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Wednesday, September 5, 2012

Plans for the ultra-rich are indeed different

5 September 2012
Richard Hartung

"Let me tell you about the very rich," said F Scott Fitzgerald. "They are different from you and me." And one of the biggest differences, surprisingly, is in insurance.

These simple products take on a new twist when the ultra-rich are involved. The average person buys insurance out of fear, one industry expert opined: Fear of high medical expenses, of losing their home in a fire or of their family being bereft when they die. Ultra high net worth individuals (UHNWIs) worth tens of millions, however, have enough money to overcome those fears. They buy insurance for "want" rather than "fear". They want to preserve the family company, or give money to a second family, or leave a legacy.

For something simple such as a car or home insurance, these differences may not matter as much. The only real difference is the amount of coverage for a Corolla or a Lamborghini, or a bungalow instead of an HDB flat.

Even for medical insurance, it is more a matter of amount - if UHNWIs get insurance at all, that is, rather than deciding they can pay their own medical costs and self-insuring. Even Prudential's new medical insurance product, which offers critical illness protection of up to S$3.6 million, may be of less interest for UHNWIs, who are defined as having at least US$30 million (S$37.3 million) in financial assets.

Where coverage gets really interesting is in life insurance. There are specialised products designed to help the wealthy achieve very different goals than insurance for the man in the street.

One goal, for example, could be to leave the family business to the one child who runs it and to use insurance to give an equivalent value in cash to the other children. Another goal could be to provide enough money for a companion to enjoy a nice lifestyle without anyone else knowing about them. Or the UHNWI may want to set up a foundation to donate money to charity after their death.

A life insurance policy lets them achieve these objectives without touching the other assets in their estate. The amount of insurance to achieve these goals can be fairly high, and a single premium policy could cost millions. Whereas an average person pays their single premium up front, private banks are often willing to loan the millions for the premium. And a loan can mean that the policy turns out to be almost free.

Let us suppose, for example, that the UHNWI wants to leave S$25 million to his daughter. A single premium for a S$25 million universal life insurance policy could easily cost about S$6.5 million. The private bank loans the UHNWI 90 per cent, or S$5.85 million, at an interest rate of about 1.6 per cent.

Interest costs of about S$93,000 per year might seem like a lot. If the UHNWI invests the S$5.85 million they did not need to pay and gets a return of just 3 per cent, however, they will receive about S$175,000 per year. For a cost of just S$650,000 for the insurance premium, the UHNWI is getting lots of life insurance and pocketing more than S$80,000 per year in profit.

Along with the relatively low cost, the UHNWI avoids publicity after they die because insurance payments usually do not go through the public disclosure of probate. The money goes where the UHNWI wants, since it is harder for heirs to dispute an insurance payout than a will.

The UHNWI could get money back from the policy's cash value if they really need it. And a key benefit of some of the really big policies is that they come with a concierge service that can help book the UHNWI into the best medical clinics in the world if needed.

Insurance policies for the ultra-rich are rarely talked about outside of specialised insurance companies and private banks, so they might seem like a rarity. With the latest World Ultra Wealth Report from Wealth-X showing that at least 1,350 people in Singapore have more than US$30 million in assets, though, they may be more common than one would expect.

There is also some talk to make such policies available to more people, for lower amounts. And with the latest Capgemini World Wealth Report showing about 91,200 people in Singapore with more than US$1 million of investable assets, there could well be a pool of people interested in these big policies.

Richard Hartung is a financial services consultant who has lived in Singapore for more than 20 years.

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