Client Affairs

Life Insurance Services “Severely Lacking” at Private Banks -GWS

Paul Rust GWS Managing Director 9 September 2011

Life Insurance Services “Severely Lacking” at Private Banks -GWS

Paul Rust of GWS explains why private banks in Asia are ill-equipped to deal with the growing need for life insurance from high net worth investors.

Paul Rust, managing director of Hong Kong-based consultancy GWS Asia Limited, tells WealthBriefingAsia why private banks in Asia are ill-equipped to deal with the growing need for life insurance from high net worth investors.

Life insurance has traditionally had a retail image, so private banks tended to ignore it. But recent events have changed this, and insurance companies have developed products for the high net worth market. The traditional tools promoted by banks - offshore companies, trusts, and foundations - have been found wanting. A recent survey by Scorpio Partnership highlighted that private banks are severely lacking in their understanding and application of life insurance in the region. Why is this?

Distribution

Although the licenses held by private banks in Singapore often permit the sale of life insurance, this is not the case in Hong Kong.  Many private banks with a presence in both centres have therefore chosen not to develop in-house expertise and capability, but to outsource the advisory and sales process to intermediaries, primarily brokers. 

If managed properly, outsourcing will widen the expertise available to clients, and increase sales. If not managed properly, the referral channel can become so narrow that too few clients are referred and significant opportunities are lost. Unfortunately this is what has happened.

Product Knowledge

Very few private bankers have the tools to identify client needs for life insurance, and too few clients are referred, with the result that intermediaries, and even the life insurance companies themselves, are seeking clients directly and from other providers, including lawyers, accountants, private trust companies and asset managers. And there is evidence that clients themselves are seeking solutions directly.

Unlike trusts and foundations, which each have their roots in fundamentally different legal systems, and which are often viewed with suspicion by tax authorities, life insurance is globally recognized and widely understood. Every major jurisdiction has rules governing life insurance, and a system for taxation of life insurance. The skill, as in all planning, is to understand those rules and how they can be applied to given situations to achieve optimal benefit.

Client needs

Asian investors are renowned for a high need for control; control over the manner in which assets are managed, and control over the manner in which wealth is held and distributed, both during and after their lifetime. Most want total control during their lifetime, and for nominated heirs to benefit thereafter, ensuring businesses remain in the family, and that liquid assets are secure for future generations. They generally prefer heirs not to know the extent of the wealth they will eventually inherit. And most want to ensure they can change nominated beneficiaries as circumstances change, with little formality, and without their knowledge or consent.

Features

Life insurance is a very simple tool; a legally binding contract between a policyholder and the life insurance company, both of which are bound by its specific terms and conditions. The life insurance company will invest the assets it receives as instructed, for the duration specified, and will then pay the nominated beneficiaries when the policy ends. The life insurance company has no discretion as regards distributions, investments, or addition and removal of beneficiaries, and no fiduciary duty to beneficiaries. Very straightforward.

The owner of a typical policy can choose when to add assets and when to withdraw assets. He can determine where the assets are to be held, and how they are to be managed. He can nominate and change beneficiaries as he chooses, and no beneficiary has a right to information, accounts, or any reporting - only to receive payment on the death of the life assured.

A policy can be owned by one or more individuals, by a company, or by all sorts of legal arrangements. A policy can have multiple lives assured to give it maximum duration. And beneficiaries can be individuals, companies, foundations, trustees, and a host of structures and arrangements.

Benefits

In addition to the obvious succession planning benefits, life insurance also offers other significant advantages. In certain countries and under certain circumstances life insurance can achieve protection from creditors in the event of bankruptcy, from claims of a spouse in the event of divorce, and from other claims. In many countries the income and gains within a policy are free of all taxation. And the proceeds of life insurance are often tax free, or taxed at reduced rates. In most civil law countries the proceeds of life insurance are not considered part of one’s estate, and will therefore avoid forced heirship provisions.

And, finally, life insurance is one of the very few structures that can still provide the confidentiality that many clients living in less stable and secure environments still desperately need.

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