Asset Protection Strategies for the Wealthy: The Psychology of Insurance
Emotions, while useful and making us human, can also thwart intelligent decision-making when it comes to insurance and asset protection. Exerting the effort to appreciate what insurance is and reflecting on a few questions may help.
“While we are, death is not; when death is come, we are not. Death is thus of no concern either to the living or to the dead. For it is not with the living, and the dead do not exist,” said the ancient Greek philosopher Epicurus.
We could probably be happier with that thought. But still, the consequences of death, cannot be ignored. And when death comes knocking, a well-considered insurance policy is a crucial thing to have, especially for the wealthy.
There is just one perennial problem.
“They don’t want to talk about dying,” said Dexter Agcaoili, Director of AXA Philippines’ Single Premium Products and Unit Linked Funds Category.
“The topic of death is not easy. Even for the young HNWIs, even if they truly appreciate what insurance is, they find it difficult to discuss it with their parents. It’s deemed an inappropriate topic because it seems like they’re already keen on their parents’ wealth even if they’re still around,” said Agcaoili, who has decades of experience in various companies handling wealth management for high-net-worth individuals.
Common mistakes of HNWIs
He said the most common mistake wealthy people make is thinking that they do not need life insurance because they are wealthy and that they have more than enough to leave behind for their families.
On the other hand, there are those who still think of insurance with a purely investment mindset. They expect returns, particularly with the variable universal life (VUL) insurance type. Many think it is purely an investment that is primarily meant to grow.
In both cases, there is a lack of appreciation for life insurance protection.
“They are comparing it to the usual mutual funds or UITFs (unit investment trust funds), which are not insurance products. Single-premium VUL insurance has a death benefit that pays at least 125% of the single premium paid regardless of the market value of the underlying investment funds,” said Agcaoili.
Some subscribe to the view of “buy the term, invest the difference”, which means buy the cheap kind of insurance (e.g., term insurance) that can cover you for, say, 10 or 20 years, and then invest the rest of your money.
The drawback, however, is that after 10 or 20 years, you don’t have protection anymore. And all your investments will then be part of the taxable estate subject to estate tax, and frozen until that tax is paid or garnished to satisfy any debts and other legal obligations.
2 uses of insurance policies
The first important use of insurance is the settlement of estate taxes.
Even if the estate tax has been reduced from 20% to 6% under the Tax Reform for Acceleration and Inclusion (TRAIN) law, the importance of insurance in estate planning has not diminished.
“You don’t just really allocate 6% or 10% of your wealth to life insurance. If you really analyze what the essence of estate planning is, it is planning all the way until death. You make a plan that will really take care of your estate, and it will be disbursed according to your wishes,” said Agcaoili.
“The tax regime can change, so 6% earmarked for inheritance tax may not be sufficient as the tax rate can go back to 20% in the future,” he added.
The second important use of insurance is wealth transfer.
According to Agcaoili, one use of life insurance is to ensure the seamless and legal distribution of your estate without the encumbrances of probate proceedings, taxes, and garnishment.
“It’s about the seamless transfer and distribution of wealth to your heirs. It won’t form part of the taxable estate for irrevocable beneficiaries. The insurance company can readily write a check to each beneficiary in accordance with stipulations in the insurance contract, which makes the wealth distribution more direct,” he said.
More sophisticated HNWIs would use a life insurance trust, a type of legal arrangement where they assign a person or corporation to hold their life insurance policy, money, property, and other assets and manage them according to their wishes, even after they pass away.
Trends in insurance
Agcaoili noted that in the past few years, HNWIs have sought insurance policies with high insurance coverage, like regular-pay or limited-pay insurance products.
What is also becoming popular are traditional single-premium endowments, which are insurance policies that provide guaranteed cash benefits on top of the insurance coverage.
“Similar to fixed income instruments, endowments provide a guaranteed cash benefit payout over a limited term like 7 or 10 years, with a certain protection of, say, 125% of the single premium amount,” explained Agcaoili.
The insurer guarantees an annual endowment payment and the payment of the initial single premium amount upon the insurance policy’s maturity.
Others want more flexibility with bespoke solutions, which could include riders, or add-ons, to the policy, such as critical illness riders.
Key things to remember
“By studying and appreciating the value and advantages of life insurance, we can fully maximize its benefits in terms of estate planning and wealth distribution,” said Agcaoili.
It would also help to be more aware of the psychology and emotions that somehow muddle the way people think about insurance.
A few questions may help:
1. What role can insurance play in my estate planning? Can it pay for estate taxes? Can I use insurance to distribute my wealth when I pass on?
2. Am I buying this insurance policy for the right reasons? Do I appreciate the life protection coverage that it provides?
3. Will there be an equitable distribution of wealth among my beneficiaries?
4. What emotions are getting in the way of my decisions?
Thinking about death may not be pleasant. But philosopher Peter Cave of Cambridge University provides us some food for thought: “Live so you will have no regrets if you die tomorrow, but also no regrets if you don’t.”
If you don’t want to have any regrets, it may help to consult your investment advisor, too.
ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir.