Planning for the future means putting time and effort into protecting what you've worked so hard to build. But, despite best-laid plans, we can't predict when a life event, such as illness, may strike. This reality has been heightened through the global COVID-19 pandemic.
Would your family needs be met if you suddenly had to stop working?
Dean Moore, head of Wealth Planning in the British Isles for RBC Wealth Management, worked with his team to create financial forecasts for an executive client to see what would happen in the event of a debilitating illness. The results weren't good, despite taking advantage of company-provided benefits.
Financial modelling for this senior executive in his 40s laid out he would've spent his wealth by the time he hit retirement if struck by illness.
Planning for income replacement
"The money would've run out at 60," Moore says. The client would have spent all of his capital to maintain his lifestyle and would have no financial resources for retirement.
Moore and his team identified ways to offset the costs of such an event and arranged permanent health insurance coverage, which included a guaranteed after-tax income of £240,000 a year, which was only marginally less than his gross annual salary of £500,000. The total cost of the coverage was around 1.4 percent of his salary, equivalent to £7,000 a year.
"There's sometimes an assumption that because a client has a high net-worth, they're self-insured against risks," Moore says. "But the fact is they tend to have relatively expensive lifestyles."
Such individuals may have above-average incomes, but they also tend to spend on costly things such private schools, which can cost tens of thousands of pounds a year per child.
That's why cash flow modeling gets deeply integrated into the wealth management process, Moore says. His team looks at a client's compensation and expenses, then projects what might happen if an event, such as illness, interrupts the income.
Serious illness is not uncommon
That sort of financial planning makes sense, given statistics. One-in-two UK residents born after 1960 are likely to contract cancer during their lifetime, according to data from Cancer Research. Cancer represents four of the top 10 causes of death for both men and women in England, according to government data. In Britain, the total of claims paid against term life insurance coverage came to £2.9 billion, or 54 percent, of all claims made against so-called protection products, according to the Association of British Insurers.
Cancer is only one of many common critical illnesses. Others include heart attack, stroke, organ failure, multiple sclerosis, Alzheimer's disease, and Parkinson's disease. That means, most people will likely be afflicted at some point during their life. People aged between 45 and 54 account for 45 percent of all critical illness diagnoses, according to insurance industry website CriticalIllness.org.uk.
In the midst of the COVID-19 pandemic, it's also important to realise the threat that this disease poses to an older demographic. The highest number of deaths related to COVID-19 in the UK have been amongst people aged 65 years and over (36,639 out of 41,220), with 46 percent (16,962) of these occurring in the over-85 age group, as of May 15, 2020. The same study shows more than 4,000 deaths amongst those aged 45-64.
Moore says one RBC client worried about his own wealth after a friend had a heart attack. The client had a property in London and a chateau in France, which can be costly to run.
The friend's illness made the client worry about what would happen if he was stricken with a similar sickness. "So we set up health insurance coverage for him," Moore says. "After that, the client said 'if anything happens to me, I would then have the money so now I have peace of mind.'"
The advantage of fee waivers
One optional extra for critical illness insurance policies is a fee waiver. If the insured customer gets too sick to work, then they're no longer required to pay monthly premiums. Instead, the insurance company waives the payment, while coverage remains in place.
Such a case helped out one self-employed man, who earned a high salary and was insured by AIG. When that man contracted motor neuron disease, he wasn't able to work. Immediately, he and his partner tried to cut down their expenses. Unfortunately, in the anxiety-ridden period, the man's partner accidentally cancelled his insurance coverage.
While that sounds like bad news, it wasn't the end of the story, says Debbie Bolton, chief UK life insurance underwriter for insurance company AIG. "We looked at the medical records, and we were able to reinstate his policy," she says. That was because the policy payments were covered by the waiver coverage. "Thankfully, we were able to do that."
Insurance can help with inheritance tax responsibilities
Term life insurance can be used to guard against unanticipated inheritance tax when a gift has been made to a relative. UK inheritance law allows gifts to be made tax-free as long as the benefactor lives at least seven years after the gift gets made. Term life insurance can be structured to make sure it covers any taxes due in the event of premature or unexpected death.
Moore says buying whole life cover is a useful way to make sure HNWIs have enough liquid cash following the death of a family member. The whole life policy pays out tax-free as long as the premium payments get made. "That level of protection is funded by your wealth, so you're chipping away at your estate," says Moore. But you do get some advantages.
"When a death occurs, all that needs to get presented is a death certificate, and then the cash is paid out, " he says. That's useful because the government must get paid within a few months of death. Contrast that with selling a multi-million-pound chateau, which may require lengthy marketing to achieve a reasonable price.
"You're still paying inheritance tax, but you're finding a different way to pay it," Moore says.
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