Life insurance for high net worth individuals
What is a high net worth individual?
The term ‘high net worth individual’, or HNWI, is frequently applied to anyone perceived to be unusually wealthy, and attempts have been made to give it a measurable meaning. In 2016, HMRC defined a high net worth individual as anyone with assets in excess of £10 million, a downward adjustment from its previous definition of £20 million. The US has a threshold for ultra-high net worth individuals (UHNWI) of $30 million in investable assets (excluding the main home and personal effects). There’s no equivalent category of UHNWI in the UK.
What is high net worth life insurance?
Life insurance for wealthy people is the same in principle as life insurance for anyone else. It provides for your loved ones and dependants after you’ve gone, giving you control over how your assets are managed and distributed. The difference is in the detail and complexity of an HNWI’s financial situation, potentially including diverse investment portfolios and business interests, multiple properties and international assets. Life insurance for people in this bracket is also typically offered together with several other high-net-worth insurance products, such as home, contents and travel insurance.
Types of high net worth life insurance products
Life insurance for the rich comes in many forms, to match a broad range of financial planning needs.
Term life insurance
This insures your life for a fixed period of as long as 40 years. After that period the policy ends and there’s no payout.
Whole life insurance
If you want your insurance cover to continue for the rest of your life then you might choose a whole life policy. It has no fixed end date, so you know that one day it will payout.
Variants of term and whole life
Level: the payout is fixed at the start and remains the same throughout.
Decreasing: the amount insured reduces over the life of the policy, making it suitable for declining commitments such as mortgages.
Increasing: the amount insured increases over time and the premiums rise accordingly.
Endowment life insurance
Endowment policies were frequently recommended by financial advisers in the 1980s as vehicles to pay off interest-only mortgages but because so many of them under-performed they fell out of favour. However, as a form of savings and investment they still have their uses. They combine the promise of a payout on the death of the insured with a payout while the insured is alive on maturity of the policy.
Critical illness cover
This can be taken out in combination with life insurance to provide financial support if the insured is diagnosed with a critical illness, as defined in the policy. The illnesses covered vary from insurer to insurer, but usually include heart attack, stroke and cancer.
Terminal illness cover
This is often included with life insurance policies. It pays out the insured sum if the insured person is diagnosed with a terminal illness that’s likely to end their life within 12 months.
Income protection
This is not a form of life insurance because it insures your ability to earn rather than your life, but it can be a very useful addition to the protections adopted by HNWIs. However extensive a wealthy person’s liquid assets are, they could be tied up in investments so their regular income may still be vital for maintaining their lifestyle. Income protection insurance can replace up to 70% of their income if illness or injury prevents them from working. It leaves their savings, investments and other assets untouched without compromising their everyday expenses.
How much does high net worth insurance cost?
Obviously, we’re talking about substantial cover – probably several million – so the cost of insurance will be correspondingly high. It will depend on several factors, including your age, weight, general health, family history and general lifestyle elements such as whether you smoke and how much you drink. The younger you are when you take out insurance the lower the cost. Seven or eight-figure sums aren’t unusual and according to some insurers, a 30-year policy for £1 million life insurance taken out at the age of 30 could cost as little as £25.47 per month. Taken out 10 years later, the price could double. If you’re thinking in the region of £10 million or more then the premiums will increase accordingly, but they remain perfectly affordable for HNWIs.
How do the wealthy use life insurance?
Financial security and worry-free living
Protecting the future financial wellbeing of your family is usually the priority in setting up life insurance. Not only will they be provided for if you pass away, but you and they have the comfort of knowing it, which makes for worry-free living now and financial security later.
Business protection and succession planning
Life insurance can be used to protect your business interests in several ways. It can cover the business debts and liabilities for which you are responsible and ensure a secure future through key-person insurance and providing the funds for surviving directors or partners to buy out the shares of the insured.
Estate planning and tax mitigation
Placing a life insurance policy in trust can take it beyond the reach of inheritance tax, ensuring your beneficiaries receive exactly what you intend. The estate of a HNWI will far exceed the zero threshold for inheritance tax of £325,000. Above this the tax rate is currently 40%.
Equalisation of inheritance
The average HNWI is likely to have a broad range of assets, including properties, businesses and investments. The provisions of a will may not distribute those assets equally among the insured’s heirs, so a life insurance policy can be used to correct any inequalities.
Specialised policies
An insurer willing to provide high net worth life insurance may well offer associated policies such as home, contents and travel insurance as well as add-ons like critical and terminal illness cover.
Philanthropy and charitable donations
Life insurance can be used to ensure your legacy as a supporter of good causes, through charitable donations and other philanthropic acts such as endowments for scholarships and the establishment of educational and research foundations.
What are the caveats about high-net-worth life insurance?
There are a number of issues to think about, which don’t necessarily make life insurance unattractive but ought to be acknowledged.
Complexity
Because a HNWI’s wealth is often spread across a wide range of assets – both liquid and non-liquid – setting up life insurance can be unusually complicated. That’s why HNWIs tend to use expert advisers to make their arrangements.
Cost
We’ve already mentioned the cost of the premiums, and there’s no denying that you get what you pay for. However, in the context of the level of wealth we’re talking about, the cost of life insurance needn’t be as high as you might expect.
Underwriting
This is the process by which insurers gather all the information they need about you, your lifestyle, your health and your wealth then assess the level of risk compared to the amount of cover you require. For HNWIs this can be a more complex process than for those buying standard life insurance.
FAQs
You can plan for this by opting for increasing term life insurance or by adding indexation to your policy,which ensures it increases in alignment with inflation.
It’s never too early or too late, but generally it will be more expensive the older you are when you take it out.
Many insurers place a limit on the amount of cover they offer under a standard life insurance policy. This might range from £1 million to £10 million. If you’re looking for a higher level of cover, you’ll probably need a high-net-worth policy.
There’s no practical reason why you can’t make your own life insurance arrangements, but because HNWI life insurance can be complicated, it can be helpful to use a broker. Alternatively, if you already engage your own financial advisers, they may be able to do it for you.
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What is term life insurance?
If you’re thinking about getting life insurance you’ll come across a lot of options and it’s not always easy to decide what’s best for you. One of the most important choices is between term life and whole life, so let’s look at what a term life policy is.