Wealth Transfer and Preservation Strategies Using High-Value Life Insurance

Few things gnaw at the back of the heads of high-net-worth (HNW) individuals like wealth preservation and transfer do. Wary of the downbeat geopolitical and economic climate in recent years, many are in search of avenues to safeguard their short-, long-term, and legacy financial interests. Though strategically exposed to conventional asset classes, they continue to be in the market for alternative investment instruments that offer a safety net for their beneficiaries. Among a few viable options, high-value life insurance (HVLI) products have gained prominence in recent months. 

What is High-Value Life Insurance?

HVLI, as the name suggests, differs from traditional life insurance by virtue of its higher value, making it more suitable for HNW investors. Additionally, HVLI can accompany geographical diversification and tax benefits when it is procured through global reinsurers — a common practice in the Middle East. The reinsurance market comprises insurers who assume the risks of another insurance company operating locally. The increasing demand, particularly from HNW individuals, is boosting the market, which is expected to grow to a whopping $474 billion by 2032, at a CAGR of 4.5%. So, what is incentivizing family offices and HNW individuals to procure high-value life insurance?

The Windfall

HVLI products tend to be whole-life with a cash-value component. In other words, the high premiums paid toward such products accrue over time without tax deductions. Unlike in term life insurance, policyholders themselves can withdraw from or borrow against HVLI products. So, if circumstances change — retirement, business setbacks, etc. — such products can provide a liquidity boost and make up for lost income. When sustained with disciplined premium payments, such policies pay the beneficiaries a generous dividend upon the death of the policyholder. The proceeds, like premiums, aren’t subject to estate taxes. 

Unlike conventional life insurance products, HVLI options bring a windfall for the beneficiaries, enabling them to clear liabilities, continue their lifestyles, fund the policyholder's funeral, address the tax implications of estate transfer, etc. The payout is so hefty that, as often as not, HNW individuals with multiple heirs tend to bequeath it to one of them as an inheritance. The predictable cost and guaranteed value of HVLI products make them ideal for estate planning. That way, both the benefactor and beneficiary have a clear-cut understanding of what the latter stands to gain as the payout. 

HVLI as a Financial Strategy

Policies can be structured to pay guaranteed minimum returns, qualifying them as viable liquid assets. Recently, following volatile economic cycles punctuated by inflationary and recessionary pressures, HVLI products have emerged as a hedge against financial risks in conventional asset classes such as stocks and bonds. Businesspersons, in particular, have liquidated their high-value insurance to boost their ventures’ cash reserves amid a funding winter. That, in turn, has incentivized reinsurers to assume more risks and reduce exclusions. 

Forward-thinking HNW individuals also create irrevocable life insurance trusts (ILIT) to maximize the tax benefits and finance the premiums externally. Typically, premium financing involves a third-party lender who regards the trust as a borrower, provided the insured guarantees the loan. ILITs are especially beneficial to investors with a portfolio of illiquid assets and a shortage of cash, as well as those who intend to reduce their tax exposure. Irrevocable trusts are often formed as part of legacy or estate planning, factoring in the eventualities and inevitable circumstances. 

Leveraging InsurTech for HVLI

With the growth of “InsurTech” — a portmanteau of insurance and technology — policyholders can now seamlessly manage their policies using hand-held devices. That has also added to the feasibility of procuring and managing offshore HVLI products, which could accompany more flexibility and benefits than what is available locally. In the Middle East, thanks to dollar-pegged currencies and broad-based regulations, local insurers are well-equipped to provide secure, reliable, and attractive offshore HVLI products. Such opportunities also complement the growing financial diversification strategies of HNW family offices and individuals in the region. For in-depth information on the benefits of HVLI, please drop a mail at info@cfsgroup.com.