Issue 7, July 2021 PCS Vision

Risk profiles evolve over time. Both personal risk as well as the external threat landscape can change. Giving up smoking improves not just your health, but your personal risk profile, while businesses are having to mitigate previously unknown threats, such as cyber and ESG. This era of uncertainty is also changing risk appetites.

In this issue of Vision, Senior Vice President, Isaac Lim, shares his thoughts on the changing priorities of the high net worth and ultra-high net worth; we explore the nine reasons why annual insurance reviews are crucial, and we answer your most pressing questions on legacy planning.

In tailoring life protection solutions for over 10 years, PCS by Mercer Senior Vice President, Isaac Lim, has had countless conversations with people holding private wealth. He thinks their perspectives and priorities are subtly shifting.

Here, Isaac reflects on the changes he is seeing.

US$68 trillion – the equivalent of the combined GDP of the world’s 25 wealthiest nations – is in the process of moving.

From the “Baby Boomer” generation down to their children, the greatest wealth transfer in human history¹ is so immense, it has no easy analogy. The sheer magnitude of the flow of wealth, however, does conjure mental images of the epic wildebeest migration through the Serengeti-Mara ecosystem.

The animals – stretching as far as the eye can see – flow inexorably through the landscape. Their majestic journey changes everything in its wake. As they travel in search of greener pastures, wildebeest calves are born, and wildebeest calves are taken by predators, life, and the collateral damage for life, evident in every moment.

In the lives of the high and ultra-high net worth, what is the collateral damage of wealth? How much stress and time were needed to acquire that wealth? Moreover, is the life they invested in asset accumulation the life they want for their children?

These are the questions we see more and more PCS clients asking themselves as they prepare to retire and transfer their asset holdings to the next generation.

Yes, our clients are still concerned about what they leave their children, but increasingly, UHNW individuals are also reflecting on and prioritizing their children’s futures over family succession.

Asset not Liability

In North Asia, where there has been an explosion of wealth in the past decades, the business landscape and opportunities have changed dramatically. Compared with the “Boomer” generation, there is now much more competition, higher labor costs, increased compliance and regulatory requirements, not to mention the growing complexity in taxation and legislation.

UHNW individuals, especially the ones who created their wealth under quite different conditions, recognize it’s much harder now to achieve the same magnitude of success. Therefore, they are wondering if they want the same stressors and intensity for their children, especially if the returns might be less. They want their children to enjoy the assets of their success, but not the liabilities.

Even if the conditions were similar, parents are naturally reluctant to expose their children to the same risks they themselves faced.

The dilemma is particularly acute in the families with a single child, or very few children, because the mental and physical pressures are concentrated on too few.

There is also the practical question of whether the child(ren) is the right person to run the business on the sole basis of genetic succession.

In the year 1800, the average life span was 30 years. Eight-five is now the average in Hong Kong, which has recently overtaken Japan as the place with the world’s longest life expectancy.² Longer lives, however, does not mean a continuation of happiness, or health. The quality of life is paramount and a growing consideration. The focus on quality has been especially important since the beginning of the pandemic.

New priorities

COVID-19 is a definitive point in time. For most, life is not being lived in the same way, or at the same pace as “before” the pandemic. The slow down and the complex, ongoing consequences of COVID-19 have given many a new perspective and prompted reflection, including for UHNW individuals. 

The fragility of life and hitherto unquestioned lifestyles have been on stark display. Volatile geopolitics and global markets are also driving ambiguity. And perhaps most threatening of all is that the uncertainty is not fully external. In the quiet moments, some clients are questioning their ability to navigate the ever-changing landscape. For the first time, they are experiencing the kind of doubt that has been almost entirely foreign in their successful lives. 

The uncertainty is increasing our clients’ risk aversion, including when managing their assets. Their instinct to protect and defend is higher than we have observed in the past.

To reduce the possibility of collateral damage, and to preserve what they have – whether assets or family harmony – HNW individuals are reprioritizing:

• Family comes first: Safeguarding the second and future generations is top of mind.
• The drive for acquisition is less intense: UHNW individuals are feeling they have enough. They don’t need more, but they are very motivated to keep what they have.
• They are looking for consistency: There is more willingness to accept smaller returns if consistency can be delivered.
• Capital appreciation: When preserving is more important than acquiring, capital appreciation is crucial. They are looking for investments that will grow irrespective of inflation, the pandemic, interest rate cycles, market and geopolitical volatility, or any other single catastrophic event.
• More time: They are more accepting of time in the creation of worth. Things don’t have to be quick, but they need to be secure.

Of course, individuals are unique and our clients each needs different things at different times. Therefore, despite COVID-19 restrictions, we are spending more time than ever talking to our clients. We are deepening our relationships and reassessing their changing needs, to deliver the right solutions for their shifting priorities.

¹ https://www.forbes.com/sites/garrettgunderson/2020/08/20/how-to-prepare-for-the-greatest-wealth-transfer-in-history/?sh=7c52d639322b

² https://worldpopulationreview.com/countries/life-expectancy

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Things change. Not always dramatically, but inevitably, things change. Our needs and priorities shift as we enter different stages of our lives. In 10 years, a newlywed couple could become the divorced parents of three young children. In 20 years, those children might be university students or even planning marriages themselves. The point is, your context is never the same, so what seems crucial to you right now, will most likely change with time. 

Your wealth is growing. That’s why it is so important to review life protection policies regularly. You need to ensure the policies still serve their purposes and provide coverage for your present-day net worth.

Life events that can alter financial outlook and trigger a change in coverage needs:

1. Getting married or divorcing
   Taking up a policy and nominating your spouse as the beneficiary often happens in new marriages. Similarly crucial is a policy review in the event of a divorce – when you might be reconsidering beneficiary designations. If a review is omitted, previously nominated beneficiaries could be legally entitled to the funds that you would otherwise allocate to new dependents.
   
   
2. Having children
   Children are expensive to bring up. As your family grows, regular reviews ensure there is enough coverage for your dependents’ genuine financial security, especially in the event of unforeseen circumstances.
   
   
3. As children grow
   While children are financially dependent, such as during their education years, it’s wise to periodically verify the death benefit is enough for them to continue their studies and live independently.
   
   As your children become financially independent, you might want to consider allocating the death benefit toward your surviving spouse. A common alternative is shifting the cash value to retirement income.
   
   
4. Purchasing a house
   After purchasing a property, a review is important to see if the coverage is enough to pay off the mortgage. Mortgage coverage is crucial if you have children, because staying in the family home can mean some stability when dealing with the death of a parent.
   
   
5. Work changes: Starting a new job or business/career progression/business expansion
   As your career or business progresses, your finances change. And any significant change should trigger a review.
   
   You might have more disposable income to allocate to retirement, or business expansion goals might be prioritized over discretionary spending. Separately, it’s prudent to assess growing business risks and have key-person protection in place to safeguard business continuity.
   
   
6. Taking on more debt: mortgages, business loans, personal guarantees etc.
   Whenever substantial debt is incurred, it is highly advisable to review the sum assured in your policies so that your loved ones don’t suffer financial stress if anything unfortunate was to happen.
   
   
7. Change of beneficiaries or deceased loved ones
   The need to add or remove a beneficiary is not always top of mind. So, reviewing your policies regularly helps to keep the nomination of beneficiaries up to date.
   
   
8. Health or lifestyle changes
   It might be time to apply for a better rate on your policy. Have you started a new health regime? Are you eating healthier and exercising for 30 minutes a day? Congratulations, you might qualify for new life insurance rates! Quitting smoking, lowering your cholesterol or blood pressure are just a few examples of how becoming healthier can potentially lower your premiums.
   
   Life insurance companies charge higher premiums from individuals who participate in dangerous hobbies or jobs. Therefore, if you have changed jobs or given up hobbies that were previously considered risky, it’s a good time to reapply for life insurance. The company might be willing to lower your premiums if you can prove you have lowered your risk profile.
   
   
9. Retirement
   
   Now that you have more time to enjoy your lifestyle, you also have more time to align your life insurance policies with your vision and the legacy you want to leave. You might want to consider reallocating benefits for different purposes, such as for philanthropy, or even leave a legacy that continues beyond three generations.

These are only some of the more common events that warrant a policy review. By assessing your policies every year with a new lens, you can ensure you have the right level of coverage to meet your changing lifestyle and needs.

The exceptional service you experience with PCS by Mercer when first purchasing a policy is only the beginning. We are committed to servicing our clients on a generational timescale; providing annual policy reviews throughout the lifetime of your policies is just one of our services. Contact us to arrange for your review.

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We helped our client evenly distribute his wealth to two generations while safeguarding his wishes and the business.

 Background

Client is a businessman and the sole bread winner of his family. He purchased a Universal Life policy more than five years ago to provide income replacement and protect his wife and two daughters’ lifestyles.

Since taking out the policy, the client has maintained a healthy lifestyle and exercises regularly. We meet with him every year to conduct an annual policy review. In the most recent process, three changes needed to be addressed:

1. We noted trends of declining interest rates that would adversely affect the cash value and sum assured of his existing policy
2. In response to the uncertainties caused by the COVID-19 pandemic, the client wanted to increase his coverage
3. The client recently expanded his business into a new industry 

 Solution

• Client increased his coverage to US$20 million (from US$10 million)
• Due to his better general health, the premium for his new policy was 12% less than the policy he purchased five years ago.

Key takeaways

PCS by Mercer solutions are consistently client-led. Before tailoring products, 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. 

Candy Quek Nelly

Assistant Vice President

Private Client Services by Mercer Pte. Ltd.

E: candy.queknelly@mercerpcs.com

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