Risk Mitigation in Wealth Management

Wealth management strategies are incomplete without risk management.  This is why insurance is an integral part of it, and its importance increases the more assets there are.  The more someone has, the more they have to lose.  Risk management is either overlooked, or outright disregarded, by many except the absolute wealthiest.  When risk is nit managed, a variety of events can derail any wealth management strategy, from illness, to estate disputes, to litigation.  Unless we are considering the mot unlikeliest of scenarios – an alien invasion, for example – or a risk that is beyond out ability to manage  -a meteor dropping into the ocean precipitating an extinction level event – all risk can be managed, and their effects mitigated. 

We need a paradigm shift, and understand that proper risk management ensures that loss of property, life, health, or income, is not debilitating.  We buy insurance not because we will die, but because the people we love are going to live.  A proper risk management strategy means that our interests can recover from loss.  Risk management, for the average person, covers several areas. 

The foundation of any insurance portfolio is life insurance itself.  Life insurance is not just insurance against loss of life, but also loss of quality of life and earning capacity, anything leading to a diminished standard of living.  This includes disability and critical illness.  Death itself is an event, and the survivors deal with that one time loss.  Disability and critical illness, on the other hand, are a lot more expensive.  They are not just a cost, but could result in the loss of more than one source of income for the family, since someone would have to take care of you.  That loss of income in totality is what needs to be covered. 

In addition to loss of direct income, life insurance is required to cover the costs of income replacement, from outstanding debt, to settlement of estate and probate, to fees arising from any of these.  Depending on where in the world the beneficiaries are, relative to the assets, and the policy, there is the consideration of income tax and estate tax.  In Singapore, like many other places, there is no income tax on the proceeds of an insurance settlement.  These funds are treated as an unexpected gain.  Singapore is also one of the few places in the world which does not have an estate or inheritance tax. 

The gains of the policy can be structured as a one off payment direct to the individual, or through an irrevocable trust.  If the payout is very large, the latter may be more suitable, since it can be stretched over a period of time, or more than one generation.  This provides enhanced value to the payout, since it mitigates the risk that the beneficiaries would waste that money on immediate gain, and impoverish themselves, negating the reason for having a policy.  We must account for the possible lack of financial education in our beneficiaries. 

The same considerations apply to disability.  Just like critical illness, total and permanent disability affects the entire family unit, and leads to the loss of more than one income.  There is also the cost of renovating the home for access, as well as the cost for professional caregivers.  An accident plan mitigates some of the cost of disability due to accidents, but it is not enough.  When calculating disability, just like critical illness, we must factor the loss of one or more income streams over an extended period, perhaps twenty or thirty years. 

The other leg of a proper insurance portfolio is a good hospitalisation plan.  Hospitalisation plans are not just about settling hospital bills, but mitigating the cost of medical inflation.  They are a means to ensure the cost and availability of long-term care is reasonable.  In Singapore, the average life expectancy is well into the age of 85 and above.  With the best in modern medicine available in Singapore, it means that the average Singaporean will likely live to suffer some form of critical illness, requiring long-term care.  This also means they have a real chance of outliving their retirement funds and assets.  Since a significant portion of that premium is paid by Medisave, it makes sense that a Shield plan is a must. 

From life insurance, we need to consider the various forms of general insurance.  The first of these is homeowner’s insurance and property insurance.  Property insurance covers loss or damage of the property itself.  Homeowner’s insurance covers loss of items such as clothing, personal belongings, and expensive furniture within the property itself.  There is no point in insurance to replace the house after fire, if there is no money to furnish it, for example.  Finally, we need to consider other forms of liability, such as being a business owner, personal liability to litigation, and any other form of umbrella coverage that may be required. 

A policy portfolio needs to be reviewed annually, and updated regularly.  In specific cases, it needs to be nominated, or assigned to various trusts or companies, as needed.  When we consider coverage, we need to look at what we are prepared to lose in any untoward event, put a monetary cost to that loss, and consider what can be covered, at a reasonable budget.  A good insurance portfolio is a requirement for any prudent individual who is working at acquiring wealth, and intend to leave a legacy after his passing.