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Life insurance’s surprising versatility

As many high-net-worth individuals tidy their affairs, so life insurance is attracting greater attention. Although one of the longest-standing wealth management tools, it has a surprisingly flexible range of uses.

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It should come as no surprise that interest in life insurance is growing in the coronavirus era. Across Asia, Europe and the Middle East, enquiries and purchases are rising.

For a start, the pandemic has reminded people of their mortality. But also the quiet of lockdown has given them the time to put their personal and business affairs in order, and to make sure all their risks are covered.

In existence for hundreds of years, life insurance is far from new. It’s a commodity product with basic risk mitigation and saving principles that do not change, although new variations are continually being developed. Yet it’s surprisingly flexible, with a range of different applications, ranging from estate planning, through to managing loan liabilities and succession planning.

As people seek to tidy their affairs at a time of uncertainty, so they are become more aware of the different ways that life insurance can help, and interest is growing. This is especially the case in Asia and the Middle East, both as new wealth expands in Asia and people become more acquainted with life insurance in the Middle East.

Seven flexible uses    
Despite its long history, when it comes to wealth planning life insurance has a wide variety of applications. Below are seven common ways that intermediaries deploy them but there are others besides.

  1. Fair succession planning   
    If a family business is passed to one member of the younger generation, life insurance can be used to give other members of that generation a cash payment instead.      
  2. Planning estate duty liabilities   
    In many European countries, saving into life insurance products defers estate duty. Additionally, in the UK where real estate prices are high, life insurance can cover the inheritance tax that will one day become due on the property.     
  3. Bequests in Islamic countries    
    In some Middle Eastern and Asian countries, Sharia law stipulates that assets must be left to male relatives. But life insurance makes it possible to leave a wife or daughter a legacy.    
  4. Lifetime financial flexibility    
    Saving into a life insurance policy frees up assets for spending, as people know that life insurance guarantees their heirs a financial legacy.         
  5. Personal business guarantees    
    Should the owner of a business die, life insurance provides the money to settle his or her personal guarantees.               
  6. Covering loan liabilities        
    Most people accumulate loans of some kind through life, whether they be straightforward loans or mortgages. A life insurance policy can pay down the loan in the event of the policyholder’s death, meaning that the family is not responsible for the loan.       
  7. Income replacement    
    In an uncertain world, many people choose to protect their income. Life insurance can protect against loss of income up to the age of 75.

Making clients aware             
So, why isn’t life insurance used more in wealth planning? Often people are not aware of its true potential. Broadly speaking, it splits into customised products that are most suited to high-net-worth individuals and traditional products. In Europe, private placement life insurance, which is unit-linked, tends to be popular. In the Middle East, universal life products are appealing. And in Asia people often opt for savings plans.

There is some evolution in the design of products, for instance as people opt for indexed universal life products where the investment element can be linked to stock market indices.

To help intermediaries understand the options, Julius Baer trains and advises intermediaries about how life insurance can meet specific needs. Additionally, we evaluate and monitor individual life insurance providers.

At a time when many high-net-worth individuals are reassessing their affairs, life insurance has an invaluable role to play. The more clients are made aware of it, the more they are likely to realise the potential of this under-appreciated wealth planning product.