Private Client Services by Mercer
How you manage your wealth is motivated by both financial and emotional drivers, and the very best outcomes are achieved when both can be satisfied.
In this issue, we hear from Bill Johnston, our Chief Commercial Officer, on the right time to begin planning wealth transfer; Director, Nicolas Ren, talks about the diverse utilizations of annuities; we share a case study on a parent maximizing their legacy of love; and we showcase how we found solutions for a client when others gave up. Welcome to our Vision.
The greatest wealth transfer in history is already underway1. By the end of this decade, a significant amount of wealth will have transferred from one generation to the next. PCS’ Chief Commercial Officer, Bill Johnston*, explains why – irrespective of your age – it’s vital to start planning your wealth transfer.
Transferring your wealth – why start the planning now?
Wealth can be transferred as gifts during your life, or after as inheritances, but irrespective of your wishes, age, and expected longevity, everyone should begin planning.
Thinking and planning for your ultimate intentions for your wealth gives you long-term control amidst the unpredictable changes that life brings. And once you have set a framework in place, a good rule of thumb is to review your wealth transfer plan yearly, because a lot can happen 12 months and you want to be up to date with your risk management, especially in volatile times.
If you are a business owner, anytime you do a major strategic plan for your business is also a good time to review your wealth transfer plans. It should reflect, in detail, exactly how you want to transfer the business assets, the structure, your succession plan, as well as the potential wealth equalization mechanism involved if there are family members who will not inherit the business assets. Developing stakeholder and shareholder communications is also important.
"Routine reviews aside, common trigger points to evaluate your wealth transfer strategy include, getting married, having kids, marriage breakdowns, business partnership dissolutions and retirement."
A strategy is key because it will help to instil confidence in your stakeholders. For instance, your business might only have two key shareholders, and however successful the business might be, if one shareholder should pass away unexpectedly without a clear partnership buyout agreement and funding mechanism to enable that agreement, the death could prove highly damaging. Funding mechanisms like life insurance inject liquidity at crucial times, and more importantly, provide certainty when it is most needed.
Having a wealth transfer plan is even more important if your world is complex, such as having multiple businesses, assets and beneficiaries in different countries. Without a clear strategy and structure, businesses and illiquid assets can be tied up for years, especially when there are legal disputes. Beyond estate equalization, you can protect the value of your assets in the long-term by building in a capital injection. The capital, when properly structured, avoids the need to liquidate assets during the wrong market cycle and eroding your estate.
The key things you need to think about when planning wealth transfer
There are four key areas we guide our clients to think about in order to fulfill their emotional and financial drivers. The two motivators are equally important, and the best outcomes are achieved when both can be satisfied.
The most common pitfall in the wealth transfer process
The biggest pitfall we see is the protect gap in many HNW and UHNW individual’s life protection policies. Having an old policy gives some people an artificial sense of being armoured. They have a misguided, but understandable belief in being fully protected. They think, “I already have one, so my family and business are protected and fine.” When in fact, they could be underinsured by as much as 20-60%.
HNW individuals’ wealth and the complexity of their assets often increase quickly. In the first year of the pandemic for example, the world's 2,365 billionaires saw a $4 trillion boost to their wealth, increasing their fortunes by 54%2 So unless they all reviewed and updated their policies in the recommended 12-month timeframe, there are many in that cohort who under-insured by a large margin.
Life policies and wealth transfer arrangements are both ways of making a long-term plans, and for any plan to be robust, it must be stress-tested regularly.
* Bill Johnston is the Group Chief Commercial Officer of PCS by Mercer Group. Most recently, Bill was the CEO of Mercer in Indonesia. Bill brings with him nearly three decades of experience in senior roles in the financial services, high net worth (HNW) and consulting industries. With PCS’ growing focus on innovation to deliver impactful solutions to you and your clients, Bill’s executive management and sales leadership experience, coupled with his proven ability to accelerate growth and scale businesses, will undoubtedly help to ensure PCS continues to deliver market leading solutions to you. Prior to Mercer, Bill was CEO of Chubb Life Indonesia, Director at Willis Towers Watson and Head of HSBC HNW and Head of Onshore Banking for HSBC in Singapore.
Annuities are surprisingly flexible insurance contracts, and the high-net-worth in Mainland China are fully utilizing their versatile features. PCS Director, Nicolas Ren, explains how.**
What is an annuity?
An annuity is an insurance contract that pays a regular and stable income stream in the future. Contracts usually start with an ‘accumulation phase’ during which premiums are paid and invested. Once the payouts begin, the income continues either for a specified period of time, or for the remainder of the insured person’s life. Annuities can be purchased with scheduled premiums or lump-sum payments.
Phases of annuity
While the product is widely available and generally used for retirement planning and/or to help people address the financial risk of outliving their assets, high- and ultra-high-net-worth (HNW and UHNW) individuals can leverage annuities in a multitude of different ways.
HNW and UHNW utilization of annuity:
Wealth transfer tool that gives you full control:
When properly structured, annuity policies allow HNW individuals to retain full control of the asset throughout their lifetime, so annuities offer enormous scope as a gradual wealth transfer tool. A range of products and solution structures allow the policy holder to choose when payments might begin and the policy withdrawal timing (if indeed they do want to withdraw) as well as the beneficiaries.
Annuities can be effective as a wealth equalization instrument. And its high manageability also makes it a useful tool for teaching good wealth management practices to the next generation – without risking other family assets.
In some cases, and in certain jurisdictions, an annuity policy and payments can be effectively isolated from debt obligations and potential asset divisions in business/marriage breakdowns.*
Minimum health disclosure:
Annuities are generally issued with minimum health disclosure and medical underwriting. As such, it’s useful in instances when a client’s health status might be not suitable for whole of life policies.
An investment: hedging for longevity
In most cases, annuity policy holders don’t outlive their annuity income, so it is a relatively low-risk hedge investment – you are hedging longevity risk. Even though annuities are not designed as a hedging tool, some HNW/UHNW individuals invest in annuities in the hope of cashing out in the future at a profit. Others use it to balance other higher risk investments in their asset portfolio.
In volatile times, annuities represent certain income irrespective of circumstances. Appropriately structured annuities can ensure liquidity and cash flow not just for you, but for your future generations.
And when structured with other life insurance products that have lump sum payouts, annuities can safeguard your family’s wealth whatever the future might hold.
Nicolas Ren has more than 17 years of experience in the wealth management field in Mainland China, with a focus on servicing HNW/UHNW individuals. He has extensive knowledge of asset allocation and insurance solutions.
Prior to joining PCS, Nicolas worked for HSBC, DBS, and other well-known foreign and local financial institutions in Shanghai. He served as sub-branch manager at Hang Seng Bank and general manager of wealth management center at Noah.
Nicolas holds a Master of Business Administration degree from Fudan University and a bachelor's degree in management from Shanghai University of Engineering Science.
He is fluent in English and Mandarin.
* This article is general in nature and not intended as financial advice; it might not be appropriate to you.
** The annuity utilization concepts and practices in this article are based on policies in Mainland China – they might differ from policies in offshore jurisdictions.
Private Client Services by Mercer China Limited
Case study:A lasting and loving legacy
You can’t put a price on love, but forward planning and a well-structured insurance solution can ensure your loved ones are cared for in the decades to come.
Our clients are a 62-year-old father and his 34-year-old son.
The father is the founder of a listed company. He has an existing life policy (USD20M) without premium financing. Unfortunately, he has received a cancer diagnosis in the past 12 months and has found it challenging to purchase more insurance coverage. But the scare to his health has made him more determined than ever to look after his only child.
The son is working in the business his father founded, but he doesn’t hold any public shares, has negligible personal assets and no private bank account in his own name.
PCS went through a thorough process to fully understand the extent of the father’s assets, and the coverage the son and family would need to maintain their lifestyle.
Father: Covered by a savings plan with death benefits. The sum assured grows by USD4M in the 10th year and USD16M in the 20th year. The total premium of USD13M was part-financed by cashing in his existing policy for USD4.4M.
Son: A sum assured jumbo policy of USD50M in view of the father’s total assets. PCS was able to utilise the results of medical examinations undertaken in the country by the client, who was able to navigate COVID related cross-border restrictions. Total premium paid: USD27M.
Insurance is an important financial expression of a parent’s love and affection. You can maximize your legacy by organizing insurance solutions as early as possible; forward arrangements not only demonstrate foresight, but they can also lower associated costs and expand insurable conditions.
Despite COVID border closures, the PCS clients were still able to easily implement offshore life insurance solutions relying on the results of medical examinations conducted in China and remote application processes.
Complexities can be managed. PCS by Mercer solutions are consistently client-centric. Before tailoring solutions, we always work to understand our clients’ specific needs and evaluate the entire spectrum of challenges they might face. Our comprehensive processes work to provide the best, most suitable and most economical solutions for our clients.
Case study: Finding solutions when others fail
Male PCS client is a married business owner living in Singapore. The client has five existing Universal Life (UL) policies with the total sum assured of USD100M. The policies were placed through another broker in 2011.
As he is generally healthy, and confident of living to an elderly age, the client had been increasingly concerned about the declining cash value of his UL policies (one policy falling to zero in 28 years at current crediting rate). And even though the client went through the standard yearly reviews with his insurance broker, the broker could not provide any solutions to address his concerns.
In search of better results, the client agreed with his private bank advisor’s suggestion of approaching PCS to conduct an independent review of his policies. The advisor recommended PCS for our client-centric reputation, as well as our ability to find and negotiate astute solutions for clients.
The client’s objectives were very challenging in the context of standard market offerings – initially, all the insurers and re-insurers were uncomfortable with offering more than USD100M of total sum assured – which he already had through his UL policies – based on the client’s declared audited financial information.
PCS undertook exhaustive negotiations with insurers, and we were successful in finding a solution that satisfied all of the client’s objectives. In the end, we were able to present multiple solutions to the client and he chose the one which blended the flexibility of his existing UL policies with the stability of two additional Whole of Life policies with additional death benefit coverage of USD50 million, from 2 insurers.
We listen to clients’ concerns and objectives without preconceived ideas, and we are always solutions focused – if a satisfying result can be found, we will find it.
PCS start by taking the time to study clients’ existing policies. We provide comprehensive policy reviews that contain more detailed analysis than the standard ‘annual review packs’ offered by other brokers. Our processes enable a clearer overview for, and of, clients.
PCS remain neutral throughout the review and broking processes. We are truly relationship-driven and provide only unbiased opinions to clients.