When facing the inescapable, says Ben Backhouse of HNW insurance broker Risk Assured, it’s politic to take out a policy
HERE’S A CHURCHILLIAN quotation you won’t find in dictionaries of snappy sayings: “If I had my way, I would write the word ‘insure’ upon the door of every cottage and upon the blotting book of every public man, because I am convinced, for sacrifices so small, families and estates can be protected against catastrophes which would otherwise smash them up forever.” But he had a point.
I wholeheartedly agree with Sir Winston, but if he were alive in the 21st century, he would be haranguing wealth managers to re-examine the use of insurance as a financial planning tool. Too many financial advisers have a snobbish attitude towards insurance and think of it as a dirty word.
But many misunderstand the core purpose of insurance, which is to guarantee the right money, in the right hands at the right time. Financial demands and opportunities in life do not follow a smooth path and how many times have you been in the situation where an opportunity arises but you do not have available cash or you are cash-rich but struggling to find attractive opportunities? Used effectively, insurance can help protect these imbalances.
Placing insurance risk in the market place is time consuming and arduous. The demands of the life offices on large cases are substantial and the client experience dire. For people used to turning left on planes it is simply not good enough. For this reason not enough insurance is written. Indeed Swiss Re claim there is a £4 trillion protection gap in the UK.
To be able to place large cases you need to treat the client properly, not just as an application number. You also need an intricate knowledge of the insurance market place, the re-insurers, their treaties and how to package cases to suit their needs.
This expertise is at the heart of the Risk Assured proposition. We’re not ashamed to say that we work exclusively with high net worth individuals looking for big-ticket insurance solutions. We have a unique approach to underwriting. We do the dirty and boring work for you – the medical checks, the form filling, the waiting – but, and this is the crucial part, armed with this evidence and our deep knowledge of the market we are able to broker this business between the insurers.
A LOOK AT specific cases shows what can be achieved in financial planning terms with insurance products, though obviously we can’t name individuals. These four examples serve to highlight solutions to specific problems, but there are an almost infinite number of situations where, with a little thought, insurance products can be used to financial advantage.
Last year we advised an entrepreneur who had recently sold his manufacturing company for £20m. After a lifetime’s hard work, this was the exit he had been hoping for and he was keen that as much of that wealth would stay within the family. Unfortunately for him, the sale created an asset (cash) that became liable to inheritance tax. Apart from giving it away, something he was not keen to do immediately, the only other option was to keep £8m in the bank to pay the tax.
We advised him to take out an insurance plan. He paid us £2.3m in one instalment and we guaranteed that when he dies his beneficiaries would receive £8m, tax-free. Our solution freed up over £5m and gave him and his family peace of mind that the tax could be paid and before probate was granted.
“Stefan”, a Swiss national, is typical of the type of client who has a need today but is unsure of what the future holds. He owns a large property in Belgravia that his lawyers have suggested that he own in his own name. Though not domiciled in the UK, he has a liability to inheritance tax on his UK assets. We advised him to take a whole of life plan with cash values. Though cover could be bought for less on a short-term basis, the uncertainty around his future made the whole of life option attractive.
The cash value really worked as well. The cost of the cover was £4,300 per year. If he died, the insurance company would pay £2.7m. If he decided to sell the asset and return to Zurich he would cancel the plan and receive a surrender value. Though subject to investment returns and not guaranteed, were Stefan to cancel the contract after ten years it would have cost him £43,000 and he would get back £45,300. In other words, the insurance was free.
With HMRC getting ever more aggressive against tax mitigation and “schemes”, insurance is often the least contentious means of achieving your goals and providing certainty and peace of mind. The payments are guaranteed, control over beneficiaries can be retained until death and the funds are received, tax free, before probate is granted. Indeed it is often not a bad investment either.
We recently completed a case of a UK couple that wanted to leave a legacy for their family. Assuming they lived in line with their average life expectancy the “return on investment” achieved with the insurance was 7.5 per cent per annum. Bearing in mind that had the couple retained the assets they would become liable to inheritance tax on death this bumped the return up to an 11.2 per cent return. How many investment managers would want to guarantee an 11.2 per cent return over 23 years?
FINALLY, THERE ARE too many incidents where the lack of insurance destroys businesses. Short term insurance is incredibly inexpensive and invaluable when disaster strikes. Look at what happened when Simon Carter died in a helicopter crash on the way back from the Chelsea match. A viable plc was destroyed and investors and banks lost hundreds of millions of pounds.
Protecting shareholdings and key people in private limited companies is vital. After all, who wants to be in business with your ex-partner’s wife’s new boyfriend’s accountant! It remains a disgrace that fewer than 5 per cent of businesses have life insurance in place.
One of the main reasons why people are put off insurance is because of the time and effort in getting underwritten. This is because the industry is a process-driven dinosaur. It takes a formula and applies it rigidly to all customers, with only tiny variations according to their personal circumstances. I can think of no other industry that does not differentiate between potential customers with assets of a few hundred pounds and those with assets of a few hundred million pounds.
This is where the unique approach Risk Assured applies to underwriting large sum assured cases is so powerful. The essence behind the business is that we underwrite in house. We collate all the medical and financial information. We employ some of the countries leading underwriters to assess the risk and we then broker the business between the differing life offices.
Our approach of developing a streamlined, personal service and focusing on one segment that we know very, very well is hardly rocket science and to most business people will seem an obvious strategy, but in the insurance world it is revolutionary.
These examples show how insurance can be used innovatively to protect and release wealth. There are almost no limits to the range of situations where insurance products can be applied, if you are prepared to have an open mind and think creatively. You may have to suspend your disbelief, but in the world of insurance – particularly for the wealthy – two plus two really can equal five. I’d advise all high net worth individuals and their advisers to take a fresh look. You owe it to yourself. And you wouldn’t want to disappoint the ghost of Sir Winston.