of the pie. Hence, in most families, there will be a need for such a structure to be in place.
To illustrate this point, Chin uses a scenario where there are multiple properties to be passed down to several beneficiaries.
“What if these properties are not identical and each of them carries a different value? This might create some issues about fairness whereby the value of inheritance of each beneficiary is not the same,” he says.
“In this case, a method of wealth equalisation can be adopted by buying life insurance that eventually creates the cash to compensate those beneficiaries that inherited lower value properties.”
Apart from taking care of their families, many HNWIs also engage in the practice of philanthropy through monetary gifts or donations to those in need, utilising the mechanics of life insurance to achieve this purpose.
“Apart from donating existing resources and funds, such as allocating a pre-determined amount of profit from businesses, one can plan by using life insurance proceeds to make charitable donations,” explains Chin.
“There are many family offices which have a foundation in place for philanthropy purposes, consisting of existing assets and cash, as well as life insurance.”
“By paying premiums from existing resources every year, this eventually increases the assets in the
foundation by claiming the sum assured for charity purposes which can help more people,” he adds.
What Are Family Offices?
HNWI often have a family office to manage their financial affairs, but not much is known to the general public. We speak to Alvin Yap, managing director at A.D. Financial, to learn more.
Smart Investor: Can you describe how the various structures of family offices work?
Alvin Yap: Family office is originally from the concept of preserving generational family wealth for European royalty and it is increasingly popular among high and ultra-high net worth Asian families. However, there is still much puzzlement as to what defines them and their primary functions.
Briefly, a family office is about effectively preserving, growing and transferring wealth across generations. It can be treated as a legal entity that houses professionals in various areas such as administration, legal, investment, corporate finance, real estates and so forth to achieve the abovementioned primary functions. Some family offices are more investment oriented; others could be driven by philanthropic causes. In terms of establishments, there is single-family office servicing one individual family and also, multi-family office that service several families benefiting from economies of scale.
SI: Can you explain the role that insurance plays in family offices as a form of generational wealth management or preservation?
AY: Primarily, insurance is used to mitigate financial damages caused by loss of life or properties. For family offices, insurance is also treated as a tool for estate planning, risk diversification and even wealth creation.
SI: How do you determine the type and amount of insurance coverage that different family offices require?
AY: It can be complex but it all boils down to family business needs and family lifestyle.
In Malaysia, term life insurance can be purchased as keyman insurance, meaning insuring the key person such as the owner or someone who is critical to the business; some family offices will source for offshore term life insurance that comes with a lower premium. There is also a variety of universal life insurance that offer very low initial cash outlay for insurance premium or options to fund the premium with movable/ immovable assets and many other flexible premium financing features. Family offices take advantage of these features and purchase universal life with very high insurance coverage.